Bruce Norris is joined again this week by Cary Pearce. Cary is the current sales production manager for Provident Loans. As a production manager, he has closed almost 2500 loans for about $350 million in his career as well as supervised another $1 ½ billion in other closings. Cary started in the business in 1985 when he worked at Coldwell Financial. He later went to work for Acu Bank Mortgage, where he first met Bruce. Here he was promoted to a position of branch manager. He has been with Provident as their production manager since 2009.
Bruce and Cary covered the last boom and bust cycles in California, so now the concentration is going forward with things that recently changed. They hit on the 3% down for Fannie and Freddie, which they had done away with. Bruce was not aware this had been around before; so Bruce wondered when they got rid of it and how big of a deal it was that it was reinstated. Cary said it was probably two years ago that they stopped doing the 3% down. Now they are trying to loosen things up to get people in the market, and they are realizing they have to loosen up the strings a little. Everything will be sold off, it will just loosen up the down payment to the 3%. Bruce said there is a little bit of a big deal here because the FHA loan limit and the Fannie Mae loan limit are about 20% apart.
If you were a builder building 3500 square foot houses in Riverside, you are probably happy that this just happened. In this case, FHA would not be a product that would work for you. Cary said they have had challenges to this where they have gone out and called on builder clients. When their homes are 380 to 450, FHA does not work for them in Riverside County. They need products like the 3% down for that type of inventory. They had previously discussed when the FHA balance went down from 500 to 350. He was asking him about a percentage of his business that disappeared or had been hurt, and it was less than he thought.
Bruce asked if this has turned out to be true but was not a big deal at the time. He wondered if there was a 3% down Fannie/Freddie program at the time. Cary said there was not but that the perception was when they dropped the FHA limit it was going to be a major disaster. However, it was not quite the case as his average loan the previous year was only $250,000. It really did not affect him greatly, but it was because of market he is in, which is Riverside. Their sales prices are lower, so it has not been that big of an impact. However, for somebody who is in LA or Orange County they do have higher loan limits. However, they still would have felt the pain more than everyone at Provident.
If you look at the past ratio of Fannie Mae’s maximum loan in the area and FHA’s loan, we are still way too close. FHA’s history would be more like $200 grand at this point, maybe $250, with a 417 loan. Bruce asked if there is a leaning toward this or if they are happy with what they have. Cary thinks they are happy with what they have. At Provident they heard that Fannie Mae might actually cut their loan limit, but this did not happen thankfully. They kept it at 417 for Riverside County. The one they would like to see come up a little is FHA since right now it is around 355-350. As prices start to climb, it will knock the FHA buyer out of some of those houses and force them into the conventional products.
Bruce asked about qualifying for a conventional versus FHA loan and what the differences are. Cary said the advantage of an FHA is they can still get someone approved with an automated approval up to 55 debt ratio as long as they are over 680. With conventional, they are pretty much seeing automated cap out at about 45%. On those 97% loans, it will be about 43%, which is a big difference. You never really think about interest rates in the sense of consumer borrowing, so Bruce wondered how big a deal this would be in a car lease with interest rates being where they are and who would be considered at the back end. Bruce asked if the interest rates are so favorable that you can buy a new car and it would be much less of an impact than it might have been. Cary said you see a 0% for 60 months on some cars, while on others you see 1% or 2%. This is still very cheap money for autos. The more debt a client has, the more it will affect them on what they can afford for a house.
Bruce asked what Cary’s sense of borrowers is now and whether he thinks they are conservative by nature or if they would get very aggressive if allowed. Cary thinks there will always be a segment that will push it to the limit and take whatever credit they can get. They are seeing people be a little more conservative these days. People are mostly buying within their means and not stretching themselves too greatly. This is a comforting thought since Cary does not see us having the meltdown that we had back in 2007 with the crazy loans out there and letting people buy with zero down. With some it was stated income where they did not even verify anything. Bruce did an interview at the time when he had not borrowed money in a while. He had paid things off and did not know what was going on as much. He asked about stated income and asked directly about where the number originates, and the person he interviewed said they just made it up. He could not believe they said this in front of an audience of 400 people since this is basically fraud. He ended the interview right here.
In lieu of this, Cary’s team did the no doc loan back in the day where you did not have to put income on the application and ask questions. You just didn’t put it on there. The market this was perfect for was the self-employed who had 20% down and good credit. This was a loan for someone who had possibly written off too much on their taxes. They did not have to get into it all, they just made up the option that they had a no doc loan for which the person did not have to show anything. It is only a quarter point pricing and minimal hit, so a lot of clients opted to go this route and felt better about it since they did not want to overstate their income.
At one point Bruce was driving around, and there was 125% loan-to-value loans, and Bruce wondered what this is. Cary said where this started was FHA’s title one loan where they would go up to 125%. However, there were people who were actually offering this on a purchase package. It did not last very long, but it was out there for a while. They threw in where you could do a pool and certain additions to the house to get you up to that 125% loan. Bruce wondered as the competition gets more creative and aggressive whether this dictates the future policies. Cary said it definitely dictates most lender policies, but now that the CFPB is in their face every day with the QM rules, he does not really see too much easing when it comes to underwriting and debt ratios. Now they put all these bodies in place that are overlooking the industry, and he does not see these going away.
Bruce asked if the oversight the same for crowdfunding where a trust deed is available through websites and they ask people to invest in it. It funds, and there you have a loan. This is something that is growing, and there are literally people funding hotel deals who don’t have a dime. They just have a concept and a deal on a hotel, and they said they would close escrow in 6 months. They said they would put a $10-$20 million trust deed online and people said they would take $10 grand of it. The difference is anybody buying a home to live in, owner-occupied, is where the QM rules are in play. For somebody buying a hotel or business, Cary does not think these rules apply. This might be why you are seeing what you are seeing.
This is certainly something that is coming into the investor world. In the hard money loan business, there are certain rates and points. Wall Street entered this business and lowered interest rates and points. This is possibly the next step toward that. Bruce is not doing hard money on owner occupied properties and never has because he has all the rules that come into play with the maximum 5% over the rate. The Section 32 kicks into play, and there have been challenges on this with people trying to do non-owner loans. Because of pricing add-ons and the loan being too small, you end up having to reduce fees just to make the loan work.
Bruce asked when loan performance really became good again and when everything was clean. Cary said it was around 2008/2009 when everything switched to full doc and the track records have been good since then. He does not think the REOs have been too high. You would have a really hard time having an REO when you funded a loan in 2009. Even when it went bad, the price aggression value went up and you could not have too many losses. Bruce was thinking he could see the private world somehow looking at this space that is open, and there will likely not be stated income loans in the foreseeable future for the world he is used to seeing. Bruce wondered if there is any bond expert out there thinking they could greatly fund it and successfully sell the bonds. It would have to be a non-qualified mortgage and a private investor. There is certainly that possibility, but most investors want to sell it on Wall Street and you need to find a market for it.
Most investors will want a bigger return and if they are going to take that risk, therefore having a higher rate. There would probably be room for a higher rate if a yes answer emerged where there was a stated income loan. If that whole world is not being funded by anyone else, you could have a higher rate and still have successful business. One of the people involved with the CFPB and all the different rules actually has gone on to start his own company in order to fit the niche of the non-qualified mortgage.
Bruce asked if you are self-employed, how difficult is it to get loans? Cary said it all depends on what they write off, but it definitely is a bit of a challenge for the self-employed buyer because typically they write off a lot of expenses and reduce their incomes by 30-50% in some cases. That is still a challenge. Bruce wondered if they are considered self-employed as oppose to their own corporation getting a check. Cary said as a corporation they are going to give themselves a W2. If they have a history of doing that, they are going to take the W2 and qualify them. However, if the person who is the sole proprietor who still files on a regular tax return and files a schedule C, this is the person who gets hurt.
Bruce asked what down payment programs are available right now. You have 3% Fannie/Freddie up to the loan limit of 417. You would have this number in Riverside while areas in LA and Orange are higher at 625. It is still priced higher because they consider that a high balance loan. Anything over 417 is considered a high balance loan. Cary had just priced one where 3 ¾ on a loan was up to 417, but when you go over this it was around 4 1/8. With anything over 417, you can also go into jumbo, which is typically 20% down. Thirty-year fixes are running right around 4 ¼ on a jumbo. The jumbo market is way more aggressive than it used to be. It used to be that jumbo money was at least ½% higher than the Fannie/Freddie money. Today they are seeing jumbo investors that are really close. Bruce asked if a jumbo by its own nature is a portfolio loan of somebody’s. Cary said in some cases it can be, but a lot of these are still being sold off and securitized.
At Provident, they have come out with a portfolio loan which their way of loosening up on the parameters. They still want a tight credit package and low debt ratio of 40%, but they will go up to 90% up to a loan amount of 850. This is an ARM product, but there is no negative amortization. Somebody who is doing a 10% down loan up to 850 can actually get a 4 ¼ rate with the MI built in and only have to put the 10% down.
Regarding MI, Bruce asked about the difference between the conventional world and FHA. MI is mortgage insurance and protection for the lender if the client defaults on a loan. FHA just recently announced they would lower their mortgage insurance from 1.35 to .85, which will be a big help. He had just done a scenario on a $300,000 sale price, which is a good number for Riverside. The mortgage insurance at 1.35 comes out to $326, and at .85 it is $205 a month. This is $121 a month less for that client buying that $300,000 house. If you want to know how much more purchasing power it gives that buyer, it is probably about $20 grand. Instead of buying $300, they can now go to $320.
Bruce wondered about MI for FHA when you get equity and if this ever changes. The sad thing with FHA is that as of June of 2013, the MI now is on for the life of the loan and does not fall off like it did in the past. It used to fall off after about 11 years once the loan went down to 78%. Cary thinks this is where conventional loans will have an edge over the FHA. The MI on conventional loans will still fall off once the loan pays down to 78%. However, you can also try to get it off sooner than that. The minimum wage is two years, and you have to get a new appraisal. You have to document that you made all your payments on time; but if you can document with a new appraisal that is now at 75% based on today’s value, you have a good chance of getting the lender to drop the mortgage insurance off the loan.
Bruce asked about FHA and what would happen if you wanted to refi your loan and it is at 70%. Cary said your only option on FHA is to refinance, and you would have to refinance into conventional. This is what they are doing for a lot of customers, and for some of them it has only taken two years. He had one client who bought in Eastvale who had a home that appreciated enough in one year’s time for him to go from an FHA minimum down into an 80% conventional loan. However, you cannot refi to an FHA product since anything FHA will have the mortgage insurance and will stay on for the life of the loan, no matter what the loan to value is.
Bruce asked if they still have the loan product that involves work, which Cary said they do and it still has MI. Cary does not do many of these and will usually refer them out to one who specializes in them. These take longer, and you have to get contractors out there to get bids. Usually, it will take about 45 days to close one. They are seeing a little more interest in this product over the last six months. Bruce wondered if this loan is still not available to investors, which Cary said it is. They are only doing owner-occupied loans. They were a big help in getting rid of a lot of bad inventory, and they were thanked by having their 90-day waiver eliminated. At Provident, they deal with investors that are huge in buying properties and reselling them to first-time buyers. It is sad that they did away with the waiver since they now have to wait the 91 days. Time is money, and you do not want to sit on a property any longer than you have to. Otherwise, your returns drop. There is risk involved too. You have a vacant house that is fixed, and this is not so hot.
If you are an investor in this market and trying to get financing for rentals, Bruce wondered what Fannie and Freddie’s rental programs are. Cary said they actually have Freddie, who will go up to 85% on non-owner. This is something that is new and also has mortgage insurance. Typically most of the investors are savvy and have at least the 20% to put down. The thing that comes into play is the number of units you have financed will determine how many loans you can get. The standard Fannie/Freddie only allows you to have up to four financed properties, including the one you are trying to buy. This is their standard product with their best pricing. They have both loosened up with Freddie Mac going up to 6 and Fannie going up to 10. In both cases you have the multi-finance property program that requires 75% loan-to-value and will take 25% down. This is a refi product, and Freddie will allow you to do cash-out that was not offered at the time Bruce’s loans were done by Provident.
Bruce asked when you do an all-cash purchase at a trustee sale, is there a time limit on being able to refi. Cary said there is also a program for this called the delayed financing program where an investor who goes out to pay cash now wants to pull some of his money out. They will allow you to pull up to 80% of whichever is lower, the sale price you paid for it or the appraised value. The standard rule for Fannie used to be six months before you could pull out cash. In this case, it is for somebody who paid cash. If you put half down then got a loan for half, they are going to make you wait the six months. The cash-buyer has an advantage here in that there is no time frame attached to it. Cary said if there are more than ten financed properties, this is when they are done and would have to find private money.
The one other thing that had changes recently was if you had a foreclosure, bankruptcy, or sold a short sale within two years, there were certain rules for buying a home. Now there has been some tightening here, which is quite disappointing. FHA has been three years and not made any changes. VA guidelines are two years on a foreclosure or bankruptcy, although Provident has overlays with their investors. They would like it to be three, but they still have exceptions for the two years on VA. Conventional is where they have seen the rules tighten up, and it is mostly on short sales. It used to be that on a short sale you only had to wait two years and could do a 10% down Fannie Mae loan. Now they have pushed it back to four years and are making the people wait an extra two years. Anybody doing a short sale in 2014 will not be a buyer until four years later when they get a Fannie Mae loan. FHA could be three, but not less than that. As far as foreclosures go, conventional loans have not changed and are still at seven years.
Bruce asked what the reason is for overlays. Fannie and Freddie will do a certain thing, and an overlay is them saying they do not want to be that aggressive and will do less than that. Investors say they will buy the loans, but they don’t like the 56-57 ratios on FHA and will cut them to the 55 or 50. They could also do it by FICO score. If it is over 680, they will take it to 55, but if it is 640 they want it to be 43. It is sad but true as they are guaranteed to sell every loan that they write. They are now forced to throw in some of these overlays that are not in the FHA guidelines.
Bruce asked about immigration law changes. With the way the lending world is set up, Bruce asked about your chance of qualifying for an occupant loan and the path of time if you became a legal immigrant tomorrow. Cary said it will be tough since they still have to document it to your history. With social security number credit, they have that issue. They have to document you, and you have to have established credit as well as decent scores. The more important piece of this is they have to be able to document two years of income. If they paid under the table, they have to wait the two years and have everything above four before they are able to buy. It could not be an immediate impact, but it could eventually be a good impact at some point.
For more information, you can contact Cary Pearce at 951-256-3715 or email him at cpearce@myprovident.com.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.