Does Anyone Remember How to Make a Subprime Mortgage?


Brokers willing to learn the lost art of making risky mortgages are in demand again.

Brandon Boyd was a high school junior during the financial crisis. Now, the former Calvin Klein salesman is teaching mortgage brokers how to make subprime loans.

Mr. Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.

Mortgage brokers, who serve as middlemen between lenders and borrowers, used to be a key part of the home-loan process. But some brokers faked loan applications and steered people into debt they couldn’t afford.

Financial regulation has severely diminished their ranks since the housing meltdown. And big banks with national sales teams say they won’t use brokers anymore because they are third-party contractors, making it harder to police loan quality.

Brandon Boyd from FundLoans, a subsidiary of Drop Mortgage, in his office in Encinitas, CA

Now, small and midsize independent lenders want the brokers back. Nonbank lenders that typically cater to riskier borrowers say they need brokers to fan out across the country and arrange mortgages to people with lower credit scores, or who can’t prove their income through a typical tax return.

Brokers are a key part of a mortgage chain that starts with a borrower going to a broker for a loan. The broker surveys lenders for the best loan to fit the customer. The lender then funds the borrower’s loan.

While brokers before the crisis served banks and independent lenders, today they are working largely for nonbank lenders who make up a critical part of the mortgage market.

In the first quarter, nonbank lenders accounted for about half the mortgages originated in the U.S., according to industry publication Inside Mortgage Finance.

The subprime going has been tough, though. In the first quarter, nearly a decade after the start of the housing crisis, lenders originated just $6 billion in loans to borrowers with less than stellar credit scores or who are using alternative documentation to prove income, a category now known as “nonprime,” according to Inside Mortgage Finance.

In all of 2016, they originated $22 billion in loans, according to Inside Mortgage Finance. Back in 2005, at the peak for such loans, lenders made about $1 trillion of these mortgages.

Meanwhile, the volume of loans produced by mortgage brokers dropped to $37 billion in this year’s first quarter, down about 34% from the last three months of 2016. Loans from brokers peaked at around $1.1 trillion in 2003.

Lenders say there is an untapped market among borrowers with good credit scores like self-employed workers who don’t have proper income documentation, or for responsibly made loans to borrowers with credit problems that have had bankruptcies in the past or had to sell their home for less than it was worth.

If they are successful in recruiting brokers, lenders believe the market potential for both types of loans could reach $200 billion annually.

A big hurdle: finding the right kind of brokers and instructing them in the lost art of making a subprime loan. Some are returning to the industry for the first time since the crisis. Others like Mr. Boyd have never been in it.


“I knew a mortgage was a loan for a house,” said Mr. Boyd, who was recruited by his boss, Jon Maddux, after selling him a Calvin Klein suit at a local outdoor mall. “I came in just a blank slate.”

Before he co-founded Drop Mortgage, the parent company of FundLoans, in 2014, Mr. Maddux ran the website between 2008 and 2012. The site charged homeowners on the brink of foreclosure $995 to learn how to leave their debt behind.

Mr. Maddux said his experience advising down-and-out homeowners is today helping him pitch them loan products. Drop Mortgage and FundLoans made about $200 million in subprime and alternative documentation loans in 2016, funding them by selling them to hedge funds and other Wall Street investors.

“I’ve seen what caused these people to walk away and I don’t want to be a part of that,” he said.

Subprime mortgages are typically made to borrowers with a credit score of around 660 or lower, at interest rates ranging from 6% to 10%. Alternative documentation loans, or Alt-A loans, are made to borrowers with higher credit scores but who use bank statements or other less conventional ways to prove their income.

Steve Arnold, an account executive at Angel Oak Mortgage Solutions, one of the largest nonprime lenders, said he Is on the phone almost nonstop from 8:30 a.m. to 6 p.m. every day except Sunday coaching brokers on how to make nonprime loans.

Recently, Mr. Arnold said, a broker called with a client who had a credit score of 620 and had sold his prior house in a sale that didn’t generate enough funds to cover the mortgage. But the person had stellar income and was paying his rent on time.

The broker didn’t know how to make a loan possible.

“A lot of (the brokers) are timid and scared and don’t know where to start with the nonprime type loans,” said Mr. Arnold, who is based in West Palm Beach, Fla.

John Maddux from Drop Mortgage outside his office in Encinitas. 

Mr. Arnold made subprime loans between 2003 and 2007 for lenders including Lehman Brothers Holdings Inc., and laughs when asked about the difference between the precrisis lending period and today.

“Back then we saw a lot of fraud with wages and earnings and bank statements,” he said. Today, every loan file “is manually reviewed and underwritten by our company.”

Mortgage brokers have become so scarce that the industry’s trade group last year launched a grant program for the first time to help loan salesmen get back into the business—or enter it for the first time. The group, NAMB, the Association of Mortgage Professionals, has been overwhelmed with interest and has made 30 grants to brokers over the last six months, said Rocke Andrews, head of the program.

There are other signs of progress. At the trade industry’s annual conference at the Luxor Hotel and Casino in Las Vegas last September, several thousand brokers packed presentation rooms. Five years ago, the association said it was lucky to get 200 people.

A view of the Drop Mortgage office and staff in Encinitas.

“It’s been a hard battle” against the stigma of subprime lending, said Krista Donecker, an account executive at Irving, Texas-based Caliber Home Loans Inc.

Ms. Donecker sometimes uses a power-point presentation showing the difference between a precrisis subprime loan and a subprime loan today when she trains brokers.

She said she would never forget the first time she gave the presentation a couple of years ago. One of the brokers raised her hand and asked, “Are you sure this isn’t illegal?”

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HUD Secretary Carson embarks on mission to increase homeownership

“We will consider anything that makes sense”


Ben Carson, U.S. Department of Housing and Urban Development secretary, conducted an interview with Bloomberg on how to improve the U.S. homeownership rate.

Indeed, this was only one of many stops, as Carson appears to be on a mission to increase homeownership.

And it is with good timing, as the homeownership rate in the first quarter of 2017 underwhelmed and held steady near its 50-year low.

In his Bloomberg interview, Carson explained that FHA mortgages should serve the market according to the need in the economy. When the economy is good you don’t need nearly as much, but when it’s hard you need more.

He also emphasized the importance of homeownership, stating that the average net worth of a homeowner is $200,000 but average net worth of a renter is $5,000.

In order to increase the homeownership rate without increasing risk, Carson suggested several solutions including helping Millennials using programs which combine their student loans to mortgages.

In February, BurkeyLoan launched its BurkeyLoan Mortgage division which included its 120% loan-to-value mortgage product that funds both a home purchase and the borrower’s student loans.

Carson also suggested a change in debt-to-income ratio, but didn’t go into specifics. Earlier this month, Fannie Mae announced it is preparing to raise the debt-to-income ratio, the No. 1 reason that mortgage applicants get rejected.

“We will consider everything,” he said. “Anything that makes sense.” But he emphasized the government should be involved as a backstop, an insurer, not necessarily the one who pulls all the strings.

In honor of National Homeownership month, the HUD secretary has been busy making the rounds as he promotes homeownership. Monday, Carson, along with his family, toured the floor of the NYSE exchange and had the honor ringing the closing bell.

In fact, Carson is filling his week with interviews where he discussed how to improve the rate of homeownership in the U.S.

He will also appear on Sean Hannity on Tuesday where he promises to talk about his vision for HUD.

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Recent Mortgage Rate Stability Could Change Tomorrow

Mortgage rates moved modestly higher today, for most lenders.  This had more to do with yesterday’s market movement than today’s.  Bond markets were weakening yesterday afternoon (which typically results in rates moving higher).  But the weakness came too late in the day for most lenders to bother with reissuing rate sheets.  Instead, they waited for this morning.  With a bit of weakness remaining intact, it was an easy call to raise loan costs.


Even so, the day to day movement in rate quotes continues to be quite small.  The average scenario won’t be detectably different if quoted today vs yesterday.  Interest rates themselves will certainly be unchanged.  It’s only via modest changes in upfront closing costs that lenders can modulate “loan costs” (or the “effective rate”) in these situations.

What will it take to change this low volatility pattern and how soon might it happen?  With a potent combination of economic data tomorrow morning and the Fed Announcement in the afternoon, that’s a timely question!  While a rate hike from the Fed is a foregone conclusion, markets can still react forcefully to any changes in the Fed’s rate hike outlook.  That makes tomorrow afternoon the most obvious staging area for potential volatility in rates in the short-term.

Higher potential volatility brings bigger risks and bigger rewards for those playing the lock/float game. With rates still close to long-term lows, risk-averse clients are well within their rights to err on the side of locking.  On the other hand, 10yr yields (a good proxy for broader rate momentum) have done a good job of holding under 2.22% for the past 3 days, despite trying to break higher on several occasions.  Floaters are hoping this is a ceiling that continues to hold through tomorrow’s Fed events.  Whatever you decide, make sure you have a strategy in place with your loan originator.
Loan Originator Perspective

Tomorrow will be a busy day and rates look to make a move one way or the other.  With where rates are today, i think you do have more to risk than to gain by floating, so i think locking is the smarter choice  I do think the FOMC statement and accompanying dot chart will be favorable to lower rate but only float if you can afford to be wrong.  –Victor Burek, Churchill Mortgage

I’m inclined to float as long as we stay under 2.22 – 2.25.  We’ve tested and held 2.22 each of the last three days. Technical levels aside, there is lots of news on tap tomorrow including FOMC rate decision.  Beware! –Jason Anker – Sr. Loan Officer 

Bonds and lock desks idled in place again, as both prepared for tomorrow’s FOMC policy statement and Chairwoman Yellen press conference.  It’s a foregone conclusion the Fed will raise its overnight rate, the bigger question is whether it will alter the outlook for future bond purchase tapering.  The last few statements have been profoundly neutral, it would be a shock if there were any big surprises tomorrow.  Don’t see a great likelihood of major moves either way for rates, but locking is always the safe route on days like these.  –Ted Rood, Senior Originator
Today’s Most Prevalent Rates

  • 30YR FIXED – 3.875-4.00%
  • FHA/VA – 3.5-3.75%
  • 15 YEAR FIXED – 3.125-3.25%
  • 5 YEAR ARMS –  2.75 – 3.25% depending on the lender

Ongoing Lock/Float Considerations

  • Investors were relatively convinced that the decades-long trend toward lower rates had been permanently reversed after Trump became president, but such a conclusion would require YEARS to truly confirm
  • Instead of continuing higher in 2017, rates instead formed a narrow, sideways range, and held inside until April.  Investor perceptions are shifting such that fiscal reforms and other policy developments will need to live up to expectations in order to push rates higher.  Geopolitical risks would also need to avoid flaring up (more than they already have)
  • For the first time since the election, we’re in a rate environment where you wouldn’t be crazy not to lock at every little opportunity/improvement.  Until/unless it’s broken, the highest rates of early-2017 mark the ceiling, and we’re now waiting to see how much lower we can go from here.
  • Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders.  The rates generally assume little-to-no origination or discount except as noted when applicable.  Rates appearing on this page are “effective rates” that take day-to-day changes in upfront costs into consideration.
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Your Resistance to Change When Buying or Selling Your Home


Resistance to change is common for buyers and sellers. This may seem surprising since both buying and selling mean seeking out a move with many related changes, but resistance is common none the less.

Buying and selling real estate involve many complex decisions packed full of real estate terminology, all of which are new territory for most buyers and sellers.

Add the pressure of time-sensitive decisions and the stress of dealing with huge amounts of money (much of it borrowed) and most buyers and sellers are way out of their comfort zones.

Does resistance in buyers and sellers make more sense now?

Too often, making no decision or a “no” decision may seem less stressful for buyers or sellers than agreeing to the significant changes related to entering into a real estate transaction. Fear of making the wrong decision can result in resistance and indecision which could cost thousands:

  • Sellers who receive their first offer — especially very soon after the house is listed — may worry they are selling too cheaply. Resistance can lead to the seller wanting “to wait and see” if a higher offer will appear. Sellers may second guess their decision to sell. Resulting stubbornness can materialize as illogical resistance to offer price, move-in date, or to giving up light fixtures or other items a buyer includes in their offer to purchase.
  • Buyers who have seen a property which meets their wish list must-haves, may still be resistant to making an offer, especially if it’s their first offer or one of the first houses they view. Resistance leads to wanting “to see more houses” as if there’s a magic number of viewings before a dream house appears. Resistance may also materialize as stubborn refusal to increase their offered purchase price for a seemingly-ideal property a few hundred or a few thousand dollars to meet the sellers half way. Buyers have been know to walk away from deals if the appliances, lighting fixtures, or other “must haves” they ask for in the offer are denied them by the seller. Ask your real estate professional about their experience with deal-breaking battles over furnishings and details.

Resistance is common under stress, even the best stress.

Real estate professionals will do their best to help buyers and sellers face their fears and overcome their resistance. Closing or decision-making techniques can help buyers or sellers realize where true value lies for them. In the hands of trained, ethical professionals, closing techniques can be communication and decision-making aids. (Caution: Unscrupulous individuals can use these simple exercises to manipulate or mislead — care is essential!)

For instance, one closing technique involves reducing a small disputed difference in purchase price like $1500 to its cost per day over a year. In this case, $1500 is $4.11 a day. Compare that amount to common purchases like a cup of coffee to put the financial decision in perspective. Or, relating that dollar difference to the cost per month on the mortgage payment, rather than cash out of hand, may also help.

Resistance leads individuals to “I’d like to sleep on it” reactions. It’s not that they expect to win the Lottery overnight. This stress-related stall provides mental breathing room but unless issues are addressed, clear thinking does not automatically result. The problem is usually lack of confidence in decision making, not in the property.

Unfortunately, in real estate, delays can cost buyers a “dream” property or sellers a dream offer. Decisive buyers and sellers will snap up opportunities while others hesitate.

When experiencing resistance, ask yourself why you’re having this reaction to put these feelings in perspective. Often the bigger the decision or resulting change, the greater the resistance:

  • What are you being asked to let go of or to release?
  • What must you face in its place?
  • How real are related fears?
  • How real are perceived benefits of proceeding with the transaction?

Enlist the expertise of your real estate professional in assessing the true benefits and weaknesses of the decision to buy or sell a specific property. Question their responses. Ask for market statistics and analysis of area trends.

  • Spend equal time and energy analyzing what is gained by not buying or selling the real estate in question. How special is this property anyway?
  • How much of the hesitation is related to uncertainty in your personal life or relationship? Is this really the best time to buy or sell? Don’t just ask these questions. Get to work and decisively tease out answers.

Usually, this deep, clear thinking reveals the true value of benefits and gains in taking the plunge to buy or sell.

More than one experienced real estate professional has suggested the 51% rule can make sense when homes are involved. That is, “more sure” than “not sure,” with slight but exhilarating uncertainty regarding the adventure ahead. That’s real estate ownership.

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What Happens To The Listing When The Agent Changes Offices?

Recently, the legal department of the California Association of Realtors produced a question-and-answer (Q&A) format memo that addresses a variety of issues that arise when agents leave one office for another at a time when they (the agent) may currently be involved with a listing or sales transaction. The title of the Q&A is Changing Offices: Transfer of Listings, Buyers, and Procedures. The situation itself is not unusual. It happens all the time. But that doesn’t mean that there are well-established good practices for dealing with it.

First of all, the general question arises (Question # 11 in the memo):


Question: Does a listing agent have the right to transfer the listing to a new broker after the brokerage relationship with the [current] broker is terminated?

Answer: Generally, no, absent the current broker’s permission. The listing is a contract between the broker and the seller. It is not between the sales agent and the seller. Therefore, it is the broker that retains the listing. Inducing the seller to cancel one listing and sign another even if done by the agent that obtained the listing originally, is likely to be an intentional interference with contractual relations.

Furthermore, NAR code of ethics 16-20 states that prior to or after their relationship with their current firm is terminated, agents shall not induce clients of their current firm to cancel exclusive contractual agreements between the client and that firm.

Lastly, in most cases the independent contractor agreement will prohibit the agent from soliciting sellers with current listing agreements. (See paragraph 9 of the [California Independent Contractor Agreement]).

Suppose, though, as is often the case, that the first broker is agreeable to letting the listing go with the agent to the new broker. Typically, the first broker receives a fee or a portion of the ultimate compensation. How is this to be accomplished?

While there is no “one way” to do it, one thing is for sure: it is not simply a matter of switching the listing in MLS with an instruction from both brokers. For one thing, you wouldn’t want to try it without the written consent of the seller.

The CAR memo notes this: “There is no single way to accomplish this. But no matter how it is done, it is important to realize that first and foremost the agreement to transfer the listing is primarily between the current broker and the new broker. And secondly, there is presently no form on zipForm® designed for this purpose.”

Having noted that, the memo does suggest a list of terms that ought to be covered in whatever agreement is reached between the brokers:

1. That it is subject to seller consent to employ the new broker

2. That it is subject to seller signing a cancellation of listing (COL) with the former broker

3. That it is subject to the agent being employed with the new broker

4. That the current broker assigns all rights to the listing representation and commission to the new broker

5. That the new broker will fully compensate the listing agent at closing

6. That the new broker promises to pay any cooperating broker the full commission offered

7. That each broker agrees to hold harmless and indemnify the other

8. That it specifies the amount of commission, if any, the new broker agrees to pay the former broker

To be sure, a less complicated agreement could be memorialized between the two brokers; but why? If anything, there might be more terms to add. Although the sales agent may not be a party to the agreement, some of the terms may reflect the terms of his Independent Contractor Agreement with the first broker. That is also discussed in the CAR memo.

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A new community with soaring airplanes!

The expression “Soaring Ceilings!” is commonplace in real estate ads for new homes. “Soaring Airplanes!” isn’t.

Nonetheless, Greenbriar, a 600-acre, mostly residential community next door to Sacramento International Airport, may start construction as early as next year. According to a recent story by Tony Bizjak in the Sacramento Bee, the builder — Integral Communities of Newport Beach — “plans to build more than 2,400 for-sale houses and nearly 500 rental units, including 200 for lower-income seniors.”

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Because the project will be built on land used by migrating birds, and will contain manmade lakes — maybe they’ll call those “artisan lakes” in the ads — it’s likely our feathered friends will patronize those water features. That can prove deadly for the birds and hazardous for the airplanes if the former fly or get sucked into the engines of the latter. To be sure, the owners are planning to create steep embankments on the lakes so that the birds have trouble walking in and out of the water — a tactic that somewhat ignores the fact that most birds fly into and out of water. You rarely see them towel off on the shore.

According to the story, “Greenbriar managers…will be authorized to chase birds off the site using fireworks, scarecrows, water spray and dogs, so that those birds do not set up house around the lakes.”

So let’s see what we have here:

– A community whose residents will hear airplanes taking off and landing at all times of the day or night, within a few hundred yards of their homes.

– Impromptu, and, one surmises, startling firecrackers popping off, possibly during the occasional lulls of silence at the airport.

– While scarecrows make no noise, the sound of barking dogs pursuing the birds while those hapless managers spray water at the birds may make the entire environment sound like a scene from a Frankenstein movie, when the villagers rise up and advance on the baron’s castle, there to kill the monster he’s created. Accordingly, I’d suggest the owners provide the managers with torches.

Since I’ve helped market communities as varied as Serrano, in El Dorado Hills, and The Creamery at Alkali Flat, I have a couple of ideas for the Greenbriar gang:

1. Market the community to hearing-challenged people.

2. Hire puffins to hide in the bullrushes, then spring out and silently trip birds trying to make their way up those embankments.

3. At a public meeting, invite members of the Sacramento City Council who were in favor of the development to move there, rent-free.

The resulting silence may be deafening.

Article and image provide by: Sacramento Business Journal


Home prices jumped the most in these 10 housing markets

Most expensive metro holds increase double that of national average


Home prices increased in March to a new peak, according to the latest Home Prices Index from Black Knight Financial Services.

Home prices rose to a median $272,000 in March, the report showed. This represents a new peak in home prices, and a rise of 2.3% from the start of the year.

And the Case-Shiller index, put out by CoreLogic and S&P Dow Jones Indices, showed home prices increased 5.8% annually in March, a pace which experts say is good news for sellers, but not so great for home buyers.

But some metropolitan areas saw home prices moving faster than others, as the fastest metro saw an increase that was double that of the national average. Month-over-month, home prices increased 1.3% nationally.

Here are the top ten housing metros with the highest increase in home prices in March, and the percent increase from the previous month. Using data from Trulia, HousingWire analyzed the median home price in each metro.

10. Bloomington, Illinois – Home prices up 2%

Median home price: $157,000


9. Boulder, Colorado – Home prices up 2%

Median home price: $625,000

8. Sacramento, California – Home prices up 2%

Median home price: $280,000


7. Spokane, Washington – Home prices up 2%

Median home price: $180,325

6. Kankakee, Illinois – Home prices up 2.2%

Median home price: $86,000

5. San Francisco, California – Home prices up 2.2%

Median home price: $1,205,000


4. Walla Walla, Washington – Home prices up 2.2%

Median home price: $218,750

3. Bellingham, Washington – Home prices up 2.3%

Median home price: $335,709

2. Seattle, Washington – Home prices up 2.4%

Median home price: $625,000


1. San Jose, California – Home prices up 2.6%

Median home price: $835,000

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