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Volume 2013 - Number 5

March 8, 2013

New Lenders in Not-Quite-Dead Nonprime Market

Five years after the subprime mortgage industry imploded, there are signs of a revival as new players are entering the nonprime space. What’s developing is “old style” home-equity lending, where loan-to-value ratios are rarely larger than 75 percent and the actual funder of the loan keeps the paper in portfolio and services it.

In the past two weeks, two subprime residential firms opened their doors for business: Citadel Loan Servicing and Deephaven Mortgage. Deephaven is the brainchild of Matt Nichols, a former managing director of Goldman Sachs.

A third firm, FastFunds Financial Corp., whose shares are traded in the over-the-counter market, announced this week that it intends to enter the business through an affiliate called NetLife Financial.

Citadel has raised $200 million in seed money from private investors. Dan Perl, CEO and chairman of the privately held nonbank, said the goal is to securitize most of its product within 12 to 18 months. “We will originate, underwrite, fund and service the loans,” he said, adding that first the borrower “must prove to us he can pay.”

According to a Citadel rate sheet, its maximum LTV ratio will be 75 percent. For borrowers with severely impaired credit, the LTV ratio will be just 40 percent. For “A” credit clients, note rates presently range from 7.95 percent to 8.50 percent. Credit scores range from 500 to 720.The lender will fund loans from $50,000 to $750,000.

Perl, who made his name in the nonprime industry a few decades back with Life Savings Bank and its no-income, no-asset mortgage, said when it comes to appraisals, “the value of the property will not be open to conjecture.” He added: “This is sensible lending.” 

Citadel, which was launched a few years back as an investor in nonperforming mortgages, will gather nonprime mortgages through loan brokers. At first it will focus solely on California, but it plans to branch out into other Western states, Perl said.

The CEO said he has no worries about the Consumer Financial Protection Bureau and compliance issues. “The borrower will be qualified,” he said. Citadel is staffing up and hopes to hire up to 55 full-time employees within the next few months. When asked who his investors are, Perl declined to comment.

Other Nonprime Players

Little information was available on Deephaven. A loan matrix provided to Inside Nonconforming Markets shows that the nonbank originator is willing to fund residential loans with credit scores as low as 560 even if the borrower has what the lender calls “derogatory” credit. The firm will fund loans with LTV ratios as high as 75 percent.

The loan sheet had a posted interest rate of 9.99 percent and a mortgage cap of $500,000.

Nichols, CEO of the company, did not return calls for comment. One source said Deephaven may have as much as $500 million in available lines. One executive who spoke to Nichols about his company said the cash behind the firm is “patient money.” This executive, who requested anonymity, said Deephaven will be a correspondent buyer of loans. “They closed their first loan on Monday,” he said.

NetLife Financial, meanwhile, said it is working on a product “not based on credit history or a personal guaranty.” A spokesman for FastFunds would only say that the product is “under development.”

Ocwen Financial is also increasing its originations, but William Erbey, chairman of the special servicer, said subprime lending is not in the immediate plan.

“I think in a prudent way, if you come back and can provide mortgages to people who can responsibly handle those mortgages, I think that makes a lot of sense to try to participate in that market,” he said. “We have to be careful, though. I abhor gain on sale and, as John [Britti, Ocwen’s CFO] always reminds me, if you have it, the auditors require you actually to book it or write it up to those levels. So I think we are going to have to think about how we do that, so we keep our balance sheet relatively pristine.”

The subprime share of recent originations remains limited. About 4 percent of mortgages originated from August through October 2012 went to borrowers with credit scores below 620, compared with a roughly 18 percent share in 2006, according to Andrew Jennings, a senior vice president and chief analytics officer at FICO.


Other areas of interest

Poll

Who "owns" the mortgage customer that’s brought to a wholesale lender through a loan broker?

The broker. It’s his/her client.

35%

The wholesale/table funder. They’re taking the financial risk.

30%

The broker, but only for the first year. After that, the borrower is fair game.

13%

Hard to answer. It’s a complicated issue.

22%