A Bubble-Era Product, Thought Extinct, Has Reemerged in California

Mortgage & Real Estate




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California mortgage broker Logan Mohtashami says the most popular product he arranged last year was a kind of mortgage that banks stopped making when the housing market blew up.

Kinecta Federal Credit Union, one of the largest credit unions in California, with assets of $3.4 billion, last year was churning out mortgages topping the Fannie Mae and Freddie Mac loan limit ($625,500) and with attached second liens valued up to $300,000. The cumulative loan-to-value ratio in some cases exceeded 89.9%, according to Mohtashami, a senior loan manager at AMC Lending Group in Irvine, Calif.

“To be honest there is a lot risk with a second-lien holder,” he said. “This is why you don’t see second liens being made by banks on top of a first mortgage anymore.”

Piggyback loans were made in droves in the run-up to the financial crisis. Lenders provided borrowers with a second mortgage that “piggybacked” on top of a first. Together, the two mortgages relieved the borrower from a required 20% cash down payment. The second loan, taken out simultaneously, reduced the need to pay for private mortgage insurance.

Kinecta’s product is unique because there is no other conforming, bank-offered product above $625,500 that has over 80% LTV, Mohtashami said.

Rob Hirt, CEO at RPM Mortgage in Alamo, Calif., said it is possible that investors also may be fueling the appetite for these kinds of loans. “Closed-end seconds [liens] will be making a comeback supported by nonbank investors,” he said, declining to elaborate on investors’ heightened interest.

Borrowers end up paying 10% down on the purchase price, and the purchase price can be big. Kinecta’s loan is ultimately designed for higher-income borrowers who are seeking mortgages between $750,000 and $1.1 million, Mohtashami said.

Officials at Kinecta, based in Manhattan Beach, Calif., declined to comment for this article or to confirm details regarding their loan standards.

Some mortgage professionals do not want to see these kinds of loans making a comeback, warning that this time the driving force is less about greed and shoddy underwriting and more about the rising values of single-family properties.

Rising home prices have had a twofold impact on the economy. Price appreciation has allowed consumers to nearly double home equity to almost $14 trillion since 2011. Consumers are saving around eight cents on the dollar, say Deutsche Bank analysts, citing price indices created by economist Robert Shiller. But for prospective homebuyers, purchases have become increasingly expensive and harder to finance.

The median home price in California rose as high as $384,000 last year, or 42% higher than in 2012. It may still take another two years for the housing market to reach equilibrium between supply and demand, according to Deutsche real estate analyst Steve Abrahams. Only then will prices really be able to stabilize.

“As the economy has improved over the past few years, home prices have been rising, making a purchase less affordable, while credit remained an issue,” reads marketing materials for Kinecta’s mortgage services, “but better news may be around the corner.”

The only other time a loan product was as popular with borrowers was in 2008 when the 3.5%-down Federal Housing Administration mortgage “came back into vogue,” Mohtashami said.

Current volumes do not appear to be having a tremendous impact, according to CoreLogic Deputy Chief Economist Sam Khater, who said he has not heard of piggyback loans returning to the market. “But if so, it has to be fairly small because we are not seeing any changes in underwriting in our mortgage underwriting indices.”

Credit unions have been trying to keep pace with banks’ asset growth, so it is no surprise to see them exploring the product, said Chris Whalen, head of research at Kroll Bond Rating Agency. Banks could never do the second liens in today’s regulatory environment, he said.

“I think it’s a little risky: do you want to be making closer to 100% loans when you’re at the top of the appreciation curve, versus at the bottom?” said Douglas Bystry, the CEO of Clearinghouse CDFI, a Lake Forest, Calif.-based community development lender with $750 million in assets. “If something happens and home values decrease, these borrowers will be upside down.”

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