Homebuyer Financing

Homebuyer Financing

Lenders get creative, new capital market created to help families buy their American Dream.  By Kim Jackson, as seen in Colorado Builder Forum

So homebuilders are happily building and selling homes this summer. Folks are coming out of their parents’ basements or high-rent situations to buy homes. “The mentality of the homebuyer has gone from one of ‘I’m not willing to dip my toes in the housing market’ to just saying, ‘To hell with it; it’s time to buy a house,’” observed Bryant Ottaviano, CEO of Littleton-based 1st Mortgages. And everyone admits that if lending practices were different, there’d be more even more people buying homes. But they’re not; in fact, by January — when the Dodd-Frank Act rule that requires a 20 percent down payment goes into effect — they’re expected to be tougher for people to buy their first homes or move up to their next homes.

Buyers get help with construction-to-perm loans

Until then, lenders are becoming more creative in helping people buy homes. For example, Fred Smith has worked with a number of homebuyers on what’s known as a ‘construction-to- perm’ loan. The senior mortgage loan officer with Mutual of Omaha Bank explained that the loan begins as a construction loan. When the home is complete — usually 12 to 18 months later — it simply converts to a permanent loan. While the home is under construction, the homeowner just makes interest payments on the amount drawn from a loan. For example, if a homeowner has a $500,000 loan and at closing, takes $100,000 to buy a lot, at the end of 30 days, the homeowner pays interest on that $100,000. During the second month, if the homeowner submits $50,000 in bills to the bank for more work, at the end of 30 days, the interest payment due is now on $150,000. “I’ve been in this business in Colorado for a long time,” Smith said, “and in my experience, it’s one of the best programs around. It’s a win-win for the homebuilder in that he doesn’t have to secure financing, and the homebuyer gets the loan. Not only are they approved, they’ve already closed on their permanent loan, so homebuyers can concentrate on just building their homes.” The loans usually are in the form of adjustable rate mortgages that range from five- to ten-year ARMs, as well as a 15-year fixed-rate mortgage. On the day we spoke in June, he said on the bank’s 7-1 ARM, the rate was 3.625 percent, at par; the 15-year fixed-rate mortgage was at 4 percent. “The ARM is good for seven years, then it adjusts to a one-year ARM after that,” Smith said. “The 15-year fixed rate is good during construction and the permanent loan. I don’t know if you can find a construction loan by itself, with that low an interest rate.” There are a couple of extra fees on these loans. One is the homebuyer pays for the inspection fees for monthly draws up front, while the home is under construction. If the home is completed in say, ten months, the unused inspection fees are returned to the homebuyer. The other fee is for outstanding title work, “basically a mechanic’s lien protection, where we update the title. That’s a few hundred dollars more,” Smith said. “Otherwise, the closing costs are the same as you’d have on a straight purchase or refinance.” Smith said that homebuyers who use this option are generally financially savvy and often use it to build custom homes. He’s worked with construction-to-perm loans that have ranged from $400,000 to $4 million, however, “most are between $1 and $2 million.” If, after the home is built and not all the approved funds have been used, “the permanent loan can go forward at that lower amount or we can pay the homebuyers the extra amount, because they’ve already been pre-approved,” he said.

Lender aids builder-credit union relationships

Many other homebuyers are looking for an already-built home — and need help navigating the new lending landscape. Bryant Ottaviano has earned a well-deserved reputation as someone who can be pretty creative in helping buyers get financed. For example, the CEO of 1st Mortgages recently facilitated a $30,000 fixed-rate credit card with one of his credit union partners, to help a homeowner with landscaping expenses. Once the landscaping was finished and an updated appraisal was made, Ottaviano flipped that card balance to a second mortgage. He’s also been known to consolidate and lower car payments, to help buyers qualify for more home. His company also creates new relationships between homebuilders and financial institutions. Often, when a homebuilder has a community near a credit union, 1st Mortgages is there to introduce the two. “We facilitate that relationship,” Ottaviano said. “For example, credit unions are clamoring to get in front of Alpert Homes in Aurora because he builds a real nice product and he has a captive audience,” he said. “We come in, drive that financial institution relationship with the builder.” He’ll bring credit unions out to homebuilder sites or bring builders to credit unions to “introduce themselves, lay out the plan, see what they’re trying to accomplish.” And while the homebuilder usually doesn’t immediately benefit from the newly formed credit union relationship, there’s now an opportunity for that to take place in the future. “What we’re finding is that credit unions are much more likely to open up their coffers for builders when they know who the builders are and they can reach out and touch them,” Ottaviano said. “So it’s getting that geographical location put together with that financial institution. It opens up the door to further communication. When the builder needs $50,000 to finish off landscaping, or whatever the case is, the relationship is already being seated.” He added that presidents of the local banks and credit unions remember when someone brings them new business. “They’ll take note of the fact that you brought in 15 new clients and generated 12 new car loans and 15 checking accounts,” Ottaviano said. After ensuring it can add as much to the relationship as possible, 1st Mortgages is there to step in with the mortgage for both builders and credit unions. “We’ll get the community financial institution the ability to look at the mortgage and put it on their books, or at least expose that institution to having some involvement with the loan,” Ottaviano said. “We’ll look to drive the ancillary products and services that the financial institution offers back to homebuyers, so they know they’re right around the corner and willing to lend.”

Higher down payment rule starts January

One of those is the Dodd-Frank Act, which by January will require homebuyers to put 20 percent down on a qualified residential mortgage. Because it takes families an average of 14 to 16 years to save 20 percent for a down payment, homeownership soon will be out of reach for hundreds of thousands of people.

New model helps people buy homes

It’s why Steve Cinelli believes the home financing model needs to change. In the last 18 months alone, the founder and CEO of San Francisco-based Primarq, Inc. said that more than $1.5 trillion of mortgage applications were denied — because banks wouldn’t lend, appraisals didn’t come in or there was an insufficient down payment. So, he contends, it’s not a market demand issue, at all. “If there was sufficient capital out there, meaning the right type of capital, all this inventory would be absorbed,” he said. “Lenders can and will only go so far now and the homebuyer is limited in his capacity. So another source of capital is required.” He’s familiar enough with capital markets, as a dozen years ago, he built out a private capital market to let third-party equity investors participate in emerging growth companies. “It was a predecessor to this whole crowdfunding movement,” he said. Most asset classes have some type of equity capital market, well, that is, except the housing industry. “And right now,” Cinelli said, “it’s drastically needed, because the two providers of capital for the market, namely lenders and homebuyers, are not participating to the extent necessary to absorb the inventory. To stimulate the economy in general, the Fed is using initiatives like quantitative easing to add liquidity. We need to do the same in the housing space.”

 Banking financier creates housing capital market

It’s why he believes equity capital needs to come into the space; as such, he has created a capital market for the housing industry. “For homebuyers, we will deliver supplemental equity or down payment funds. For investors, we think there’s merit to gaining exposure to the single family home price movement by co-investing with someone with a vested interest, namely an owner/occupant,” he said. Here’s how it works: You have an individual who wants to buy one of your homes. He or she doesn’t have the full down payment. Primarq has third-party investors who want to invest in the Denver market, because they believe it may go up ‘over the next ‘X’ number of years. “With the leverage factor,” Cinelli said, “investors can generate a pretty compelling return. It enables third-party investors to invest in a big asset class — single family residential homes — as passively as REITs, which generally consist of other subclasses of real estate, such as commercial, industrial and multifamily.” While the equity investor is seeking appreciation, unlike a lender, he is also taking the price risk with the owner if the price goes down in value. The homeowner enjoys exclusive occupancy rights and is entitled to improve the property, while the investor is solely participating in market returns. Some homeowners will live in their homes the rest of their lives; others may only live there a few years. Homeowners are free to live in their homes as they would without the equity investors. For their part, equity investors can return their equity position to Primarq’s market and sell it on a secondary basis, “much like if I bought Facebook shares on the IPO, but then I turn around and sell them on a secondary basis back to the market,” Cinelli explained. “Primarq is changing the way residential real estate is invested in, including the liquidity of the investment.” He added that it was pretty logical that there should be more equity in the housing space, “and if the owner-occupant can’t bring it, let’s create a mechanism by which third-party equity investors can. We’re creating a comprehensive capital market system.”

Passive investors gain access to housing, homebuyers enjoy lower debt

Investors get access to a viable asset class and homeowners have access to a new pool of capital that doesn’t require monthly payments, thereby lowering the level of debt and payments they make, and improving affordability. “Everybody wins: Homebuyers and owners, lenders, realtors, investors and the government,” Cinelli said. “Even the PMI providers, who trade on the high degree of leverage, can benefit with a lower risk profile.” Cinelli was slated to launch the program in August, and feels this funding mechanism suits both national and smaller niche homebuilders. “With smaller niche markets, there is more comparability in how these new homes are doing, compared with existing homes. And our investors’ return in the Primarq market are based on the ultimate performance of these homes.” He added, “Freddie, Fannie and the FHA are broke. They’re in need of a drastic overhaul. This approach can actually aid builders in providing additional equity capital to complement the more restrictive mortgage environment. And if there’s more financing in place, it facilitates the movement of inventory — which is what the lenders want.”


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