With subprime mortgage lenders shutting their doors and huge players like Countrywide Financial Corp. and IndyMac Bancorp Inc. facing severe liquidity problems, these would appear to be the worst of times for mortgage lenders.
And for the most part they are. Yet some mortgage lenders are thriving, especially credit unions and small niche lenders, precisely because they have stuck to a conservative lending philosophy and decided to keep their loans in house instead of selling them in securitized packages to the market.
"Any portfolio lender that doesn't have to go outside for their funds or borrow in the secondary marketplace is doing well right now, because with other lenders having to tighten so much, they can pick and choose from good quality borrowers that are out there," said Fred Kreger, principal at mortgage brokerage American Family Funding Corp. and former board member of the California Association of Mortgage Brokers.
Consider Kinecta Federal Credit Union, the largest credit union by assets in L.A. County as ranked by the Business Journal and the twelfth largest mortgage lender among credit unions nationwide, according to First American Loan Performance.
Like other credit unions, Kinecta is a portfolio lender that funds home loans to its members primarily from customer deposits. More than 70 percent of Kinecta's $1.7 billion first mortgage loan portfolio consists of loans to borrowers with Fair Isaac Co. (FICO) scores above 720 (considered top-grade prime), another 25 percent to borrowers with FICO scores of at least 660 (considered prime grade) and less than 5 percent of loans to non-prime borrowers.
"We've been pretty conservative, because that protects our members," said Chief Executive Simone Lagomarsino. "Our members are owners of the loans. If we take on excessive risk, it's a negative impact to our members."
That philosophy is in stark contrast to the high-volume mortgage lenders that have dominated the marketplace in the last few years, selling off their loans often hours after they were made in huge securitized packages to Wall Street.
With such a good quality loan portfolio and the ability to obtain supplemental borrowing from the Federal Home Loan Bank, Kinecta Chief Financial Officer Mark Joseph said there has been no need to tighten underwriting standards as other mortgage lenders have done.
What's more, Kinecta is now benefiting as other lenders have tightened the screws on borrowers. "We've had some pickup in our broker business because other places have been getting crunched," Joseph said.
Of course, Kinecta only makes loans to credit union members, so individuals who've been rejected for loans elsewhere can't just walk into a Kinecta branch and get a loan. They have to become members first.
And that's precisely what's happening. "Folks have gotten to know about us and we've been able to grow our deposit base and our mortgage loan volume," Joseph said.
Kinecta has also expanded its mortgage loan offerings, including making some loans with short-term interest-only components. "But this is provided as a convenience to our customers, as opposed to qualifying them for loans they would not otherwise qualify for," Lagomarsino said. In other words, once a Kinecta customer qualifies for a loan of a certain amount, they can choose an interest-only option.
Lagomarsino said Kinecta does sell a small portion of its portfolio, primarily conforming loans, to Freddie Mac and Fannie Mae, the federally sponsored corporations formed to broaden home ownership and inject liquidity into the mortgage market.
Kinecta is not the only credit union benefiting from the turmoil among other mortgage lenders. Burbank-based Lockheed Federal Credit Union, which has more than $2.6 billion in total assets and ranks as the 15th largest home mortgage lender among credit unions nationwide, is now publicizing that its conservative lending philosophy has enabled it to charge interest rates lower than currently found at many of the mainline mortgage lenders.
"Our mortgage delinquency is very low, based on excellent underwriting, and the fact that we do not participate in sub-prime lending," said Dave Styler, Lockheed Federal Credit Union's chief executive, in a press release late last month. "We are fortunate to have such a strong balance sheet, and we are well-positioned to withstand any foreseeable economic and financial turmoil."
Niche portfolio lenders
Other smaller lenders besides credit unions are moving to take advantage of the mortgage market meltdown. For example, Woodland Hills-based Value Home Loan Inc., a small portfolio mortgage lender, is now boosting its staff in a bid to increase market share.
"We're recruiting loan originators from failing mortgage companies and we're building out thousands of square feet of office space to accommodate these industry veterans," said president Neil Gitnick.
Value Home Loan, funded by private investors, started out as a portfolio lender, keeping its loans on the books in-house. But like many mortgage lenders, about six or seven years ago, Value Home Loan started packaging loans to sell on the secondary or commercial paper markets. However, unlike many lenders, Value Home Loan only sold off a small segment of its loans with the bulk of its $140 million portfolio remaining in-house.
Other small portfolio lenders also dot the L.A. market, including West Los Angeles-based Budget Financial Corp.
But Value Home Loan has not been immune to the mortgage market meltdown. Gitnick said that the collapse of the secondary market in recent weeks has forced him to shut down the mortgage loan repackaging side of his business and lay off five people. But those layoffs have been more than offset by the increase in the roster of mortgage loan originators.
"We're lucky because we are not solely financed by the sale of paper by secondary market participants," Gitnick said. "We actually have a size that we can shrink down to; others that went into this 100 percent now have nothing and have to shut down."
Portfolio mortgage lenders are not the only ones trying to make a buck in today's turbulent market. Mortgage brokers, desperate to stay in business as the volume of home sales plummet, are also retooling. Many are now offering mortgage refinance packages, making pitches to borrowers who find themselves in over their heads on their existing mortgage loans.
Among those advertising on local radio stations is H.J. Mitchell Group, which is targeting borrowers whose mortgage loan interest rates are resetting, offering to get them into mortgages with lower payments.
Such offers are legitimate, regulators say, as long as they involve new loans. "It's when they represent that they can intervene on your behalf on your existing loan, without working directly with the loan servicer, that there could be problems," said Mark Leyes, spokesman for the state Department of Corporations.
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