Builders Laud Jumbos for Self-Employed, Lament Slide at FHA

The renewed interest in jumbo originations that's driving down mortgage rates and spurring new secondary market conduits is also benefitting self-employed applicants that typically find it difficult to sufficiently document their income and get qualified.

That's welcomed news for luxury homebuilder Toll Brothers, which has many wealthy borrowers who rely on jumbos to fund home purchases. Lately, TBI Mortgage president and CEO Donald Salmon has noticed that private investors are starting to buy mortgages specifically underwritten for self-employed borrowers.

"We are actually seeing people come out with products targeted to self-employed people. No verification-of-income loans with 30% down and good credit scores," Salmon said Sept. 3 during a webcast on Toll Brothers' earning for its fiscal-year third quarter, which ended July 31.

The Toll Brothers executive noted investors are not looking at the borrowers' paychecks or tax returns. "They are looking at cash flows. They use 12 months' worth of bank statements to determine if they can afford the mortgage payments, regardless of their tax return. That is really good news. And frankly I think it is prudent," he said.

Salmon's enthusiasm for this product appears to be spreading to the private-label securities market.

"These types of loans made to high-net-worth borrowers with excellent credit, significant equity in the property, and substantial reserves is not new, but has been limited," according to Michele Patterson, a senior director at Kroll Bond Rating Agency.

"However, there has been increased focus on including these products in securitizations, and originators that previously were not originating these loans are looking at this as a new product to offer," she told NMN.

At Hovnanian Enterprises, executives continue to lament the decline in Federal Housing Administration lending.

"Our percentage of FHA loans was 15% in the third quarter," down from 21.5% in 2013 and 38% in 2010, according to Larry Sorsby, Hovnanian's chief financial officer and executive vice president.

"The steady decline in FHA lending is primarily due to increases in FHA mortgage insurance costs. Borrowers have switched away from FHA loans to more affordable Fannie Mae and Freddie Mac loans," he told investors and analysts Sept. 4 in discussing the homebuilder's financial results.

During the first three quarters of the federal government's fiscal-year 2014 (ending June 30), lenders originated nearly 566,500 FHA-insured loans, which is 47% lower than FHA endorsements during the same period in FY 2013, accord to the latest FHA quarterly report sent to Congress.

"Entry-level buyers represent a little less than 30%" of Hovnanian's homebuyers, the CFO said. Hovnanian American Mortgage captured 62% of builder's noncash home buying customers. "Credit scores continued to remain strong with average FICO score of 745," he said.

The Red Bank, N.J.-based homebuilder held $76.2 million in mortgages as of July 31 that it intends to sell, compared to $55.1 million as of April 30.

"We continue to hear some positive comments about loosening of underwriting guidelines and taking off the credit overlays. We have seen some evidence of that, but I would say it is really around the edges and fringes. And hasn't had much significance impact on underwriting for the entry-level buyer. We haven't seen any significant easing," Sorsby said.

However, competition in the mortgage industry has heated up since the refinance business has declined. "If our mortgage company is unable to approve a prospect, we immediately try to send it to a third party lender. They may do a lower FICO score than our company," the CFO said.