Leonardo Simpser has blunt advice for homebuyers considering a funny-money subprime loan requiring no documentation: Don't! "If you can't afford to buy a house," he says, "don't buy a house."
And definitely don't sign up for a mortgage that promises to make the unaffordable affordable.
Simpser holds a key position in the American mortgage market. He is managing director of the Hispanic National Mortgage Association (HNMA), a major new funding channel connecting Latinos and other communities with Wall Street and the global capital markets.
Hispanic first-time buyers not only constitute the fastest-growing segment of the market, but they are also among the most vulnerable to curveball pitches from subprime mortgage lenders and brokers. Many Latinos, especially recent immigrants, have low FICO credit scores - or no scores at all - and appear to be less creditworthy than they are in reality, says Simpser.
They often have no credit cards or checking accounts. Their main credit-related activities - rent payments, utilities payments, money-order transfers to relatives in their country of origin - are never reported to the national credit bureaus. Their income patterns also frequently are different from other applicants. They may have multiple employers, multiple income earners in the household, and a significant portion of their total income in cash.
Loan officers often don't look past the FICO score - which is likely to be artificially depressed because of the applicants' nontraditional credit histories. If they want to buy a house, applicants are told, the only way is to sign up for a subprime mortgage with high fees, payment-shock rate resets and crushing prepayment penalties.
San Diego-based HNMA, which has joint venture funding relationships with Deutsche Bank, a global capital player, and home loan giant Wells Fargo Home Mortgage, exists to "change this pattern and produce better products and results" for Latinos and others who get raw deals under the current system, says Simpser.
The company's research and development division, for example, has created the first culturally sensitive electronic application evaluation system - the Hispanic Automated Underwriting System, or HAUS. The system enables private lenders to "see through" nontraditional credit and income patterns quickly and give appropriate weight to on-time payment in rents, phone bills, utility accounts and a variety of other credit indices, some of which are in proprietary databases.
HAUS eliminates the need for time-consuming manual underwriting of nontraditional applicants, and allows lenders to underwrite borrowers with no Social Security numbers and multiple income sources. Lenders using the HAUS software typically can close and sell their mortgages to HNMA Funding Co., which provides a secondary market for such loans, much as Freddie Mac and Fannie Mae provide for the conventional sector.
HNMA Funding has a half-billion-dollar revolving warehouse credit line with Deutsche Bank. Currently it has funded approximately $300 million in new loans, according to Simpser, and its target is $5 billion of nontraditional mortgages per year.
What sort of loans do borrowers with unusual income and credit patterns obtain through HAUS underwriting? You might assume they would have some unusual features, but they look very traditional: either 30-year fixed-rate loans or five-year "hybrid" adjustable-rate mortgages where the rate and payment are fixed for the first 60 months, after which the rate is adjusted annually.
Simpser concedes that HNMA's plain vanilla, limited menu is the polar opposite of offerings in the higher-rate, higher-fee subprime market. "We are completely against stated-income loans, we verify everything, and we do 100 percent due diligence," he said. Where do HNMA-funded loans differ slightly from conventional mortgages? Its underwriting system provides more flexibility on household debt-to-income ratios and down payments - allowing total household debt to go as high as 45 percent of monthly household income, and requiring lower cash up front.
And how do HNMA's loans to immigrants perform? Most experts would predict that people who have minimal experience with the American credit and banking system - to say nothing of complicated income profiles and linguistic challenges - would present higher than average risks of default and foreclosure.
Virtually all of HNMA's customers traditionally would have ended up in the subprime market, taking out mortgages that now have delinquency rates of 14 percent or higher. Yet with a year's worth of production, HNMA's early delinquency rate "is zero," said Simpser, "and foreclosures are zero." The 30-day delinquency rate for the entire HNMA portfolio is just over one-half of 1 percent, which is well below the rate in the prime marketplace, where applicants have high incomes and FICOs.
Simpser's explanation: Immigrant families "are significantly more likely to rate owning and keeping their homes as their No. 1 priority."
All they need is for loan officers to see them - and their nontraditional credit and incomes - in a fairer light.