Mortgage company sees niche as new rules tighten lending

By Joy Wiltermuth

NEW YORK, May 22 (IFR) – US home loan originator WJ Bradley Mortgage Capital is pursuing a market niche for would-be homeowners who don’t qualify for typical agency mortgages under tougher new US regulations.

The Colorado company said it sees an opportunity in borrowers left out in the cold by the rules, and eventually wants to tap the securitization market as part of its plans.

When it begins lending nationally in the next few weeks, WJ Bradley will welcome borrowers whose debt-to-income ratios and FICO scores are outside levels needed for agency home loans.

COO Michael Kime told IFR that the rates on their lending, between 5% and 7%, would be higher than those available from the Freddie Mac and Fannie Mae government-backed agencies. Loan-to-value (LTV) ratios could also stretch to 80%, he said.

There isn’t a fixed LTV threshold to qualify for an agency loan under federal guidelines that came into effect in January.

But in the first quarter of 2014, the agencies took only 36% of loans that hit 80% leverage when borrowers had FICO credit scores below 659, according to Matthew Jozoff, head of securitized products research at JP Morgan.

Cheap and fast money from Freddie and Fannie has made them the dominant players in the US residential mortgage market.

The new rules for so-called qualifying mortgages (QM) under the agencies, however, require lenders to confirm a borrower’s ability to repay – with debt-to-income ratios capped at 43%.

As this will disqualify many hopeful borrowers, WJ Bradley, which was founded in 2003, plans to step in with just one type of loan to begin with – a 5/1 ARM, an adjustable rate mortgage that has a five-year introductory fixed-rate period before it adjusts once a year thereafter.


WJ Bradley’s push comes as Mel Watt, the new head of the Federal Housing Finance Agency which regulates Fannie and Freddie, has signaled a desire to slow down plans to reduce their market share.

The two agencies currently own or guarantee 60% of all US mortgages.

But as a tentative recovery in the US housing sector tries to gain some traction, WJ Bradley and other lenders have their eyes on what could be a lucrative business.

Raj Date, the former deputy head of the US Consumer Financial Protection Bureau, a government watchdog set up in the wake of the financial crisis, has founded Ethos Lending, which is also targeting non-QM borrowers.

The companies are jumping into a sector that looks to be shrinking in the short term.

Mike Fratantoni, chief economist of the Mortgage Bankers Association, said Tuesday that the MBA’s forecast for 2014 originations is US$1.05trn – down 40% from 2013 and the lowest level in more than 14 years.

On top of that, the nation’s US$1trn pile of student loan debt is dampening mortgage demand, according to Jozoff.

He said home prices now have risen 9% above income growth, which is another factor that will limit growth in the mortgage market.

Securitizing these non-QM loans will entail further hurdles – and bankers in the market say that is still some way off.

“The way to look at it is that it’s a thing to come, in about a year,” one said. “The form it is going to take is yet to be determined.” (Reporting by Joy Wiltermuth; Editing by Marc Carnegie and Alex Chambers)