Getting Rich on Government-Backed Mortgages
(Bloomberg Businessweek) -- In his corner of American finance, where hard selling meets hard luck, Angelo Christian is a star, and he looks the part. He’s wearing black caiman shoes and a Bordeaux-red silk shirt, tight and open wide at the chest. His dark widow’s peak is slicked high with gel. He has 180,000 Facebook followers and a budding YouTube network, where he shares original videos such as “How to Master Your Mind” and “How to Manage a $50 Million Pipeline.”
Each time Christian sells a home loan, the company he works for, American Financial Network Inc., takes as much as 5 percent—$12,500 on a $250,000 loan, to be distributed among his staff, corporate headquarters, and, of course, himself. As he and his team chase more than 250 leads a week, they’re on pace to close 50 a month. Christian says he has a Lamborghini on order to go with his Mercedes.
On a recent afternoon in a suburban Houston office park, he leans back in his swivel chair, iPhone glued to his cheek. A TV projecting to a screen behind his desk pounds music videos, keeping his adrenaline flowing. He calls back a customer who’s spent hours watching his sales videos: “Bad Credit, I Can Help,” “Fresh Start: Credit Boost,” and “Go For Your Dreams.” This would-be homeowner has a 596 credit score, putting him in the subprime range. His car has been repossessed, something that would likely disqualify him at the Bank of America branch next door.
“Usually a repo that’s like three years old, we’re not really going to sweat that,” he assures the caller. “We’re pretty lenient here.” He steers his prospect to several $400,000 homes with swimming pools. “Have your wife check that out,” he says, referring to a remodeled kitchen with granite countertops. “She’s going to love it.”
Many of Christian’s customers have no savings, poor credit, or low income—sometimes all three. Some are like Joseph Taylor, a corrections officer who saw Christian’s roadside billboard touting zero-down mortgages. Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. “If he can help me, he can help anyone,” Taylor says. “My credit history was just horrible.”
Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk.
This kind of lending echoes the subprime mortgage boom that preceded the credit crisis of 2008. Then, as now, independent mortgage companies, the so-called nonbanks, dominated the business of making loans to people with blemished credit and low incomes. In the pre-crash years, companies such as New Century Financial Corp. helped spur the crisis with their shoddy underwriting standards. Using a line of credit from a major bank, they would offer mortgages essentially to anyone with a pulse. They would then quickly resell them into a market that repackaged them into high-risk securities that were destined for failure, infecting the financial system and requiring a government rescue.
No one is saying the system is close to another collapse. Yet nonbanks, more loosely regulated than the JPMorgan Chases of the world, are bigger players today than during the last mortgage bubble, according to a Brookings Institution report. They’re making almost half of new loans, compared with 19 percent in 2007. As before, many are companies you’ve never heard of, like American Financial Network, a closely held firm based in Brea, Calif. A few are better-known, such as LoanDepot, Freedom Mortgage, and the industry leader, Quicken Loans, with its ubiquitous Rocket Mortgage television commercials.
For first-time purchasers, many nonbank lenders rely on the government’s affordable financing, backed by the Department of Veterans Affairs, the Department of Agriculture, and, most of all, the Federal Housing Administration. Lending under these programs differs in some important ways from the subprime mortgages of the aughts. Unlike the usurious loans of the past, federally backed mortgages can charge low rates—often less than 5 percent—and require documentation of jobs and income. Jonathan Gwin, American Financial Network’s chief operating officer, says delinquencies are low for these kinds of loans. And overall, it’s still difficult for many people to get a mortgage. (Only 3.5 percent of new loans are to people with credit scores below 620, compared with 15 percent in 2007.)
Nonbank mortgages make up about 80 percent of the loans for borrowers insured by the U.S. government. The banks have largely abandoned that market because of tighter scrutiny. As before, lenders use lines of credit to fund the loans, which are packaged into securities—in this case, Ginnie Mae bonds, common in mutual funds and pensions. In the subprime debacle, private investors risked losses if borrowers defaulted. Now, as long as lenders follow the rules for writing loans, the government guarantees FHA mortgages.
To protect taxpayers, FHA borrowers are supposed to make small down payments, equal to 3.5 percent of the home’s purchase price. But many FHA borrowers put nothing down at all. They often get cash from down payment assistance programs, typically run by housing finance agencies or nonprofit groups. The Department of Housing and Urban Development’s inspector general says some of those programs violated HUD rules by having borrowers pay for the assistance in the form of higher rates and fees.
In civil fraud complaints, the Department of Justice has accused many companies, including Quicken and Freedom Mortgage, of improperly underwriting FHA loans and then filing claims for government insurance after borrowers defaulted. In 2016, Freedom Mortgage settled for $113 million, without admitting liability. Quicken is fighting the Justice Department in court. “This is nothing more than a shakedown,” says Quicken Vice Chairman Bill Emerson, who adds that the company makes prudent loans under FHA guidelines. He says multiple state and federal agencies regulate nonbanks.
There are other worrisome signs. Even in a strong economy, recent FHA loans are souring faster than those made years ago when the industry had stricter credit standards, the Mortgage Bankers Association says. About 9 percent are 30 days or more past due, manageable by historical standards and well below the high of 14 percent in 2009. But the FHA itself is concerned that, on average, borrowers are spending 43 percent of their income on debt payments, the highest level in at least two decades.
Many borrowers “are living paycheck to paycheck and, if they lose their jobs, they go into default immediately,” says John Burns, a housing consultant based in Irvine, Calif. The government requires these customers to buy insurance, including an upfront premium of 1.75 percent of the amount of the loan, in case they can’t repay. In the last crisis, the insurance collections couldn’t cover all the losses. Last year the FHA’s capital reserves barely met the legal minimum the government must set aside for bad loans.
Dana Wade, acting FHA commissioner until the Senate’s confirmation this week of a permanent leader, says concern is growing within the agency, which is studying the riskiness of its portfolio. If too many loans sour, she says, the FHA could end up financially weakened and unable to extend help during the next downturn. “Borrowers are stretching more,” she says. “We’re concerned about it from a borrower perspective and a taxpayer perspective.”
One reason more borrowers may be stretching: Real estate prices are soaring again. Bidding wars are back in many cities. That’s only making it harder for first-time and lower-income borrowers. Without the New Deal-era FHA program and other subsidized loans, nonbanks and affordable housing advocates say, the U.S. would increasingly be a place where homes are reserved for the well-to-do and are out of reach for many minorities. Homeownership has fallen from its 2004 peak of 69.2 percent to 64.2 percent in the first quarter. Rents are skyrocketing, too, pricing some families out of any shelter at all. “The homeownership deck already is stacked in favor of the haves,” says Julia Gordon, executive vice president of National Community Stabilization Trust, a nonprofit in Washington. “But you still want to give people a chance to get their first foot on the ladder.”
Offering that leg up can be enormously lucrative for mortgage companies. That’s especially important now because interest rates are rising, so the refinancing business is drying up. Pitching government loans, top mortgage officers can make millions a year, according to Jim Cameron, senior partner at Stratmor Group, a mortgage industry advisory firm.
Brian Decker works at LoanDepot in Riverside County, Calif., where he sold more than $200 million worth of home loans last year. Based on typical rates, he could have earned as much as $2 million in commissions. (Decker declined to comment on his income.) Christian, as one of American Financial Network’s top-producing branch managers this year, could make up to $500,000, according to COO Gwin. Christian says he thinks he can pull down twice that.
Christian grew up poor in Houston. His mother worked as a waitress at Olive Garden. His father, a restaurant manager born in Iran, dropped in and out of his life. His mother frequently couldn’t scrape up enough money for rent. He says the family sometimes slept in her Chevy Suburban before it was repossessed. Christian says he sought comfort in binge-eating, weighing 400 pounds at age 17. The teenager reinvented himself after seeing Rocky IV. He slimmed down, jogging seven miles each way to his after-school job while listening to the 1985 movie’s soundtrack album: “Rising up straight to the top, had the guts, got the glory.”
After graduating from the University of Houston with a finance degree, Christian worked as a loan officer at Ameriquest Mortgage Co., a subprime lender that sold its lax underwriting standards in its slogan: “Don’t judge too quickly—we won’t.” The company collapsed in the credit crisis.
In 2007 he started making government-backed loans, working for various firms before signing on last year with American Financial Network. Married and with three children, he lives in a five-bedroom house with a swimming pool. He starts each day at 6:30 a.m., meditating first and then doing paperwork while exercising on his treadmill desk before heading to the branch, where he calls customers late into the evening.
From the outside, his office looks like any bank branch. It’s next to a busy highway and down the street from a Whataburger outlet. Inside, the vibe is harder-charging. “Do or do not. There is no try,” read the words on a wall, a quotation from Jedi Master Yoda. On a whiteboard, Christian has scribbled: “If the customer does not buy from us, it’s your fault, not theirs. … BE OBSESSED.”
His crew of assistants, including a former car salesman and a van driver, is pounding the phones, hoping to stay in Christian’s good graces. A computer screen keeps a live ranking of the number of calls each staffer makes. “Are you calling the new leads I gave you?” he shouts as workers stretch their arms between calls. “Stay focused, bro.”
Around 2 p.m., he heads to the studio upstairs to tape his three-day-a-week video podcasts. The decor sends a message. There’s a green toy Lamborghini and a collection of his favorite books, including Dale Carnegie’s How to Win Friends and Influence People. The topic today is down payment assistance, or, more to the point, how to buy a home without any savings. Christian says he recommends making down payments if possible because the terms of the loan are better for the customer.
The videos are part of his growing online operation. He charges $50 a month or more for his Millionaire Mortgage University, which aims to help loan officers make six-figure pay after six months of training. He also offers a free credit recovery program.
Downstairs at the office, Christian checks in with Mike Howard. In his job as an underwriter, Howard must make sure the loans will pass muster with the government. His boss has handed him a tough case. The customer is a self-employed maintenance worker in Arizona who makes $910 a month. He wants to buy a townhome with no money down.
When Christian was working for Ameriquest, he tells Howard, he could have put the customer in a loan. No more. “If you’re like, ‘Hey man, I can close this loan,’ you’re smoking crack,” he says. “Back in the day, that was a golden nugget, man. Now it’s not going to happen.”
A second borrower, a construction worker, has a 578 credit score. He has a tax lien on his house and has filed for bankruptcy. For good measure, he’s late on his current bills. In this case, Christian isn’t giving up. He suggests Howard tell the laborer to open up a secured credit card. It requires borrowers to have money in an account before making purchases. That way they can rebuild their credit. “Let’s try it in six months—always end on a good note,” Christian says. “Most lenders aren’t going to call this guy. But, one day, he will buy a house, and you want him to buy with us.”
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