Business Consultant & Career Coach @ Onward & Upward Consulting | Owner & Creative Director @ The Cardboard Jungle
In an industry full of twists and turns, one thing it seems certain we can count on is that there's going to be a lot of new home construction in America these next 3-4 years. Unsurprisingly, homebuilder stocks have soared the last six months. The ten biggest public homebuilders in America have all seen their stock price rise between 28-47% from May 14 to Nov 14 of this year. One of the things I'm helping my lender clients assess at Onward & Upward Consulting is how to take advantage of what is going to be record levels of construction to permanent financing these next 3-4 years. The most viable construction lending product is a fixed-rate one-time close construction to permanent (CP2) loan. A vast majority of people building new homes think they're going to be in them forever. And inherently people don't want to have to deal with an ARM loan that could begin adjusting upward in 3, 5, or 7 years. The dilemma with one time close C2P loans is that they present interest rate risk to depositories, as the rate is fixed throughout and you won't have a fully amortizing loan for until 6-9 months after the loan closes and disbursements begin. And the verifications of all the things the GSE's need will expire over that time. Even if you re-verify when the home is close to being complete, you still have that interest rate risk problem. Hedging fixed rate interest rate risk for 8-11 months (hedge starts at time of rate lock) is insanely expensive. And the accounting rules mandate that you have to classify loans at origination as held for sale or held for investment, so you can't cherry pick. Next most viable (to borrowers) is a two-close C2P where you have one rate during construction and then a second close when construction is complete, where you reverify, adjust the rate to current market, and then you can sell it to the GSE's. But it's still wrought with risks to the lender. If rates drop significantly during construction, even with conversion options, its often beneficial for customers to walk away from the second close. What if their credit deteriorates during the time the home is being built? What if the 6 month build turns into an 11 month build because of weather or other issues? What if investor guidelines change during that time? I could go on, there's other issues. The last lender I ran residential for my last project there before leaving to go to The Mortgage Collaborative was transforming our bustling C2P program from a one-close to a two-close program so we could begins selling them flow. All other options are very imperfect. There's never been a consistently good mainstream secondary market product for C2P due to all the challenges laid out above. It will be interesting to see how things develop in this arena as we begin to understand the powerful incentives that will (FINALLY) be afforded to builders in the coming months.
Colin Robertson
1mo
Problem is so much of the new construction is with big builders, who have their own in-house financing units that are offering unbeatable mortgage rate buydowns and other concessions. How much of it are third-party lenders actually going to get their hands on?
John Preston
1mo
I agree
Mortgage Executive...Arizona-based...Now NATIONAL in Scope with the power of Quontic Bank: The Adaptive Digital Bank...A CDFI Designated Institution...Knowledgeable. Trying to get it right every day for my clients!
1moGreat topic and discussion. There's risk is several areas of this loan for both the borrower and lender....and upside as well... These borrowers are typically stronger, financially and their focus....so the lender is capturing a quality customer... Constructing a new home also helps the borrower mitigate the future...they are working with discounted dollars...something less than buying a home in the retail marketplace.