Deutsche Bank and the Hispanic National Mortgage Association launched a joint venture that will finance mortgages largely to Hispanic immigrant borrowers who, for various reasons, have limited traditional credit profiles.
The joint venture, HNMA Funding Co., is a correspondent investor backed by a $500 million credit facility, enabling it to buy that amount of mortgages at a time. If all goes well, the venture will finance $1 billion of mortgages in its first year, and exceed $5 billion in three to five years. The loans will very likely be securitized, Leonardo Simpser, CEO of Hispanic National Mortgage Association, said.
Investors appear to be more intrigued about mortgage assets aimed at lower-income borrowers, spurring demand for the product. Because liquidity for these types of loans is somewhat limited, their refinancing rates are lower and are less negatively convex securitized deals, said a market source. A deal backed by the HNMA Funding Co. loans could come to market by mid-2007, with quarterly issuances after that.
"There are a significant number of individuals - immigrants and non-immigrants - who do not have enough information for a FICO score," Simpser said in an interview. "Those individuals do not necessarily represent a higher risk. What we are trying to do is provide liquidity to a large segment of the population."
Specifically, Simpser said, some individuals might previously have been disinclined to take on debt, preferring to fund large purchases with cash. This, he said, might resulting in a non-existent FICO score, but does not necessarily indicate that the borrower would manage his or her debt carelessly.
In conjunction with the joint venture, and to help identify the best underlying collateral for its future securitizations, the HNMA launched its customized and proprietary automated mortgage underwriting system. Designed to identify reliable borrowers amid Hispanic and other immigrant communities, the system accounts for monetary practices that are unusual by traditional bank underwriting standards, but common among immigrant groups.
It considers information from multiple borrowers for a single mortgage, reflecting a tradition among immigrants of several working adults pooling their income to support one household. Borrowers can also report multiple sources of income, including cash, which is information that current mortgage application forms to verify income do not accommodate.
Although the HNMA Funding Co. will pursue mainly Hispanic immigrant customers, the company will make loans to other immigrants and any qualified borrower that falls outside the normal credit spectrum in the U.S., Simpser said.
"It is a growing, underserved market," he said. "There is not a lot of refinancing going on. People are focusing again on the markets that have a lot of potential."
HNMA Funding Co. has already begun purchasing loans from mortgage lenders, community banks and credit unions across the U.S., according to the HNMA. Of the loans that HNMA Funding Co. will securitize, the venture will split the arbitrage between the underlying loan and the security. It can also take on the credit risk of the securitization and purchase the residual piece of the security, Simpser said.
The HNMA, based in San Diego, Calif., is a three-year-old holding company that has bought more than $100 million of mortgages in the Hispanic market. Aside from the joint venture with Deutsche, its two other divisions include the research and development division that came up with its underwriting system, and a retail mortgage joint venture with Wells Fargo Home Mortgage, called Ilumina Mortgage.
"We think it is an attractive market and that we can do future deals on a stand-alone basis," said someone familiar with the situation.
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