Home Builders Relying Upon Captive Financing

One of the interesting developments within the ongoing slowdown in mortgage finance is the extent to which home builders have nourished their financing arms, presumably to stimulate demand for their homes.

Pulte Mortgage, LLC finances 77 percent of the homes, excluding those sold for cash, in their developments. Pulte Homes sells for its own properties as well as for their Centex Homes subsidiary.  Pulte Mortgage’s financing operation differs dramatically from the status quo in the larger retail market. At a time when refinances make up two out of every three new loans, Pulte originated only 117 refis.

Credit has been tight for several years, but home builder financing takes a different path. In 20087, when mortgage markets crumbled, conventional originations at Pulte outnumbered denials by a ratio of more than 10-to-1.

Pulte bought Centex in 2009 for $1.3 billion, making it the nation’s largest homebuilder.

For years, American car manufacturers used no down-payment or ultra low-cost financing to get more buyers into their showrooms. The tactic was not so common among elite makes like Lexus or BMW but fairly widespread at GM and Ford. At the buy-here pay-here lots, many stores lead with “we finance anyone.”

To be fair, even though an entity like Pulte Mortgage rarely says “no,” they originate their loans to a client group with good credit. In their most recent 10-q, they reported that the average credit score for their borrowers was approximately 745.

For the most part, buyers of a Pulte/Centex home end up with a fixed rate product. However, if you go to Pulte’s “Which Mortage is Right for Me,” you will notice a few bits of advice that might go against the grain.

Here are a few of the ones that stand out to me:

About Balloon mortgages:

Benefits:

• Generally, the initial interest rate is lower than that of a fixed rate mortgage.
• If you know you’ll be in your home for less than the term of the mortgage, this may be a product you should consider.

Advantages:

• Balloon mortgages are typically offered at lower interest rates than other fixed products, making them more affordable.
• It may be easier to qualify for a balloon mortgage than a traditional 30 year fixed mortgage because of the lower interest rate.

About ARMs:

Benefits:

• Generally, the initial interest rate is lower than that of a fixed rate mortgage. The lender bases its interest rate and payment calculations on the index and margin of the mortgage. The index is a base rate that the lender then adds the margin at each adjustment period to determine a new interest rate. Be sure to check the type of index your mortgage lender is using, because some fluctuate more than others.
• If you know you’ll be in your home for less than the term of the mortgage, this may be a product you should consider.

Advantages:

• Generally the initial interest rate is lower than a fixed rate mortgage and therefore the monthly payment will be lower.
• Because the interest rate and payment amount are lower, it may be easier to qualify for an ARM than a fixed rate.
• The interest rate you pay will generally drop if prevailing interest rates go down.

Pulte includes some language that warns people about the problem when interest rates reset at a point where interest rates have gone up since origination. However, even if the LIBOR is lower, interest rates go up on an ARM. The teaser rate on an ARM always sunsets.

The really glaring issue is the balloon mortgage. Very few people stay in their home for the entirety of their mortgage. Does that mean that anyone with the intention of living in their home for the next thirty years should take out a balloon?