Back in September, a press release came across my desk announcing Brett Robinson was hired by Schmidt Mortgage Co., based in Addison, Texas.
Normally, personnel changes including promotions don’t register with me, but this one was different because Robinson is a specialist in tribal mortgage loans and he was being hired by Schmidt Mortgage to manage its new 1st Tribal Lending Division.
It’s a division that Robinson started at Greenpoint Mortgage, then moved to Bank2 in Oklahoma and now has taken to Schmidt Mortgage.
Tribal lending, actually the production and servicing of Section 184 Guarantee Program loans geared to American Indian and Native Alaska families, tribes, Alaska villages and tribally designated housing entities, is such a specialized niche that there aren’t a lot of players.
The only major bank making these loans is Wells Fargo; all of the others are community-based lenders. Other banks such as Bank of America and M&T Bank had been in the business, but dropped out, partly because these loans can be a little challenging to service.
Tribal mortgage loans were created in the Housing and Community Development Act of 1992, but the first loans weren’t made until 1995.
Since then, year-over-year growth has been the norm, at least until 2010 and 2011 when the market flattened along with the economy, reports an unidentified spokesperson for the U.S. Department of Housing and Urban Development. The spokesperson predicted growth would begin again in 2012.
As of the last fiscal year, HUD guaranteed 15,000 of these loans with a value of $2.3 billion; 90 percent of all those loans occurred within the last seven years.
Part of the reason for the growing usage of Section 184 loans has been an expansion of the program, allowing for members of a tribe living off-reservation to use this type of mortgage as well. In other words, a Native American working and living in Los Angeles can get a Section 184 loan.
"Under Section 184, HUD came up with a loan guarantee program and the intent was to bring mortgage capital to Native American reservations," Robinson said.
"Those lands cannot be alienated and are held in trust by the tribes, so it makes it problematic for a normal mortgage lender to go in and make loans there. If you had to foreclose, you would be dealing with the tribal court system."
Essentially, the program was created to provide a loan guarantee so the lenders could bring mortgage capital to reservations with the assurance that, as with any lender, if something went wrong, they would get their money back.
Recently, the program was expanded so it allows off-reservation lending to what is called Indian operating areas, which are defined by the tribes that live nearby, "but effectively means in the Western United States you can do one of these loans anywhere," Robinson said. "As you head east, it becomes more limited as to where areas are open to it."
A handful of questions immediately come to mind. First, can any Realtor handle this kind of loan?
The answer is yes, but HUD does require the Realtor go through a two-day training seminar and be brought up to speed on the program.
"It would be good for more Realtors to know the program is out there because they are the point of sale," Robinson said.
"They might recognize their customers are Native Americans, and could say to them, ‘Hey, do you know there is this excellent program for Native Americans to help you buy a home?’ because one of our issues is a lot of Native Americans aren’t aware this program is available to them, especially the ones no longer connected to their tribes."
The second question is: How competitive is the loan?
"From a tribal member perspective, it’s a fantastic program," Robinson said. "There’s no monthly mortgage insurance, a low down payment of 2.25 percent, a 1 percent guarantee fee that is paid at closing, and a loan-to-value that goes as high as 98.75 percent."
These loans can be securitized as normal Ginnie Mae loans, so it has a market-based-type interest rate. The loans can be used for single-home construction or rehabilitation. Individuals or tribes can get the loans. In the latter case, the tribe could do an entire housing development and then rent or sell the homes to tribe members.
Finally, the third question is: How secure are these loans?
Delinquencies have not been a problem. Last year, for example, there were 80 claims for $21 million, which, according to the HUD spokesperson, comes out to a 1.25 percent default rate based on the insurance in place.
"Delinquency and foreclosures have not been a problem because the loan requires active servicing," the HUD spokesperson explained.
"If a person misses a payment, there’s a requirement for reaching out and notifying the client. The traditional mortgage doesn’t have an interactive role for the servicer. When you get to 45 days on a delinquency, you have to send a letter and make an attempt to reach the borrower by telephone. For that reason, the claim rate has been much lower."
As noted, the Section 184 loan business had been expanding rapidly and this was mostly due to Native Americans being one of the most underserved demographic groups in the country as far as housing was concerned. In addition, with the development of reservation gaming, a lot more capital is available to Native Americans.
"What I find is, the loan officers who get involved in these projects have a real passion for Native American issues," Robinson said. "A lot of times we will sign up a company with 100 loan officers, but it is really just one or two that get involved in this niche and are out there marketing and promoting."