PERSON OF THE WEEK: Joseph Badal is a man of two worlds. In one sphere, he has clocked in nearly four decades of experience in the financial services industry, most notably as senior executive vice president and chief lending officer of Thornburg Mortgage, one of the major jumbo-loan originators in the years prior to the recession. In the other sphere, Badal is a novelist specializing in suspense thrillers. His fourth novel, ‘The Nostradamus Secret,’ was recently published as both a paperback and e-book. MortgageOrb spoke with Badal about his parallel professions.
Q: How would you categorize the current state of residential mortgage banking?
Badal: Residential mortgage banking is competitive on the conforming side and barely recovering on the jumbo side. As long as the government-sponsored enterprises are in play, the conforming side of the market will be robust – subject, of course, to housing prices, economic exigencies and interest-rate levels.
Smart originators with their own portfolio capabilities are putting jumbo loans on their balance sheets. This is a superb opportunity for those lenders that have balance-sheet capacity. It is especially advantageous to those lenders that have a wealth management platform, because the mortgage product is an ideal entree product to a wealth management relationship.
For banks operating under restrictive agreements with or dictates from the regulators regarding commercial real estate lending, jumbo portfolio loans offer favorable alternative investments on the basis of risk yield, relationship-building and more favorable treatment by the regulators.
Q: Where do you see the jumbo mortgage sector heading in the near future?
Badal: I have never observed a mortgage market more susceptible to domination by one or a few players than the present jumbo market. Jumbo borrowers can be the safest of all mortgagors and often have significant liquid reserves and high incomes – good customers for the average lender.
The average jumbo loan being closed today is probably the least risky in recent memory. Loan-to-value ratios (LTVs) are low, and loans originated today on jumbo properties are, effectively, even less risky, because the properties have dramatically declined in value over the past four years.
A newly originated loan today with a 60% LTV, with the typical decline in property values over the last four years, would be equivalent to a 42% LTV on the 2006 value of the same property. For example, a property in New Canaan, Conn., worth $5 million in 2006 and now appraised at $3.5 million might be eligible for a 60% loan, or $2.1 million, or 42% of its 2006 appraised value. I believe most jumbo lenders will continue to make loans, albeit at more conservative underwriting standards.
There are a lot of cash deals going on now because most jumbo lenders have capped their maximum loan amount at lower levels than we saw a few years ago. However, as long as there is effectively no secondary jumbo market and investors remain pathologically risk-averse, loan production in the jumbo arena will be anemic.
Q: Redwood Trust has just announced that it is issuing a new jumbo-based residential mortgage-backed security (RMBS). Do you see more private-label RMBS issues for this year?
Badal: Redwood Trust's first RMBS deal was, I believe, the first of its kind in the industry last year. The quality of the loans in that issue was exceptional. As long as the quality of loans remains high, I see no reason why there won't be more such issues. And I don't see the loan quality declining.
But I don't see a huge bolus of activity in the jumbo RMBS market, because jumbo-loan origination activity has been severely curtailed. And many lenders are so liquid they are putting their jumbo originations in their own portfolios rather than securitizing and selling them.
Q: If we can switch gears and discuss your other professional pursuit: What's the story behind ‘The Nostradamus Secret’?
Badal: ‘The Nostradamus Secret’ is, at its core, a story about good triumphing over evil, with a solid dose of revenge mixed in. The historical context revolves around Nostradamus' 58 missing quatrains from his 7th centurie. As these quatrains don't exist in reality, I ‘found’ them by creating them and put them in the hands of a world-class wealthy, megalomaniacal Iranian. The essence of these missing quatrains is they prophesied the rise of a Persian to world power. This megalomaniac orchestrates terrorism against the U.S. and elicits a response. The sub-plots are intricate, and the action is fast.
Q: From a professional perspective, which task requires greater skill and focus: mortgage banking or writing novels?
Badal: You can pretty much write a novel independent of other people and can make things up. Managing a mortgage banking firm is about employees, customers, vendors, investors, shareholders, secondary markets, servicing, etc. – all anathema to independence. And God forbid you make something up!
