The Revival of the Construction-to-Permanent Mortgage

If you follow the housing market, you’re no doubt aware that inventories of single-family homes are at all-time lows in many areas of the U.S. This lack of inventory, in turn, is boosting prices and making it very difficult for first-time and lower-income buyers to find the homes they want.

Currently, in low- to mid-tier markets across the country, single-family listings are seeing multiple offers, as buyers clamor over what little inventory is available. As a result, many qualified buyers are simply being shut out of the market. It’s a pesky problem that housing economists say won’t go away anytime soon – especially with rates on the rise.

There is, however, a financing solution to the problem of “little-to-no-inventory” that is regaining popularity among both developers and borrowers: construction-to-permanent (CP) loans. These multi-stage loans, which were popular up until around 2007 but became practically extinct in the years following the Great Recession, enable borrowers to purchase a lot, design and build a new home to their unique specifications, and finance both stages over a 15-year or 30-year period.

Given the recent increased demand for CP loans, Flagstar Bank recently re-introduced its One-Close Construction program, which incorporates a construction period of six, nine or 12 months, followed by a fully amortized loan term with a single closing.

What makes this offering unique is that borrowers don’t have to deal with two separate closings – one for the construction stage and one for the permanent stage. In addition, the rate can be locked at any time during the loan application process – and the simple and flexible draw process has no set schedules. Loan-to-value can be up to 70% with no requalification required, post-construction, and up to 90% with requalification required post-construction. Loan amounts are capped at $424,100, as per the government-sponsored enterprises’ requirements, with exceptions made for properties in high-balance areas.

Eligible properties under program include the following:

• Single-unit site-built homes;
• Planned unit developments;
• Modular homes;
• Site condominiums; and
• Rural properties.

This new CP offering became available through Flagstar’s retail mortgage network in April, and the bank is now offering it via its wholesale channel, thus expanding it to its network of third-party originators.

“I think CP products have always been great products, but with the downturn from 2007 through 2011, many companies took construction off the list,” Doug Norman, first vice president for Flagstar, tells MortgageOrb. “But today, construction is up – it is up all across the country – and the credit quality characteristics are very high. The mortgage business is very strong – and that’s why Flagstar felt this was a good time to re-enter the CP loan arena.”

When asked how CP products might help stimulate the housing market, Norman says, “Many markets currently have low inventory – it’s a seller’s market, and some sellers are getting multiple offers. There’s not enough housing to go around – which is great for the building community. Builders are strong again, and a lot of land has been bought up over the past few years by home builders.

“New construction is a necessary component for the inventory – and products such as this, on the wholesale side, allow our broker clients to have access to a product that has traditionally been a retail bank product,” Norman adds. “We feel it is important for us to offer this one-time-close CP product to our broker community, so they can have a full product set and be able to serve all the clients that they want.”

When asked if the recent strong growth in the pre-fabricated home market entered into the bank’s decision to re-introduce CP loans, Norman says, “We offer the product on modular homes, yes. We have pockets in the Midwest and the Northwest where that type of construction is more popular. And that’s a really nice way to have a house built for a client. That type of home building is definitely on the rise.”

Norman says what makes the offering unique is that it is one-time close, and that the 30- or 15-year fixed rate gets locked in before the home is built.

“So, clients don’t have to worry about interest rate changes while the home is being built – and they can have peace of mind about what they qualify for and what their monthly payment is going to be,” he says. “That’s a big feature – and one that helps sell the product.”

Still, CP loans are among the most complex out there – and that can make applying for one somewhat daunting for a consumer.

“It’s a very complex process for a client,” Norman says. “They have to pick a builder – and they have to have plans and specifications, so that we can properly appraise the property.”

“And there is an approval process,” he adds. “We have to approve the builder they use. For our protection, and for our client’s protection, we do not want to work with a builder that, for example, is struggling to pay its subcontractors. There’s also a process to appraise the property, and then there is the normal credit process for the buyer.”

Because these loans are more complex, additional training is required for brokers who plan on offering the product. As such, Flagstar requires all third-party originators to complete its construction loan training course prior to originating any loans under the program.

“There is a lot of demand for the product, so how fast we get loans in depends on how fast the brokers and the retail loan officers make connections with the builder community,” Norman explains. “If you’re a broker that doesn’t have those connections, you need to go out and solicit builders and let people know that you’re in that business.

“It takes a while to become a construction lender, if you’re not already one,” he adds. “We expect that, over a period of time, through education with our brokers and loan officers, we will gain significant share in the CP market.”

One reason why training is so critical is that CP loans generally require a higher degree of customer service. There are many more customer “touches” that take place throughout the process compared to a traditional single-family mortgage. For example, there is a very important customer service touch point that takes place each time the borrower requests a draw during the construction stage. It means more transactions – and ones that need to be handled quickly and flawlessly.

“The key for these products is the customer service,” Norman says. “Builders need their money when they need their money – so, you have to be competitive in terms of how fast you get their draws out to them, as construction progresses. And, if we deliver good service, that builder will refer new clients back to that mortgage broker.”

When asked whether the bank has any plans to get the real estate community involved in promoting CP loans as a solution to the inventory problem, Norman says that’s part of the training Flagstar’s mortgage brokers and loan officers will receive.

“We’re educating our mortgage brokers and loan officers, and that, in turn, should enable them to go out and educate Realtors and the real estate community,” he says. “This way, when the brokers and loan officers are making their sales calls, for their referrals, they can tell the agent, ‘Hey, if you have clients who aren’t finding what they want out there, we have a construction product, and they can build the house they want.’”

So what are Flagstar’s expectations for growth in the CP market? Does the company expect to see rapid consumer uptake of this product, due to pent-up demand, or is it expecting more gradual growth, as third-party originators build their CP businesses?

“I think it is both,” Norman says. “It’s a long-term plan for us, because it is a profitable business to be in – and because we want our broker clients and our retail loan officers to have that product. We want to be able to help people build homes and promote homeownership. That’s always been a pillar of Flagstar as a major mortgage lender.”

Norman reports that in recent months, Flagstar has become “very active in development lending, subdivision lending and builder lines of credit… so, we’ve been lending a lot of money on the commercial side to help developers build subdivisions.”

“The idea behind reintroducing this CP product was to have a complete product set for all of our brokers and our retail loan officers; to share in the excitement of all the building that is going on, all around the country; and be able to help home buyers build the home that’s right for them,” he concludes.