Private Lenders Remodel the Mortgage Market

Investors dip into savings to offer high-price home loans to borrowers rejected by banks Private lender Mike Klemens makes home and business loans from his house in the San Fernando Valley, putting to work his retirement savings and profits he made in 35 years of buying and selling Southern California real estate. PHOTO: DAVID WALTER BANKS FOR THE WALL STREET JOURNAL By Kirsten Grind Updated May 11, 2016 12:44 p.m. ET TARZANA, Calif.— Mike Klemens, 81 years old, is a bridge player, real-estate investor and part of a new generation of private lenders helping reshape the American home-mortgage market. From his ranch-style house in the hills above the San Fernando Valley, he services home loans financed from his individual retirement account and profits made in 35 years of buying and selling Southern California real estate. “Holy cow!” he said during a recent tally of his more than $3.7-million loan portfolio, which in two months this year jumped to 29 mortgages from 19. “I didn’t think it was that much.” Many traditional mortgage lenders have retreated from the business since new rules and higher standards were imposed after the financial crisis. Even with real-state prices rebounding in California and other high-demand U.S. markets, cautious banks lean toward wealthier, lower-risk borrowers. Mr. Klemens and other upstarts are filling the vacuum. That means a small but growing slice of the mortgage market has shifted from mainstream banks to an informal, loosely regulated corner of property finance. These lenders can earn 8% and more on their money—the catch is they must stomach the risk of lending their savings to borrowers rejected by banks. “It’s the Wild West out here,” said Corey Kohnke, 27 years old, who spends his days driving around Orange County, Calif., matching borrowers with investors looking to make loans, a job that pays commissions of 2% to 8%. Private lenders charge annual interest rates as high as triple those of a conventional 30-year fixed-rate mortgage. Some, like Mr. Klemens, issue loans from personal fortunes and collect monthly interest payments. Others make loans and sell the note to investors. There also are private mortgage funds that pool investor money. “We can’t make loans fast enough to sell them to our investors,” saidMichelle Rodriguez, general counsel for R.C. Temme Corp., and its affiliate, private lender Woodland Hills Mortgage Corp. in Los Angeles. When the firm’s salespeople call investors to market the loans, she said, “they’re snapped up within minutes. Literally, 15 minutes and they’re gone.”...