(Editor’s note: This article was originally published in March 2018. It was a recent award recipient in the National Association of Real Estate Editors annual competition.)
Wendy and David Alphonso had an all-too-familiar experience when they decided to become homeowners: The longtime Brooklyn residents couldn’t afford to buy in their own community.
And the Alphonsos weren’t really sure where to start to get advice on a mortgage. “Everyone just talked about Chase and banks like that,” said Wendy, a New York state auditor. But she contacted a nonprofit that helps first-time buyers become owners, and learned about a local lender called Quontic Bank.
Wendy and David, a city health inspector, liked their Quontic loan officer, Darrin English, immediately. Wendy appreciated how English helped her understand what a mortgage payment could mean to her monthly budget. She was also grateful that he took time while on vacation to make sure all the necessary paperwork was completed as the Alphonsos bid on a house they adored, a comfortable Tudor-style home in the Cambria Heights neighborhood of Queens.
“I’ll tell you honestly, you go to a big bank and you don’t get that one-on-one personal relationship,” Wendy said. “With his help we were able to get the house.”
The Alphonsos’ happy experience is, in many ways, all-American, from being priced out of a desirable neighborhood to setting their sights on a cheaper market and getting lucky in a bidding war.
But in some ways they’re different from many Americans, and their decision to work with Queens-based Quontic reflects that. The Alphonsos both immigrated to the U.S. from Trinidad, and in one of the most polarizing environments for “outsiders” in recent memory, they found a bank that not only welcomes newcomers, but caters to them, with a customer base that’s 75% immigrants and where bankers speak a dozen languages, from Chinese to Urdu.
“This is the most ethnically diverse community in the world and we’re great at niche lending,” Chief Executive Steve Schnall told MarketWatch. “There’s a huge population of people who should be great prospects as homeowners. We think there’s a lot of continued upside in this community.”
Quontic was formed in 2009 out of the wreckage of the financial crisis. Schnall had worked in housing finance for decades, including founding a national mortgage-banking business which he sold in 2007.
“I thought I had sworn out of the mortgage business forever, but when I was watching what was going on in banking and the economy, the whole collapse of the market and Dodd-Frank causing it to be more and more difficult for people to obtain home loans, it was just compelling that this was my core competency,” he said.
Schnall thought getting back into the mortgage business — this time as a bank, which would offer a variety of other services and had potential for what he called “franchise value” — was the right next step for him. “I was further inspired by the fact that everyone told me I was crazy,” he said. “There seemed to be a great opportunity.”
Schnall partnered with George Lazaridis, also a mortgage-industry veteran, and someone who’s a legend among the Greek community in Queens. They found a Long Island-based bank on its last legs, which the FDIC was only too glad to find a buyer for.
The bank had “no customers, no goodwill. It was hard as hell,” Schnall said.
He’d never dealt with depositors, nor bank regulators, before — and in the jittery post-crisis landscape, regulators were also feeling their way for the first time, making it very difficult for a new business to navigate.
“The first year we lost money, the second year we broke even, the third year we made money,” he said.
From the beginning, the two men knew their target customer base had to be what Schnall calls the “underserved ethnic communities in the boroughs.” Those communities are filled with people who were the subprime mortgage clients of a generation ago — usually moderate- to lower-income residents, often people of color, many of whom have taken steps backwards since the crisis. In 2016, African Americans made up 13% of the population but got only 6% of the mortgages, and the gap between black and white homeowners was the biggest since World War II.
|Mortgages by racial group|
|2016 national averages, source: Federal Reserve||2017 Quontic Bank, source: the bank|
Schnall and Laziridis also decided Quontic should become a Community Development Financial Institution bank, a designation awarded by the U.S. Treasury to acknowledge a bank’s mission of community development and its service to a specific market.
Quontic’s model fills a gap in a fractured mortgage market that isn’t meeting the needs of all would-be buyers, said Dan Immergluck, a professor at the Urban Studies Institute at Georgia State University, whose academic work focuses on the housing market, mortgage finance and foreclosures. “We still have a fairly tight mortgage market since the crisis, tighter than it needs to be. I think CDFIs are certainly part of the answer.”
Yet Quontic’s approach bears little resemblance to the “anyone who could fog a mirror” lending standards that pulled in so many subprime borrowers during the bubble. Its clients have excellent credit — the median credit score for its mortgage borrowers is 722, compared to 726 for the national average, according to the Urban Institute — and make sizable down payments, averaging about 43%, compared to a national average of 13%, according to data from the Urban Institute.
The missing piece that keeps them out of the traditional mortgage market, besides past experience and personal connections, like the Alphonsos, is a steady paycheck, since many run their own businesses.
For clients like those, Quontic developed a product called “Lite Doc,” a name that evokes, somewhat eerily, the jargon of the mortgage mania a decade ago, when “low-doc” begat “no-doc” which gave rise to all kinds of exotic yet toxic products.
(“If I had to predict one characteristic that would predict default, it would be no-doc loans,” Immergluck told MarketWatch.)
But Quontic says its approach is necessary; as long as the clients are clearly good credit risks, just one missing piece of a traditional credit profile — the W-2 paycheck — shouldn’t be a strike against them, they believe.
Steve Ho, now 38, came to America as a child with his parents from Taiwan. He’s been in mortgages his whole career and with Quontic since 2014, in part because he considers George Lazaridis a role model. “In his community, I don’t think anyone who needs a mortgage doesn’t know his name,” he said. “In the Chinese community, I want to have that same impact.”
Ho is business-like — he says he defines success as “executed volume,” meaning he wants to get as many mortgages for clients as possible, but only as long as he can find the right type of home loan for those individuals, adding, “I don’t want to be an order-taker.”
Still, his eyes get a little misty as he describes a typical Quontic customer: a husband-and-wife team who have been running their own laundromat for the past 10 years, “saving, accumulating, finally ready to purchase a house.”
They ask around and get a referral to Quontic, taking a few hours out of what Ho imagines is a seven-day-a-week livelihood to come talk with him about mortgages, trusting him to do right by them, given that they know as little about mortgages as they do English. “I know they’re losing business spending time with me,” he said. “I would go the extra mile for someone like that.”
Ho sees his own immigrant parents “reflected” in so many of the families that come to him for help, he said. “I love a hard-working couple like that.”
That kind of bootstrap work ethic means most clients don’t just have excellent credit, but that they rarely miss a payment. “The loan performance is impeccable, with virtually no delinquencies,” Schnall told MarketWatch. Besides the big down payments, clients often return to the bank in later years to pay down even more of their mortgage.
Mark Zandi, chief economist for Moody’s Analytics and a housing industry veteran, also thinks there’s a big gap in the mortgage industry that the Lite Doc product helps fill. So many Americans “don’t have the documentation necessary to become a traditional credit, but they’re still good credit risks,” he said. One of the things that sets Quontic the most apart is the big down payment requirement, Zandi said. That gives borrowers “skin in the game.”
Because the Lite Doc product doesn’t fit the standards established in the aftermath of the financial crisis, the big federal mortgage agencies like Freddie Mac, Fannie Mae, and the Federal Housing Agency won’t buy the loans.
Quontic keeps most mortgages it makes on its own books. Right now, its mortgage portfolio is about $305 million. For some perspective, big banks like Wells Fargo have portfolios of home loans in the hundreds of billions.
Still, Quontic recently tested selling a batch of its mortgages. They found eager demand among institutional investors, and ultimately made the sale to a private equity firm. “The reason they’re so excited about it is that it’s a relatively high-yielding note with a low loan-to-value, high credit-score borrower,” Schnall said.
“High-yielding” means that the average interest rate Quontic’s customers are paying is 5.75% — a little more than one percentage point more than current national averages. “No one’s complaining,” Schnall said when asked if those higher rates were fair to Quontic customers.
Immergluck called it a “reasonable additional risk-based price,” noting that during the boom many subprime clients paid as much as three percentage points over average rates.
Of Quontic’s decision to stake its business on a segment of American society that’s been politicized in recent years, Schnall said simply, “The immigrants that we lend to are here legally.”
But, he added, “We’re finding that our best lending opportunities and our best payers are the foreign-born. Native-born Americans overuse debt. Real estate is the single best asset class for building wealth and I think everyone understands that.”
Zandi was a bit more poetic. “I do think the American Dream is alive and well, particularly among immigrants,” he said.
What’s more, while having a little plot to call one’s own is important to all kinds of families, the wealth that comes from ownership goes far beyond the household, Zandi said. “Homeownership is good for the community because owners have skin in the community, and it’s good for the macro economy, as source of capital for many startups and small businesses, for economic innovation and growth.”
The journey most immigrants make has “more positives than negatives,” Wendy Alphonso said. Many “take a step back” when they arrive in America in search of a better future, and expect to “work their way up,” Alphonso told MarketWatch. She had worked in finance in Trinidad, but took a restaurant job in New York, she said.
And though she’d grown up in a house, she had to downgrade to an apartment when she came to the U.S., something she chafed at.
“Your dreams of what you want have to get pushed to the side until you can afford it,” she said. “My goal was to get a house before I turned 50. I’m currently 48. I love being home right now. I’m just pinching myself. I say, is this real?”