We did an article on fractional mortgages a year ago, but with the overall economic climate and particularly the changes in the mortgage market, with mortgage lenders generally applying much stricter lending standards, it's time for an update.
A top story in fractional lending news today is that one of the major players in the market, National Bank of Kansas City, First Fractional Funding's parent company, recently pulled out of the fractional mortgage business. Its exit was considered "a necessary reaction to the overall mortgage market turmoil." However, this did not happen because they lost faith in the fractional industry, according to a First Fractional Funding press release.
We were curious to see if other companies are seeing similar pressures to get out of the fractional mortgage business. We spoke to Dustin Carfield of NextStar Funding to get the scoop on today's real estate market and the fractional buyers' place in it.
Q. Is NextStar Funding planning on keeping the fractional mortgage option available for investors?
A. Absolutely-we remain very committed to this exciting space in the resort ownership world.
Q. Are you seeing any pressures to get out of the fractional market?
A. Not at all. Our projects and buyers remain very strong although there have been more challenges recently than in previous years.
Q. Have you noticed a change in the market since last year?
A. There are definitely some markets that have slowed down quite a bit, and to some extent, I would say real estate sales/prices in nearly all markets have softened. At the same time, we are seeing an incredible surge in the number of developers interested in the fractional model.
Q. What do you forecast the market to look like in the next year or so?
A. So much is up in the air in terms of the economy, the election, the war, etc. That I think we will continue to see some challenges, but there is no question in my mind that this concept makes tremendous sense and will continue to be a viable element of resorts across the country.
Q. Why are fractional mortgages slightly higher than primary mortgages?
A. A number of reasons:
1. The loans are held in a portfolio as opposed to being securitized and sold like conventional mortgages;
2. There are a limited number of lending sources available so that willingness to lend in this unique market commands a premium;
3. It is still early in the life cycle for evaluating how the properties are going to hold value and how the loans in general are going to perform.
Q. What rates and terms do you offer for fractional mortgages?
A. We provide a variety of adjustable rate mortgages with 30-year terms/amortizations and no prepayment penalties. These are traditional arm products-not balloons. Rates today are in the low 6s to high 7s depending on the product and the underwriting.
As it stands, there is much up in the air, but it looks fairly positive for both developers and fractional buyers. Our thanks go out to Mr. Carfield for his wise insights into these tumultuous times.
If you have any comments, or insights of your own to add to this topic, please let us know.