Stonegate raises $115M to fund jumbo mortgage expansion

Stonegate Mortgage Corp., the closely held lender that originated almost twice as much debt last quarter as in all of 2011, sold $115 million of common shares in a private offering to continue its expansion, it announced Wednesday.

The company will use the funds to fuel originations of loans not intended for government-backed programs, as well as to build its portfolio of servicing contracts, CEO Jim Cutillo said in a telephone interview. After recently starting to grant such jumbo mortgages directly to consumers, the Indianapolis-based firm plans to offer the product to its brokers and correspondents this month, he said.

Stonegate joins lenders such as W.J. Bradley Mortgage Capital LLC, Shellpoint Partners LLC and Pennymac Mortgage Investment Trust with plans to start contributing to a slow thaw in sales of so-called non-agency mortgage bonds. The market will grow more important as U.S.-controlled Fannie Mae and Freddie Mac raise their guarantee fees to scale back the government’s role in financing about 90 percent of new loans, Cutillo said.

“You can start to see the tide turning,” he said. “People are going to be scrambling to figure out what their non-agency strategies are.”

FBR & Co managed the share sale for Stonegate, which now services $5.7 billion of mortgages and originated about $1.8 billion last quarter, $3.5 billion last year and $1 billion in 2011. Its volumes may reach $10 billion this year, Cutillo said.

Stonegate, ranked as one of the fastest-growing businesses in the Indianapolis area, told IBJ in March that it was negotiating to raise a new round of private equity.

While non-agency issuance has grown to about $6 billion this year from $3.5 billion in all of 2012, Barclays Plc analysts said in a report Tuesday that the expansion will be slow to accelerate, and they maintained a 2013 forecast of $12 billion to $15 billion. Issuance peaked at about $1.2 trillion in each of 2005 and 2006, before the debt’s tumbling values as foreclosures soared helped cause a global financial crisis.

The revival will be limited by widening spreads on the top- rated portions of transactions as issuance expands, agency bond- guarantee fees low enough to offer larger profits to lenders and bank demand for the safest loans, the analysts led by Sandeep Bordia said.

Still, over the next 12 to 18 months, “non-agencies could become competitive in a broader part of the market,” especially if the size of debt that Fannie Mae and Freddie Mac can finance drops and regulators finish work on new rules, they wrote.

Jumbo home loans are those larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in high-cost areas. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments, limits range from $417,000 to $625,500.

Stonegate expects loans in that expanded range to also soon make their way into the non-agency market, Cutillo said. The firm’s potential bonds will offer something new for investors because it works with about 700 small and mid-size originators across the country, such as “the guy on Main Street in Oklahoma who doesn’t really have anybody to sell to,” he said.

With recent deals, the “geographical concentration remains a concern,” with much of the debt tied to San Francisco and Los Angeles, the Barclays analysts said. The risks are limited by the high quality of the mortgages, they said.

Stonegate, which raised $25 million in 2012 from private-equity firm Long Ridge Equity Partners, is now “institutionally held” by investors including insurers, real-estate investment trusts and hedge funds, Cutillo said. The firm last year acquired warehouse lender NattyMac from Guggenheim Partners, which will also help in its non-agency expansion, he said.