Mortgage lenders knowingly and sometimes unwittingly provide residential purchase and refinance loans to tax cheats, money launderers and even straw buyers.
How so? Lenders typically face a low bar for income documentation, they don’t look too hard and they don’t ask many tough questions.
So, why can’t lenders provide mortgages for legally licensed, self-employed folks in California’s legal marijuana industry?
Last week, a wholesale mortgage lender in Encinitas quietly announced its “game on” for borrowers using cannabis-related income to cut a home loan. The only restriction is the lender won’t fund grow-at-home or grow-farm locations.
The terms are generous, the rate not so much. We’re talking a 720 or better middle FICO score and just 10% down on a $2 million mortgage. A 30-year mortgage with an initial five-year adjustable-rate lock can start as low as 4.6% for a primary residence. Qualifying is easy-peasy using 12 months of bank statement deposits. Or you can do 20% down for a second home or investment property with even lower rates.
Loan limits with this company soar to $7.5 million with a fatter 40% down payment.
The marijuana industry is pulling in plenty of money. It’s amazing to think folks who grow, cut and sell weed can’t get a home loan using their pot deposits. Just how big is the trade? Let’s explore …
Taxable sales for the second quarter of 2021 were more than $1.3 billion with total state taxes assessed at more than $333 million, according to the California Department of Tax Fee Administration.
California has 12,144 licensed cannabis businesses. Los Angeles County has 1,338, Orange County 115, Riverside County 403, and San Bernardino County 212, says spokesperson Christina Dempsey of the Department of Cannabis Control.
Legal cannabis crop ranks fifth among U.S. agriculture, ahead of cotton, according to data from the U.S. Department of Agriculture in a November 3 paper by Leafly.com. Prices range from $500 to $3,000 per wholesale pound. (And you thought beef was expensive!)
California legal cannabis revenue is projected to be $4.92 billion for all of 2021, says Beau Whitney of Whitney Economics and the chief economist for the National Cannabis Industry Association. He projects California legal sales to increase to nearly $9 billion for the 2025 calendar year.
So, will marijuana-infused mortgages impact home sales?
“It won’t have a huge impact on the number of transactions in the macro market but hypersensitivity in the local markets (where the industry has a lot of presence) like Southern California could see an impact,” said Jordan Levine, chief economist at the California Association of Realtors.
Why did it take so long for the mortgage industry to offer these so-called marijuana mortgages?
It’s a gray, says Michael Correia, director of government relations for the National Cannabis Industry Association.
Marijuana is listed as a Schedule I drug as far as the feds are concerned. But people playing in the cannabis space point to the February 2014 Bank Secrecy Act memo, also known as the Cole Memo. It largely places marijuana as a lower priority as far as federal law enforcement goes.
Financial institutions are still required to file SARS (suspicious activity) reports for any marijuana-related businesses because it’s still technically illegal.
“They charge higher administrative fees,” said Bethany Moore, deputy communications director at the National Cannabis Industry Association. “They cover themselves by filing SARS reports.”
Will marijuana mortgages become more common just like cryptocurrency mortgages are becoming?
We have 48 states with legalized medical or recreational marijuana laws that don’t jive with the federal government’s Schedule I.
“My only guess is it has to do with risk,” said Correia. “An overzealous U.S. attorney could still go after you.”
Whitney estimates just 40%-50% of California marijuana sales are transacted through legal cannabis operators. The rest are in the illicit market.
It’s great that legal marijuana business owners finally have mortgage access. It’s up to Congress to update federal laws to match state sentiments when it comes to marijuana use. This way, the likes of Fannie and Freddie will just say yes to pot — albeit at a much lower mortgage rate than 4.6%.
These legal cannabis operators should not be penalized in the form of being locked out of the mortgage market or paying exotic mortgage rates.
Freddie Mac rate news
The 30-year, fixed-rate averaged 3.09%, five basis points lower than last week. The 15-year fixed-rate averaged 2.35%, two basis points lower than last week.
The Mortgage Bankers Association reported a 3.3 decrease in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed-rate on a conforming $625,000 loan, last year’s payment was $104 less than this week’s payment of $2,665.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.375%, a 15-year conventional at 2.375%, a 30-year conventional at 2.875%, a 15-year conventional high balance ($625,000 to $822,375) at 2.5%, a 30-year high balance conventional at 2.875% and a jumbo 30-year fixed at 3.25%.
Note: The 30-year FHA conforming loan is limited to loans of $477,250 in the Inland Empire and $548,250 in LA and Orange counties.
Eye catcher loan program of the week: A 15-year, fully amortized fixed rate at 2.625% without cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
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