In the wake of First Fractional Funding’s exit from the fractional mortgage business, we spoke to the founders of two of the remaining big players in the market, NextStar Funding and Vacation Finance, for look at what’s ahead for fractional buyers seeking mortgages.

First Fractional Funding pulled out of the mortgage business after its lending partner, the National Bank of Kansas City stopped providing fractional loans. While the company attributed the move to large forces in the mortgage industry rather than a fractional development red flag, Bob Waun, the CEO of Birmingham, Mich.-based Vacation Finance wasn’t surprised at the announcement. “At any other time you would be shocked,” said Waun, “But with the news about Bear Stearns, it’s hard to be shocked by any of this.”

Waun sees potentially higher interest rates on fractional loans in the near future. He notes that First Fractional’s loans carried interest rates that weren’t much higher than those on a traditional home loan, a factor he said, that didn’t truly reflect the fact that such a loan carries more risk and is more costly for the lender. “First Fractional was out there with less than a hundred basis points, or one percentage point, between primary homes and fractional shares of vacation homes. That’s a pretty thin margin,” said Waun, noting that fractional loans make up a growing 30 percent of his business. Waun said his fractional mortgage products carry interest rates of 1.25 to 1.5 percentage points higher than traditional mortgage loans, and that rates for borrowers may be headed up.

“The rates will trend higher in the days and weeks to come,” he said.

Dustin Carfield, the founding principal of Steamboat Springs, Colo.-based NextStar Funding sees a different picture ahead for fractional buyers seeking mortgages, noting that fractional loan rates tend to move in step with rates on other traditional mortgage products. Compared to a fractional loan seeker a year ago, said Carfield, the lending program is identical, with one key difference. “Rates are better than a year ago.”

What has changed in recent months is the level of scrutiny applied to borrowers seeking stated income loans, or mortgages where income is not verified by the bank. “It’s a little more stringent in terms of the review,” said Carfield.

Since fractional loans, unlike traditional homes loans, aren’t sold off into the secondary market, Carfield hasn’t seen the liquidity crunch that other mortgage lenders have faced. “We’re not looking for someone to buy the fractional loan, so there is much less disruption,” he said.

The same can’t be said for the loan providers for condo-hotel developments. Many banks have pulled out of this market altogether while others have so-called blacklists of projects they won’t finance. Carfield has seen more developers approach him after witnessing other lending partners walk away from offering loans to condo-hotel buyers. “The shake up on the condo-hotel side is even more dramatic.”