As the weather begins to get cooler, it will be interesting to see how the market trends going into the holidays. The last two months has been crazy for us in the mortgage world. Mortgage interest rates hit a three year low around September 3rd and many home owners and investors were able to better their long-term financing positions. I just read an article the other day that said over 8 million people can benefit from refinancing, the question will be if they recognize and take advantage when they can. Now, onto some updates happening in the mortgage world!

Subprime now known as Non-QM

Recently the Wall Street Journal ran a piece on the mortgage market re-opening to risky borrowers – is this true? The article specifically stated that risky mortgages are making a comeback, no longer called ‘subprime’ but now ‘non-QM.’ NonQM loans are ones that don’t comply with post-crisis standards set forth by the Consumer Financial Protection Bureau (CFPB). These loans cannot be sold to Fannie, Freddie or to any other Government Sponsored Enterprise (GSE) and are usually kept as portfolio loans or sold to specific investors.

While the name non-QM might conjure fears of the subprime mortgage mess of the mid 2000s, it’s crucial to remember that these loans are not subprime. In many cases they are non-QM due to the borrower being self-employed or due to reduced documentation, however the credit profiles of these borrowers tend to be strong with high credit scores and high down payments or levels of equity.

Another area where non-QM is gaining traction is with borrowers that have less credit history and low-down payment availability. This is common among first time homebuyers from diverse communities that may have multiple generations pooling money together to make a home purchase accessible. One statistic shows that 78% of new households being formed nationwide are formed in this manner and non-QM loans may be able to better serve this niche than traditional QM loans.

Citigroup and Chase have now thrown their hats into the Non-QM ring and are creating mortgage backed securities for non-QM products and funding Non-QM loans respectively. While these big players have entered the non-QM market, there is still room for much growth in this area as this market accounts for only a small portion of the total mortgage market. As the QM patch has been given an expiration date, the non-QM segment of the mortgage market is poised to continue growing. And while lending guidelines for non-QM loans are relaxing, we are still nowhere near the pre-crisis laxness in lending practices. Not only does non-QM serve underserved areas of the market, if one analytically reviews the characteristics of non-QM loans today, it’s clear a majority of these loans meet Ability to Repay requirements. It will be interesting to see how this plays out.

Make sure to let us know if you have any questions.  We hope to see you at the next AZREIA meeting!

By Andrew Augustyniak, Branch Manager Loan Officer Prime Lending