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Mortgage market opens reserve for Iffy borrowers

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Lew sichelman

Thes good news for the candidatest fit into the precise mold demanded by Fannie Mae and Freddie Mac: After declining at the start of the pandemic in March, other lenders are returning to the market.

Banks like Citi, Flagstar, Regions Financial and Truist have turned on the financial taps again, according to the industry publication Inside Mortgage Finance, and non-bank lenders have started to relax their rules.

Better yet, the demand for these loans by investors has increasedwhich means that when direct lenders sell loans in the secondary market, they will take more money to make more loans.

Theis not as much investor activity as it was before COVID-19, butIt’s up from April, Michael Franco of SitusAMC told me. The company provides due diligence services to investors.

Pooja Pathak, director of structured finance at MetLife, sees the same thing.

The demand is out there,she said at a recent roundtable.

No-QM not so dangerous

Loans that don’tt make note to Fannie and Freddie, the two government-sponsored entities that buy the lionshare mortgages, were once calledsubprime.And theyre considered largely responsible for the mortgage crisis that led to the Great Recession of 2008.

Back then, Wall Street capital was chasing mortgages like these: loans in which their balances increased rather than decreased, inflated mortgages in which a significant amount was overdue until term expired. loan, interest-only loans for which no principal was repaid, and loans in which neither the borrowerneither income nor employment were verified.

As a result, loans were made to virtually anyone who could cloud a mirror because, by selling their production to investors, the lenders took little risk. And when house prices started to fall, the mortgage market collapsed.

[The mortgage business]out of control,saidSteve Schnall, Founder of QuonticBank.There was a race to the bottom of the barrel of credit. And when property values ​​stopped increasing, it all fell apart.

Now the mortgages that don’tt fit into the Fannie-Freddie box are known aswithout bonusandnon-QM loans,as not qualified for purchase by GSEs. But theyare not as dangerous,saidFranco.

No moreliar loans,for example. Negative amortization loans have also disappeared, as have balloon and reported income loans.

Many good borrowers

Non-QM lenders must adhere to the same regulations put in place by the Consumer Financial Protection Bureau under the Dodd-Frank Wall Street Reform and Consumer Protection Act for lenders who wish to do business with GSEs.

Under the rules, for example, lenders who sell loans to Fannie and Freddie must be reasonably certain that the borrower has the ability to repay the loan. There are seven other underwriting factors that also need to be considered, including the borrowers employment, projected monthly payments for other loans and obligations (such as alimony and child support), and credit history.

Non-QM lenders must do the same. But they often stretch the boxsometimes more than a littleborrower baseds credit score and loan-to-value ratio, as opposed to debt-to-income ratio. This means that theyI will exceed 43percentDTI ceiling which binds the GSEs. And theyHe often lends greater amounts to Fannie Mae and Freddie Macs statutory limits, which this year is $ 510,400 in most places.

QuonticBank is one of the many non-QM lenders. It provides financing to low-income but creditworthy borrowers who run small, one-person businesses; well-capitalized startups; and businesses with non-recurring debt or low overheads.The list of targets for s are immigrants, freelancers and so-called concert workers: musicians, Uber Driversand others who move from one temporary job to another.

There are a lot of good borrowers who don’tt qualify according to traditional standards,saidLoop.

COVID increases the need for non-QM

Indeed, with COVID-19 resulting in temporary job losses, credit problems, career changes, depleted assets, forbearance and other financial challenges, the need for non-QM loansstayed,if not grown up,writes Aaron Samples of First Guaranty Mortgage Corporation in the latest issue of the Non-Prime Lending Councilnewscast.

Using what SchnallsaidEasta common sense approachto approve borrowers for funding, lenders like Quontic are back in the game after all, but they stop when the virus hits. For example, LoanStreamMortgage has broadened its product offering, including lowering its credit score requirement to 640 and raising its minimum loan-to-value ratio to 80percent.

Elsewhere, Angel Oak Mortgage Solutions now allows LTV ratios of up to 90percentfor borrowers who can show two yearsbank statements. GreenboxLoans has full documentation loans up to 90percentLTV, plus loans for foreign nationals who do not require any tax declaration, and 70percentLTV loans up to $ 750,000 for people coming out of foreclosure.

In the meantime, the CFPB has proposed allowing non-QM loans to become qualified mortgages three years after issuance if they meet certain conditions. The goal, the officesaid, is ofincitemore lenders to make non-quality management loans, which they could not do otherwise

None of this is necessarily meant to brag about the lenders mentioned here. Rather, it is to say that potential buyers who dodon’t think you can qualify for financing should find a good mortgage broker who has a finger in the market and sees over there. Or, if youyou turned down a mortgage during the pandemic, you might want to try again. You might be pleasantly surprised.

LewSichelman has been covering real estate for over 50 years. He is a regular contributor to numerous housing magazines and to housing and housing finance industry publications. Readers can contact him at[email protected].

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