Meet the ‘last resort’ mortgage lenders rising from the ashes of the financial crisis to help underqualified borrowers buy a home

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  • Demand for mortgages has skyrocketed during the pandemic.

  • The same goes for the number of self-employed people, a group that often struggles to qualify for a mortgage.

  • As a result, unconventional mortgages are gaining ground, while other home loans are collapsing.

The number of Americans struggling to get a mortgage is on the rise, and a group of niche lenders are cashing in to help.

Sprout Mortgage, Angel Oak, Carrington and Athas Capital Group are four of the lenders promising to help borrowers without W-2s. They offer competitive prices and say they help those who are on the road to repairing their credit.

Their specialty caters to ordinary investors and borrowers who could not qualify for the tough underwriting standards that followed the 2008 housing crisis, as well as the self-employed. Following the subprime crisis, they were embraced by some but did not play a major role in housing finance in the United States.

Now, as the rest of the mortgage industry shrinks, these lenders are doing better than ever by catering to borrowers who were market pariahs due to low credit scores, heavy debt or their self-employed status. Loans from these lenders differ from conventional mortgages in that they are not backed by the US government or financial agencies Fannie Mae and Freddie Mac – which have stricter underwriting guidelines – and they do not meet the definition of a “mortgage qualified” gold standard” set by the Consumer Financial Protection Bureau.

The pool of borrowers for these “non-QM” loans can be large, with about 8% mortgage applications turned down each year, according to mortgage publisher HSH. In another study, personal finance company NerdWallet found that while loans processed by lenders increased by 10% in 2020 compared to 2019, there were approximately 58,000 additional refusals.

As for the self-employed, Pew Research found last year that there were about 16 million of these workers.

“There have been more independent business owners since the pandemic began, and their needs are not easily met by traditional loans,” said Sam Bjelac, executive vice president of Sprout Mortgage.

Sprout Mortgage is a lender run by Michael Strauss, the former head of American Home Mortgage, one of many subprime lenders that went bankrupt in the late 2000s. More regular borrowers are also finding they can’t also not fit into the standard mortgage box, Bjelac said.

So, as the mortgage market intensifies its focus on these underserved workers, the non-QM market is growing. At the end of the year, some experts predict that the non-QM market will quadruple to $100 billion.

Angel Oak Mortgage Solutions, another non-QM lender, projected that its creations would grow to $7.5 billion this year from $3.9 billion in 2021. Angel Oak finds that borrowers who fit into the non-QM mold are “very underserved” today, just as they were when the company spotted the need and jumped into the non-QM business nearly a decade ago, said Tom Hutchens, executive vice president of Angel Oak.

In contrast, conventional lenders are scramble to downsize their businesses as soaring mortgage rates hamper their operations. The Mortgage Bankers Association predicts total U.S. mortgages will likely plunge 40% this year to $6.8 trillion, with most of that decline due to lower refinances.

Non-QMs are “more of an art”

What hurts the conventional mortgage market helps non-QM lenders, whose borrowers are less sensitive to interest rate movements because there are few alternatives. Brokers who have been busy offering easier-to-close loan refinances for the past few years are suddenly keen to help borrowers who are having a harder time qualifying for loans, including those who might take advantage of non- QM, Brian O’Shaughnessy, said co-CEO of Athas Capital Group.

When originating a loan for non-QM borrowers or investors, lenders like Angel Oak and Athas are willing to consider a wider variety of financial information than lenders who sell their loans to Fannie Mae or Freddie Mac. For example, Fannie Mae strictly limits the number of properties it finances for an investorbut Angel Oak approaches this differently.

“If the cash flow from the investment property will cover their mortgage, taxes and insurance, and they have a good credit rating and probably a track record as a real estate investor, then we think that’s a good ready to go,” Hutchens said. .

“It’s really more of an art and a specialty in non-QM,” said Greg Austin, executive vice president of California-based Carrington Mortgage Services, another non-QM lender with ties to the subprime industry. before the crisis.

Carrington — as is often the case with non-QM lenders — works with independent borrowers to analyze bank statements, profit and loss statements, or 1099s to determine their loan eligibility. Some investors even keep a traditional job, just so that their W-2 can save them from a headache.

“It’s so much harder to get a loan as a self-employed person,” Ryan Chaw, a real estate investor, told Insider.

Non-QMs are a “last resort”

Rashad Tillman, a California resident, said non-QM loans have come to be both a lifeline and a “last resort”. Since he started looking for homes in early 2020, the 31-year-old father of three – and soon to be four – said he has encountered obstacles at almost every turn.

First, he said a total of four real estate agents and four loan officers did not want to work with him because of his unique income stream.

“When it comes to the self-employed, they’re like, ‘Well, that’s taking too much time and that’s too much effort,'” he told Insider.

Tillman’s financial situation is complicated. He is a full-time manager at a used car dealership, but also earns income from his small businesses. Because of the way Tillman structures his write-offs, the highest mortgage he was eligible for under traditional methods was $400,000, even though he was confident he could afford more.

“I can’t look at a cabin here in California for $400,000,” he said.

Tillman said he heard about non-QM loans through a Facebook ad touting “bank statement loans,” which are approved based on deposits reflected in a bank account instead of a W-2. He completed the attached survey, but this lender would only review 50% of what he deposited in his business bank account.

He continued his search until he found New American Funding, which he said offered him a non-QM loan valuing 100% of his income.

His journey did not end there. Two residential construction companies would not accept non-QM loans. It wasn’t until October, after nearly 10 months of searching and giving up, that he found a nice homebuilder in Riverside County, California, about 90 minutes from Los Angeles.

He was able to purchase a $640,000 three-bedroom, two-bathroom home still under construction, which has the backyard of his dreams. This would not have been possible without the alternative mortgage, he said.

“It allowed me to finally qualify for a home that I can afford, that is in a safer neighborhood, that my wife would like, and where the kids can feel comfortable living,” he said. -he declares.

A disadvantage of non-QM mortgages is that interest rates are higher than conventional loans, in part because they are sold and bundled into private mortgage-backed securities that do not carry the payment guarantees of bonds issued by Fannie Mae, Freddie Mac or Ginnie Mae. Rates have risen on all mortgages since the start of the year, although Tillman is still paying around 7%, or 2 percentage points more than a conventional loan.

The rate is only part of the cost of having your own business, Tillman said.

“That money was going somewhere anyway,” he said. “Do I want to throw it towards the IRS? Or do I throw it towards my down payment on a house?”

Read the original article at Business Intern

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