TheMReport — News and strategies for the evolving mortgage marketplace.
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18 | TH E M R EP O RT COVER STORY resultant tightening credit standards and government regulations, along with lenders' own risk-averse attitudes, left a large pool of borrowers out of the housing market—those with low credit scores, many of who typically belonged to low- and moderate-income households. More recently, millennial homebuyers dragged down by heavy student loan debt and gig economy workers who didn't have the 'proper' paperwork were also added to this pool. Today, as lenders look at new avenues for growth in their origi- nation volumes, they're opening their doors to this pool through products customized to suit the needs of these borrowers. The early part of 2018 saw the introduction of nonprime mort- gage products for a borrower de- mographic that had credit scores between 520 and 600. These products allow borrowers who have had some housing or life event that resulted in the lowering of their credit score a chance to get a mortgage loan. LendingTree, the online mortgage-aggregator platform that allows consumers to look at and compare mortgage rates of various lenders, found an increase in the average number of offers that borrowers with low credit scores were receiving from lenders on their platform. "The GSEs have also eased some requirements. For example, last year, Fannie Mae increased its maximum debt-to-income ratio (DTI) to 50 percent from 45 percent," said Tendayi Kapfidze, Chief Economist at LendingTree. "This allows more borrowers to qualify for mortgages in a rising- price and rising-rate environment." Parkes Dibble, Director of Mortgage Product Innovation at Embrace Loans, explained that many people who were impacted during the housing downturn are working themselves out of their prior debt issues. "The downturn was one big event that affected their credit scores, but we believe that they're still good borrowers for us to make loans to," he said. Like many nonbanks, Embrace has also introduced a product for this specific borrower seg- ment. The company's 'beyond' product allows borrowers with a major credit event in their past to get a home loan sooner than they otherwise would for more traditional products, such as FHA loans. As an example, "We've reduced the waiting time from a prior bankruptcy in our beyond underwriting rules that allow us to lend to people who have had a prior bankruptcy," Dibble said. Nonbanks are also ensuring that their products are more well rounded than they were in the precrisis era. "There are some legitimate reasons for no-income verification, zero down payment, and lower credit score loans, generally just not all at the same time," said Jim McQuaig, Branch Manager of Churchill Mortgage's Herndon, Virginia region. The big banks, though, are adopting a more cautious ap- proach. "We're going to see more innovative products as the market continues to change. But we must look at balancing affordability and sustainability in new product design," said Eric Schuppenhauer, President, Home Mortgage, at Citizens Bank. "I believe that product design is a large part of what got the industry and bor- rowers into trouble during the 2007-08 housing downturn. We must do all we can to ensure that the industry does not slip back into that type of product innova- tion in any shape or form." Nonqualified (Non-QM) mort- gages for borrowers who don't qualify for conventional loans can also be good performing loans, according to Tom Hutchens, SVP, Sales and Marketing at Angel Oak Mortgage Solutions. "Non-QM has wider guidelines and wider credit availability than agency and government loans." New Borrowers, New Products T he Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, along with the FHA are already cater- ing to a pool of underserved borrowers. Today, nonbanks are also looking at this pool that consists of borrowers who are unable to make a large down payment or those who don't hold a traditional job and therefore, remain unable to get a conventional home loan. According to Kapfidze, various studies point to the easing of lending standards because of which a wider pool of borrowers can enter the market. Lenders, too, are willing to work with them. "As volumes decline, lend- ers are more willing to work with borrowers they may not have focused on when business was booming," Kapfidze said. "Many investors are introduc- ing non-QM products with a focus on ensuring responsible lending that meets the changing needs of borrowers," said Michael Kuentz, President of Lenders One, a cooperative of more than 200 mortgage bankers covering the entire mortgage-lending spectrum. "In addition to affordable lending programs, we expect to see more products focused on helping those in the gig economy without tradi- tional income from one employer." "The borrower profile is getting more diverse and going forward it will become imperative for lenders to look at creating products that satisfy these new profiles, too," Schuppenhauer said. "Looking at alternative means of analyzing credit will be one of the most critical com- ponents of innovation." Despite the growing diversity of underserved borrowers, those with low credit scores remain by far the largest of the pool of bor- rowers who were shut out, and the industry is taking steps to ad- dress their needs as well as it can while also trying to avoid past mistakes. "Agency guides have credit score restrictions," Hutchens explained. "With non-QM, we look at the entire picture includ- ing a borrower's ability to repay, not just their credit score." Borrower Concerns A s lenders woo them, bor- rowers are looking at which companies can not only give them a great rate but high standards of service as well. "A borrower's biggest concern is that they don't want to get taken advantage of. They want to feel in control of the process, and want the process to be fast and efficient," said Churchill's McQuaig. "We're going to see more innovative products as the market continues to change. But we must look at balancing affordability and sustainability in new product design." — Eric Schuppenhauer, President, Home Mortgage, Citizens Bank