TheMReport — News and strategies for the evolving mortgage marketplace.
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28 | TH E M R EP O RT FEATURE The Rise of the Gig Economy S arah and Jake are not alone. Some 16 percent of Americans work in the gig econo- my, according to a study released by Fannie Mae's Economic & Strategic Research Group. Roughly 44 percent of gig economy work- ers are between the ages of 18 and 34. Half of all gig workers make $50,000 per year or more. A majority of gig economy workers believe their financial situations are on the upswing. About two-thirds have obtained at least some form of college education. An examination of that data reveals that gig economy workers are ideal candidates to seek out a mortgage. They make good in- comes. They are in the prime age range to get married, start a family, and buy a first home. They are optimistic about their futures. And there are at least hundreds of thousands of people in the gig economy. However, almost all of the income from these jobs comes via 1099 forms. Further, this income may also not be steady due to the fluctuating nature of this type of work. But as we all know, those improved underwriting standards mean that banks and other lend- ers require people seeking a mort- gage to have at least a few years of steady W-2 income that shows the ability to repay a loan. This prevents people like Sarah, Jack, and hundreds of thousands of others like them from getting approval for a mortgage. And that's not the only reason. The Challenges of Tax Time S arah and Jake learned years ago, through their accountant, that they have to keep every last piece of paperwork come tax season. Sarah can deduct internet and phone bills since she works at home. Jake can deduct his costs from the coworking space he uses. They also can deduct their health insurance costs and any mileage they accrue while driving for business-related purposes. For teaching yoga, Sarah can deduct everything from the apparel she wears in class to seminars she takes to further her education in the field. Jake can deduct dog treats, leashes, and other expenses accrued when dog sitting. He can also deduct having his car detailed for his ridesharing side-job, as well as buying water and snacks for his passengers. Come tax season, all of these write-offs add up and significantly decrease their net income, commen- surately reducing their tax liability. But filing the many deductions hurt Sarah and Jake when apply- ing for a mortgage. Underwriters use net, not gross, income when determining the validity of a mortgage application. Further, underwriters and oth- ers involved in the steps needed to obtain a mortgage often require proof of employment, references, and a list of past employers and landlords. Freelancers may have a lengthy job history consisting of any number of employers and past contacts, so it takes a lot of organization and paperwork to have this information handy. It's just another factor that pre- vents gig economy workers from having the chance to buy a house. The Growth of Non-QM T he housing market is becom- ing tighter. Recent data releases show slowdowns in new and pending home sales. Home prices throughout the country seem to have plateaued in many major markets. We are starting to see the effects from the combina- tion of rising interest rates and questions about home affordabili- ty. We have already seen refinanc- ing essentially vanish. The non-qualified mortgage (non-QM) has become the best chance for growth in the origina- tion industry. Non-QM origina- tions currently total roughly $20 billion per year. Many insiders project that non-QM could soon surpass $100 billion per year in issuances. The growth in non-QM is hap- pening because so many quality borrowers now fall into that clas- sification due to regulation changes in general. The growing number of people who choose to make their income through the gig economy has skyrocketed. Along with that comes the chance for the mortgage industry to capitalize. Programs for the Gig Economy T here are innovative programs out there that grant opportu- nities to borrowers who do not fit into the "credit box" that has lim- ited so many. For example, "bank statement" mortgage programs have grown in popularity over the past few years. These are wonder- ful for self-employed workers, as well as those in the gig economy. Typically, a mortgage applicant must provide two years of tax returns, W-2s, and payroll checks to gain approval. But "bank state- ment" mortgages rely on a review of 12 months of deposits into a bank account. While the need for stricter analysis when issuing loans was certainly needed after the "Great Financial Crisis," the new regula- tions and policies have boxed out many qualified candidates from the mortgage market. Bank statement programs pro- vide for a much better and more accurate look at the financial health of couples like Sarah and Jack. How the Mortgage Industry Can Get Younger H ere's another quick case study. Let's take a small mortgage brokerage company outside of Philadelphia. There are three partners in the com- pany, all of whom are men in their mid-50s—the average age for loan officers. However, they have just taken on a new 28-year-old employee named Ryan. Like most other brokers, they have developed a client base largely based on refer- rals and local networking. Ryan, understandably, does not have his book ready. He is growing frus- trated with his career path. But these brokers have seen firsthand the recent trend in the marketplace. When interest rates were at rock bottom, they constantly fielded calls about refinancing or buying a new house. But interest rates, while still historically low, have climbed and the brokers have seen a pretty quick drop in business. The older partners in the com- pany likely do not understand the "gig economy." For them and their peers, most people settle into one career and only change jobs when a better opportunity presents itself. The concept of freelancers isn't something they are familiar with. But people who work contract jobs and have "side hustles" are commonplace to Ryan. Many of his friends have happily chosen this lifestyle. He understands their thought process and as one of the rare young faces in the mortgage business, stands to capitalize on this natural connection. The mortgage industry has gotten grayer and older. It needs to get younger to survive. The gig economy can make that happen. The gig economy certainly presents its challenges for the mortgage industry. It takes pa- tience and understanding not just to find people with this kind of lifestyle but also work with them. The opportunity is knocking though. Non-QM is the growth market for the mortgage industry right now and the number of people in the gig economy is only going to grow with time. Sarah and Jake aren't anoma- lies. They are the future. And the future is now. TOM HUTCHENS is EVP of Production at Angel Oak Mortgage Solutions, an Atlanta-based wholesale and correspondent lender leading the non-QM space for five years and licensed in over 35 states. Hutchens has been in the real estate lending business for nearly 20 years. He may be reached by phone at 855.539.4910 or e-mail Info@ AngelOakMS.com.