MReport May 2022

TheMReport — News and strategies for the evolving mortgage marketplace.

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28 | M R EP O RT FEATURE L ocation is widely recognized to be of critical importance in real estate. Similarly, flexibility may be just as critical to the mortgage industry. However, finding that flexibility has been difficult for many years, as rigid loan guidelines and regulations have dominated originations, curtailing who is considered a "qualified" borrower and creating demand for loan products that can serve those borrowers who fall outside these parameters. Non-QM lending is a growing niche, and one that can not only help originators grow their business but also help borrowers who have been overlooked by conventional lenders. But why does the market need non-QM loans? Who are today's non-QM borrowers? And what do they need from a lender? Credit Availability Remains Low M ortgage credit availability has remained low since the housing crisis in 2007. In addition to the regulations put in place to protect consumers, many lenders have been extremely risk-averse and have stuck to qualified mortgage originations as defined by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. This has left a significant percentage of the population without access to credit, despite other indicators of being creditworthy. According to the Housing Finance Policy Center's Credit Availability Index (HCAI), mort- gage credit availability was 5.2% in Q 3 2021; it stood at the same mark in Q2 2021. 1 Although this is still historically low, it was an improvement over the record low of just below 5.0% seen in Q 3 2020, reflecting the effects of the COVID-19 pandemic. However, from 2001-2003, prior to the housing crisis, the credit avail- ability standard for the mortgage market was 12.5%. Borrowers with less-than-perfect credit or with unusual documentation or cir- cumstances are now largely being left out of the mortgage market. At the heart of the issue is the Qualified Mortgage Rule itself, as well as many lenders' unwilling- ness to originate loans outside of those narrow parameters. What is considered a "qualified" mortgage is determined by the Consumer Financial Protection Bureau (CFPB) as part of the criteria that must be met for a mortgage to be backed or purchased by govern- ment loan programs or by the GSEs. These criteria currently include meeting the ability-to- repay rule, and loans must be fully amortizing with terms no longer than 30 years. 2 In addition, the sum of points and fees cannot exceed 3% of the loan amount (except for loans under $100,000), and the borrower's monthly debt- to-income (DTI) ratio cannot be greater than 43%. 3 These rules were put in place after one of the worst financial crises in history, in order to prevent a repeat of the high-risk lending that caused the crisis. Despite good intentions, these regulations have created a set of borrowers that are left out of the housing market, despite being creditworthy. According to the ICE Mortgage Technology report, conventional loans continue to dominate, starting 2021 off with 84% of the market, although that dipped to 78% by December. 4 Federal Housing Administration loans made up 12% of originations in December 2021, while U.S. Department of Veterans Affairs made up 6%, leaving just 4% for other loan types. For borrowers who don't fit into the qualified standards, this leaves little room to acquire the financing they need. Who Are Non-QM Borrowers? P art of the difficulty with the non-QM borrower as a subset of the market is how wide-ranging those who fall into the category can be, from the self-employed to investors or from foreign nationals to gig economy workers. There is often the misconception that non-QM borrowers have low or bad credit. However, although some non-QM borrowers may have credit issues, many have high credit scores and are otherwise very qualified borrowers but need to use alternate documentation or a different way to calculate their income for qualification. Certainly, one of the largest types of non-QM borrower is the self-employed or small-business owner. According to the Bureau of Labor Statistics, roughly 9.98 million Americans were self- employed in February 2022. 5 Even more are looking to this avenue for better work-life balance, flex- ibility, and fulfillment. According to the FreshBooks 2021 Annual Self-Employment Report, 95% of the surveyed self-employed Americans intend to stay that way, and 40% of the tradition- ally employed consider it at least somewhat likely that they will work for themselves in the next two years (and that number goes Who Needs Non-QM Loans? Non-QM loans offer critical flexibility for the self-employed, investors, and more. By Greg Austin

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