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22 | TH E M R EP O RT FEATURE B race yourself. Major changes are coming in 2017—and it's not what many people are expecting. It's not just about refinances drying up and the purchase market taking the lead. Baby boomers and millennials are anticipated to account for 60 percent of home purchases in 2017, and a large share of them don't qualify for conventional loans. So for all those originators who are accustomed to running pro - spective borrowers through their product and pricing engine hoping to find a good option, a harsh real - ity will be coming soon. This year will be, without a doubt, the year when non-conforming loans make a comeback—and in a big way. Research shows that demand for programs that don't fit the agency credit box could increase to $100 billion in the next year, and continued growth is expected in future years. So what's bringing on this change? And how can loan of - ficers and financial institutions prepare themselves? The Millennial Conundrum L et's begin with millenials. Re- search shows that they already account for about 35 percent of today's home buyers—by far the biggest generational segment of the market. However, while millenni - als are now looking to buy homes, getting approved for a mortgage is a common concern. Many millennials don't have the credit scores needed to qualify for agency loans. Accord - ing to data from FICO, one-third of millennials don't meet the mini- mum credit requirement of 620. Many millennials are just start- ing their careers and may face large amounts of student loan debt, making it a challenge to save for a down payment. These factors put pressure on their debt- to-income (DTI) ratios as well as loan-to-value (LTV) ratios. The bottom line? Millennials will struggle to fit the standard credit box for FHA and agency loans, so they will need to find other options. The Baby Boomer Challenge B aby boomers also promise to be a good source of purchase business, as many retire and seek to downsize or are moving because of a career change. Unlike millennials, many baby boomers fall outside the standard agency credit box, although for different reasons. More and more, boom - ers are self-employed, do contract work, or may have credit issues from the past. That, along with the fact that more boomers are retiring, means that many will need to be approved based on alternative sources of income. These generational home buying trends are happening at a time when the credit box has tightened. Coupled with fundamental market changes, this leaves lenders looking for ways to expand their purchase business. Rates are on the rise and refinances are no longer the low- hanging fruit many lenders have relied on. A Disconnect Between Originators and Wholesale Lenders O ffering loans to more of these non-agency borrowers, many of whom have previously fallen by the wayside, would be a logi - cal course for lenders. So what's holding lenders back? For one thing, loan origina- tors are often unaware of a host of loan options from non-agency wholesale and correspondent lenders, so non-standard borrow - ers end up being turned away. But that may be changing. There's growing interest from Wall Street investors seeking to buy non-agency mortgage paper. They see the potential for huge growth in that market, as well as the higher margins seen on many non-agency loan programs. In turn, wholesale and correspondent lenders who originate or buy those loans are creating products and programs for brokers and mortgage bankers to offer non-prime borrowers. They're doing so in part to fuel the demand from Wall Street, but also to provide mortgage loan options for a wider range of borrowers. Citadel Servicing Corp. (CSC) is a leading example. The Irvine, California-based non- prime wholesale lender recently launched a new loan program called Maggi Plus, which offers up to $3 million loan amounts just 24 months after a short sale, foreclosure, or bankruptcy. "Maggi Plus is advancing our commitment to provide loan op - tions for all types of borrowers," says Will Fisher, SVP of Loan Production with Citadel. "We see a good deal of room for growth in the non-prime space." CSC takes all the necessary precautions to ensure that loans the company underwrites don't end up in default. The lender adheres to the ability-to-repay cri - teria in every loan CSC originates, purchases, and services. "That helps ensure that a high percentage of loans will pay over time," Fisher says. Caliber Home Loans also provides loan products for non- agency borrowers. "Caliber Home Loans offers several portfolio loan products for borrowers who require a non-traditional, non-agency ap - proach to home financing," said Will Pendleton, Caliber's SVP for Portfolio Lending. "One of our most popular portfolio loans is 'Fresh Start.' It's designed to assist borrow- ers who can prove their ability to Lending Outside the Box Demand for non-agency loans could climb to $100 billion this year. How can lenders embrace out-of-the-box but creditworthy borrowers? By Eloise Schmitz