A Looming Renaissance in Special Financing?

Most REALTORS® are not familiar with the nuances of mortgage regulation … they are busy brokering real estate deals.  However, many noticed that it became more difficult to find funding for special clients two to three years ago.  The housing finance market appears to be thawing, but in the meantime it is important to seek out a special lender, for your special client.

Regulations introduced in 2014 made it tricky to find funding for some clients with special characteristics:

• Borrowers with high debt to income ratios in high cost areas
• Borrowers who use interest only loans
• Borrowers who use some ARM products, and
• Borrowers who may have trouble documenting their income but who earn enough to qualify by traditional standards.

These borrowers fall into a group who don’t qualify for an exemption to a new set of lending rules.  The exemption is called a qualified mortgage (QM) and the rule is the ability to repay (ATR), which is intended to protect consumers.  The exemption is for the lender who originates the loan and it helps them to reduce their legal liability in case something goes wrong with the loan.  Hence, lenders prefer to stick with mortgages that fall within the QM exemption to the ATR rule.

Things appear to be improving, though.  In NAR’s 6^th Survey of Mortgage Originators, lenders indicated that their willingness to originate non-QM loans improved in the 1^st quarter of 2015 for the first time in 5 quarters.  As depicted below, willingness to originate these loans plunged in the 3^rd quarter of 2014, shortly after the new rule was implemented.

What’s driving the change in originators attitudes?  Most lenders in the Survey of Mortgage Originators do not have portfolios, which means that they need investors to buy the loans that they originate.  Thus, investor takeout is critical.  As shown below, the share of respondents reporting an improvement in investor demand surged to 37.5%, nearly doubling the 19% from the 4^th quarter.

Furthermore, as depicted by the blue bars in the right side of the chart below, the lenders who responded to the survey expected  investor demand to rise over the next six months for the non-pristine types of credit which have had issues in recent years: non-QM, rebuttable presumption, and lower FICO prime borrowers.  As a result, originators expect access to credit for these same borrowers to improve over this time frame.  Improvements in investor demand appear to be loosening up the log jam in non-pristine lending.

However, while willingness to lend these non-pristine loans among those lenders who offered the products has improved, only about 40% of respondents indicated that they offered non-QM mortgages and 75% would originate QM loans with a rebuttable presumption designation.

Confidence among lenders who specialize in non-pristine financing appears to be gaining steam, driven by improvements in the investor space.  It may take time for a robust expansion of non-QM lending, but REALTORS should be aware of the option and maintain multiple lending contacts to meet their special clients’ needs.