As published in Scotsman Guide's Residential Edition, September 2005.
The mortgage industry has changed since the not-so-distant days when Fannie Mae and Freddie Mac ruled the industry. As the market becomes more sophisticated with more products and features, government-sponsored entities (GSEs) are capturing a smaller percentage of the overall business. In the past few years, emerging loan products and lenders’ desire for increased originations have blurred the lines between prime, Alt-A and nonprime lending.
Why the change?
The historical competitive disadvantage of Alt-A and nonprime loans, compared to what have been considered “conventional” loans, is beginning to fade for several reasons.
Borrowers now can float up and down the loan spec-trum to locate products that meet their specific needs, regardless of FICO scores. For example, traditional prime borrowers might find a better loan solution in an Alt-A or non-prime environment than with a typical, 30-year fixed-rate agency product.
With competition in- creasing in the market, the industry has experienced “credit drift.” This occurs when lenders expand the credit guidelines in which they are underwriting to capture more loans. In addition, investors are expanding other risk parameters to qualify borrowers who might have been considered too risky in the past.
More borrowers also are becoming less traditional. For instance, borrowers with excellent credit scores might be self-employed and have difficulty verifying their income; therefore, they might not qualify for conventional loans. Stated-income or no-income-verification loans exist in the Alt-A and nonprime world to meet these borrowers’ needs. Borrowers with great credit also might want to avoid making a down payment on their home purchases and choose instead one of the many 100-percent programs available in Alt-A or nonprime lending.
Market liquidity and the influx of in-vestors interested in buying mortgage- and asset-backed securities also contribute to the expansion of new products. The demand for mortgages has spurred rapid industry growth, which has birthed Alt-A.
Today, most lenders offer some type of Alt-A product. Nonprime lenders are creeping up the credit-score chain, while prime lenders are creeping down. Whereas prime lenders used to focus only on GSEs, Jumbo ARMs and Federal Housing Administration and U.S. Department of Veterans Affairs loans, they now consider Alt-A to be a key part of their business. By offering an Alt-A product, these lenders have the opportunity to garner more market share.
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