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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2014

Call It a Comeback

As nongovernment-backed loans reemerge, originators should offer a wide array of products

As has been widely reported by the Mortgage Bankers Association, mortgage applications took quite a hit this past first quarter. At one point this past February, purchase applications fell to their lowest levels in nearly two decades. Rising interest rates have affected the purchase sector and the refinance sector, although the latter was arguably more severely impacted.

Unless you had your head in the sand, this development should not have come as a surprise. With the artificial pumping of funds through the Federal Reserve’s quantitative-easing policy, the 3.25 percent fixed 30-year rate could not last for long. Although current rates are still at historical lows, there is no growth in originations and many experts agree that this year will be considerably slower than last year.

One of the major factors that could reverse this trend is the increase in certain products that are being reintroduced to the market by niche lenders — particularly loans that are not qualified mortgages (QMs). According to Freddie Mac, 56 percent of all mortgage-backed securities issuance consisted of private-label loans in 2006. Fast-forward to 2013 and that number had dropped to an astonishing 2 percent.

"The private investor lost a tremendous amount of faith in the system, so new programs are unlikely to be as indiscriminate as they were in the past."

If you have been in the business long enough, you’ll likely recognize that the Federal Housing Administration was almost nonexistent 10 years ago. Subprime loans were easy to originate, heavily promoted and had much higher profit margins. So, naturally, they were widely used and sometimes exploited. As a result of Wall Street’s hunger for these products, the current generation of originators will be scarred for many years to come.

After the mortgage meltdown — characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages — the pendulum predictably swung in the other direction and government regulations intensified. Ask any processor or underwriter you know about the increase in paperwork and policies they have been facing over the past few years, and you will most likely get an earful.

So, where is the relief? Where is the balance?

Fortunately for the millions of hopeful homebuyers seeking financing, the industry is seeing new non-QM programs emerging almost daily, along with 40-year term loans and no-ratio programs (to help the self-employed, primarily). Granted, the private investor lost a tremendous amount of faith in the system, so new programs are unlikely to be as indiscriminate as they were in the past.

"The industry is seeing the emergence of a new generation of nongovernment loans that are less risky and make a lot more sense than they did in the past." 

Let’s focus on the silver lining in all of this, however. Today the industry is seeing the emergence of a new generation of nongovernment loans that are less risky and make a lot more sense than they did in the past. This allows the small-business owner and the self-employed borrower to qualify for loans that they were otherwise barred from in recent years, a disadvantage that bordered on discriminatory in its power to prevent this demographic from achieving the American dream.

Mortgage banks working with a strong portfolio of private lenders help borrowers with unique financial situations find niche lending that meets their needs. Stated-income loans may never be what they were at the start of the millennia, but there are great products available for borrowers who can’t qualify for loans with traditional documentation. Buyers just need to find an experienced loan originator they trust to do the research and pair them with the perfect mortgage for their lifestyle.

Despite many industry professionals’ grim outlook for the rest of this year, all in all it seems that gentler, kinder guidelines and lower rates from private lenders are making a comeback. According to a recent report from the U.S. Census Bureau, homeownership has reached a bottom not seen since 1995. Even so, the dream of homeownership is as strong as ever, and where there is a will there is a way. More than ever, it’s vital for originators to have access to a wide array of loan options.


 


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