For mortgage brokers and loan officers, there’s a lesson to be learned from the former Harvey’s Hardware, a family-run Greater Boston institution. Even with the arrival of big-box stores, Harvey’s thrived by being ready for anything. Small in square footage compared to the warehouse-sized retailers, it was packed, floor to ceiling, with every conceivable product a customer could want and was the go-to place for services like gas grill maintenance.
Customers who had scoured other stores seeking halogen bulbs in atypical sizes or a certain brand of rust remover could find them at Harvey’s. Moreover, its highly trained staff were well-versed in the nuances of these services and products. This formula helped Harvey’s leap far ahead of competitors in measures like sales per full-time employee and net sales, according to an Inc. magazine profile.
As the mortgage industry immerses itself in the spring selling season, the mantra of being ready for anything that Harvey’s embraced is particularly relevant. It’s largely why the non-qualified/non-agency mortgage segment — and the mortgage brokers and loan officers who focus on its products and services — are succeeding despite the challenges of the past few years. Indeed, this was the fastest-growing segment of the mortgage market last year, and something experts predict will continue in 2025.
Current housing dynamics should continue to ignite strong interest in non-QM/non-agency products among a wide variety of borrowers, including real estate investors, developers and builders, along with high net worth, self-employed individuals. Many of these borrowers fall outside the government-sponsored enterprises’ underwriting standards — such as investors with more than 10 properties, or self-employed individuals unable to qualify for a mortgage using their tax returns.
The mortgage brokers and loan officers who can meet these borrowers’ needs with a broad range of products — such as residential transition loans, debt-service coverage ratio (DSCR) loans, bank statement loans, second liens and home equity lines of credit (HELOCs) — will be better positioned to grow with the market.
‘Perfect storm’
It’s well-known that the “perfect storm” of high valuations, high interest rates, and a demand-supply imbalance has dramatically changed the housing finance industry. The numbers tell the story.
The U.S. housing market has a shortage of 4.5 million homes, according to Zillow. And it’s expected to get worse. Data from the United States Conference of Mayors’ and the American Institute of Architects’ National Housing Survey of 120 U.S. cities indicates that over the next five years, the shortage of affordable and safe housing should rise by more than 2 million units in those municipalities.
The first-time homebuyer market share decreased to a historic low of 24% between July 2023 and June 2024, down from 32% the year before, according to the National Association of Realtors. And homebuyers’ “ages hit all-time highs of 56 years overall (up from 49 last year), 38 years for first-time buyers (35 last year), and 61 years for repeat buyers (58 last year),” the association noted.
In December 2024, all 50 of the most populated U.S. metropolitan areas saw home price increases, with the median price reaching $427,670, according to Redfin. That means that many consumers are priced out of the market and forced to rent.
In almost 90% of U.S. counties analyzed by Attom, median three-bedroom rents are more affordable than mortgages, property taxes and insurance for comparably sized homes. Taken together, these numbers point to the needs and opportunities that mortgage brokers and loan officers can capitalize on in the current housing market using non-QM/non-agency loans.
Enterprising solutions
The shortage of housing inventory has led to demand for more new homes, which some enterprising builders and developers are now helping to fill. These builders may be candidates for residential transition loans, short-term bridge loans which can be used for ground-up construction or fix and flips. They can fund quickly (often within 10 days), which enables borrowers to claim their space in a crowded construction market before others overtake them.
Pressures on inventory, along with today’s high valuations, have also created a market for fix and flips, in which an investor (frequently an LLC) profits by purchasing and rehabbing a home, and then putting it back on the market for a quick resale. Twelve-month terms for residential transition loans for fix and flip projects of values of $50,000 to $10 million with a loan-to-cost (LTC) ratio of up to 95% are typical. Loans for both fix and flips and new construction are for one- to four- unit residential properties.
Spurred on by high demand for quality rentals, individual business- purpose investors are financing purchases income properties of one-to-four units and five-to-nine units using DSCR loans. These products enable them to qualify based on the rental cashflow of a property and do not require borrower income or employment information — streamlining the approval process for investors seeking to act with speed and agility.
Despite the unrelentingly high home prices that are forcing many borrowers out of the market, some business owners have a different challenge: their tax strategies underrepresent their qualifications for a traditional mortgage on a home that is well within their reach. Non-QM bank statement loans enable them to qualify by using 12 or 24 months of business or personal bank statements, rather than tax returns, for income verification.
This alternative view into their income can open new homeownership doors for them. Originators with fluency in bank statement loans stand to benefit, too. There are approximately 16.5 million self-employed people in the U.S., according to the Center for American Progress, some of whom may need a bank statement loan to achieve their homeownership goals.
Finally, today’s spiking valuations are prompting many property investors and homeowners to apply for home equity loans such as second liens or HELOCs to free up cash for renovations or consolidate high-interest debt. The Federal Reserve Bank of New York notes that total household debt today is $18.04 trillion.
Just like with mortgages, there are bank statement options for self-employed and other borrowers who might not otherwise qualify. These products are also helpful for borrowers who took advantage of lower interest rates during the pandemic; they can hold onto their first mortgages while borrowing smaller amounts at today’s non-QM/ non-agency rates.
In short, just like with Harvey’s Hardware, mortgage brokers and loan officers can maximize their sales in any market by anticipating borrowers’ every need. Adding non-QM/non-agency products to their toolbox and establishing strong relationships with long-time non-QM wholesale partners who can educate them on all the product nuances, can help them nail more business.
