Despite predictions that 2019 was going to be a difficult year for the real estate and mortgage industries, there is reason for optimism. Recent declines in mortgage interest rates have led to increased demand that’s being seen in the market.
The new-home sales report this past February from the U.S. Department of Commerce showed a 4.9 percent month-over-month increase. The early portion of 2019 also ushered in a welcomed increase in inventory. In January, Re/Max reported a year-over-year supply increase of 6.4 percent, the largest annual increase in the past 10 years.
Still, competition is expected to remain fierce in the mortgage industry. The key to success in a crowded, competitive market is to stay ahead of these trends by anticipating changes in the marketplace and consumer behavior. To be successful, mortgage originators should understand the issues that will likely have a major influence on the market in 2019 and beyond.
As would-be homeowners search for their dream homes this spring buying season, mortgage originators can expect many of them to be self-employed. Admittedly, this has been an underserved segment for the past several years.
As of 2015, there were more than 15 million self-employed workers in the U.S. The challenge for originators is finding ways to help self-employed borrowers, or borrowers with a nontraditional source of income (income that isn’t reported on a W-2 form and doesn’t fit standard credit guidelines) gain access to affordable credit.
Many of these workers are younger Americans who simply aren’t following the paths of their parents and grandparents — working 30 years for the same company. Today’s lenders and originators can utilize innovative products that thoroughly evaluate a borrower’s creditworthiness through alternative documentation that looks beyond just a FICO score and W-2.
Millennials have meaningfully entered the housing market. According to Realtor.com, millennials were responsible for 45 percent of all new mortgages at the end of last year.
Although many millennial homebuyers are dealing with considerable student debt and credit challenges, they have progressed in their careers and the annual household income for this demographic increased to $88,200 last year, according to the National Association of Realtors. That increase is good news for lenders who can offer products that take a more comprehensive look at a borrower’s creditworthiness.
A recent study from Clever Real Estate, an online real estate platform, found that millennials are prioritizing homebuying before other life events such as marriage or having children. The research also shows that the vast majority (84 percent) of millennials surveyed believe that homeownership is a core component of the American Dream.
So, what should savvy lenders do to make sure they have attractive options for millennial homebuyers? Originators must understand how these younger individuals utilize credit in ways that are different than previous generations and how it may impact their ability to access an affordable mortgage.
Research from TD Bank shows that 32 percent of millennials don’t pay their credit cards in full every month, which is likely one of the reasons they have lower average credit scores than prior generations. Additionally, half of all millennials use between 31 and 90 percent of their credit limit, surpassing the traditionally recommended utilization rate to qualify for a conventional mortgage loan.
These borrowers may not be viewed the same as those with longer credit histories and, as a result, may not qualify for conventional loans. A flexible, nonqualified mortgage offering (non-QM) can be attractive to millennial borrowers who don’t fit the limited scope of typical loan programs. A non-QM loan is one that falls short of meeting the strict “qualified-mortgage” standards set for loans to be securitized by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
In addition to some of the borrower credit and documentation challenges that can be satisfied with a non-QM product, there are opportunities for originators to meet other nonconventional needs that borrowers may have. Investors purchasing residential properties comprise about 15 percent of home sales, creating consistent demand for both fix-and-flip and long-term rental loans.
Wise lenders and originators hedge against uncertain market conditions by making sure their product offerings include enough options to serve a diverse set of borrowers. A growing number of quality non-QM and investor products have emerged that are meeting more borrower needs.
From bank-statement, rental and fix-and-flip loans to interest-only and bridge options, the mortgage offerings available in today’s market are flexible and answer the needs of unconventional borrowers. Although it’s true that conventional lenders have become accustomed to selling to the GSEs, there also are opportunities for them to sell nonconventional loans to investors.
In the near term, originators will be very busy with refinance activity in addition to building their purchase business. Originators who truly want to grow their business should make sure they are offering a full range of mortgage products, including non-QM and investor options. Smart mortgage originators who are committed to the rapidly growing non-QM lending space will help a wide range of borrowers — including millennials, foreign nationals, investors and the self-employed — obtain the homes they deserve.