Curve

Jumbo, low-doc, alt-doc mortgage loans disappear overnight

Craig Berry
The Mortgage Reports contributor

Echoes of the housing crisis as non-QM lending shuts down

Coronavirus strikes the mortgage industry, again.

In just a matter of days, many alternative loans, known as “non-QM lending,” came to a screeching halt.

It wasn’t a government task force that caused the non-QM shutdown. It was the market.

Non-QM investors worry about risk in an economy shaken by the coronavirus outbreak. And they’ve simply stopped buying new loans until they have a clearer picture of what to expect.

Will this affect your mortgage at all? Here’s what you should know.

Verify your new rate (Jun 2nd, 2020)

What kinds of loans are being cut off?

How do you know if your loan was one of the non-QM mortgages being affected?

If you’re in the process of getting a mortgage, you more than likely knew if you were applying for a non-QM loan. These almost always come with higher interest rates and higher down payments.

A few examples of common non-QM mortgages include:

  • Jumbo loans
  • Bank statement loans
  • Lower credit score loans
  • High debt-ratio loans

Regardless of where your loan was in processing, you could be affected. Most lenders have halted all non-QM funding — effective immediately.

Why did non-QM lending disappear?

Lenders don’t keep the mortgages they make. Instead, they typically sell them to investors who profit from the interest. Some of those investors go in for non-QM mortgages specifically. That’s how non-QM lending survives.

Normally this system keeps lenders in the money so they can continue making loans to home buyers.

But as the coronavirus pandemic continues to grip the nation, many non-QM lenders have loans sitting in their pipelines for which there are no investor-buyers.

As the coronavirus pandemic continues to grip the nation, many non-QM lenders have loans sitting in their pipelines for which there are no investor-buyers.

Understandably, investors have been frightened from the wave of economic disaster prompted by the novel coronavirus.

No one (lender or investor) wants to get stuck with potentially non-performing loans.

And if a mortgage borrower loses his or her job before an investor purchases a loan — as many people are, due to coronavirus — that loan will get stuck with the lender.

Thus, if investors aren’t buying QM loans, lenders won’t offer them. That’s exactly what we see happening today.

How long will the non-QM moratorium last?

Angel Oak Mortgage Solutions — one of the largest U.S. mortgage firms that caters to riskier borrowers — cut nearly 70 percent of its workforce due to coronavirus concerns.

According to Angel Oak, “The pandemic has continued to cause turmoil in the worldwide economy. Due to the constant shifts and the inability to appropriately evaluate credit risk, we are pausing all loan activity for two weeks. This includes fundings and any new loan activity.”

According to most of the non-QM lenders, these changes are temporary. However, it’s impossible to say how long the pause in originations will last.

Angel Oak halted operations for two weeks. Citadel Servicing, another big non-QM lender followed suit. But, for 30 days.

Most non-QM lenders made similar announcements last week.

The pandemic has caused a state of instability in financial markets that has impacted the entire real estate industry.

Until things settle down, investors will be waiting on watching market developments to determine their next move.

Background: What are non-QM mortgages? Who gets them?

Five years ago, the Consumer Financial Protection Bureau (CFPB) issued regulations to provide safer and more sustainable home loans for consumers, known as Qualified Mortgages (QMs).

Qualified Mortgages fit into a certain box with regard to the borrower’s debt, income, credit, loan-to-value ratio, etc. These parameters ensure a borrower’s “ability to repay” and are meant to make lending less risky.

But not everyone fits into the QM box. Even some people who are perfectly able to repay a home loan simply don’t meet the criteria.

Enter non-qualified mortgages. Non-QM loans came onto the scene for mortgage borrowers who were unable to meet the standard “ability to repay” guidelines.

That usually includes people like:

  • Self-employed borrowers
  • Those who use bank statements to qualify instead of W2s
  • High debt-to-income ratio borrowers
  • Borrowers with lower credit scores

For many, non-QM mortgages have been a savior.

In 2019, non-QM mortgage lending accounted for $25 billion in mortgage volume, roughly 2.5 percent of all mortgages in the U.S.

What should you do if you were affected by this non-QM news?

Until a week ago, there were more than 40 mortgage lenders projected to fund $10 billion in mortgage volume in 2020.

If you were shopping for any of these loans, by now you’ve probably heard from your lender.

If you haven’t been contacted by your lender, reach out to them for direction.

Although your lender may not be able to give you an exact time of when your loan could be back on, they may at least give you some guidance.

Questions such as what happens to your rate lock, how your interest rate may be impacted, and any other terms or conditions are important questions to ask.

Most likely, much like the millions of other Americans who are being impacted by COVID-19 developments, you’ll need to bide your time.

One thing that most experts agree — if you can hang in there, things should go back to normal before long.

Verify your new rate (Jun 2nd, 2020)