Non-Prime is Back

Mortgage lending company Citadel Servicing Corp announced a record-breaking volume of non-prime mortgage originations in the month of August.

Per the report released by Mortgage Professional America, the company successfully originated non-prime mortgages to a total of $200 just in August.

CSC’s senior vice president Will Fisher said they are “firing on all cylinders, preparing for the end of the year. We received more loans (in August) than we have in our company history.”

What could be driving the rise in the number of Non-QM originations?

Various factors are at play:

a) Inclusiveness

In the years following the 2008 crisis, the government established laws that would protect borrowers from predatory loans. The Dodd-Frank Act categorized mortgages. Those loans that are able to meet the standards set by the law came to be what is known as a qualified mortgage. Any loan offered that defies even one or two of these rules are ruled out as nonqualified.

Thus, lenders shied away from offering these risky loans since the trauma of the crisis still lingers. Now, almost a decade after the disaster, many lenders are getting back to business, seeing that there’s profit potential in underserved segments of the market.

These include borrowers who:

– have bad credit

– are self-employed

– need jumbo loans

b) Flexibility

The variety of Non-QM options make for a flexible and easy choice that extend their reach to different segments of the borrower market.

At Citadel, for example, their innovative non-prime products include:

• A ONE-month bank statement program designed for self-employed borrowers. The only requirements for qualifying is a single bank statement and a good credit history.
• A lender-paid compensation allowing the broker to offer borrowers a no-point loan.
• A business bank statement loan which is designed for self-employed borrowers who can only show business bank statements as proof of income.
• A non-owner business-purpose loan for borrowers looking to purchase non-owner occupied properties.

With fewer requirements than qualified mortgage products, non-QM loans also allows for faster loan processing less all the traditional underwriting hassle.

As lenders pick up the potential that Citadel is now reaping profits from, Fisher said they expect more competition to join the picture in the near future.

“We do expect more competition in our space, but we think there’s more than enough volume for everyone to do well,” he adds. “That’s why we’re expanding our correspondent channel – we want to show originators that there’s another outlet where they can diversify their business away from diminishing government originations.”

What are the risks?

Most of non-QM loans carry high interest rates. With high rates, you’ll have to shell out a bigger amount every month. And because there are only few lenders offering them, there are many predatory players taking advantage of those who have little to no other financing options.

When you ask experts today, most of them will tell you that the non-prime mortgages of today are not like their pre-crisis predecessors and there may be some truth to that. Although most of these programs defy one or two rules of the Qualified mortgage standard, some lenders exercise caution when approving applications, making sure that their borrowers still has some capacity to carry the burden of the loan.

The bottom line is, the risk management should be exercised by both lender and borrower. While lenders should establish ability-to-repay requirements, borrowers should be able to adequately evaluate their financial capacities before they commit to an already risky deal.