The real estate market just can’t catch a break, with a low inventory of resale homes and rising interest rates making it harder for buyers to justify the jump.
And now we can add the financial problems of mortgage lenders – and the rise (and fall) of “non-qualified mortgages” – to the factors exacerbating an already uncertain market.
A report from ATTOM shows that the number of new mortgages in the third quarter of 2022 fell by 47% compared to the previous year. That’s down 19% from the previous quarter and represents the biggest annual decline in 21 years. And while the chill in the market affects all lenders, non-bank lenders – especially those trading NQM – are most affected.
But what do the problems surrounding these NQM mortgages actually mean? And what does it mean for non-traditional buyers trying to gain a foothold in the market?
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An “unqualified” mess?
NQMs use non-traditional income verification methods and are often used by people with unusual income scenarios, self-employment, or credit problems that make it difficult to obtain a qualified mortgage loan.
They have previously been touted as an option for creditworthy borrowers who otherwise cannot qualify for traditional mortgage loans.
But now First Guaranty Mortgage Corp. and Sprout Mortgage — a pair of companies that specialize in non-traditional loans that don’t qualify for government assistance — run aground this year, real estate experts are beginning to question their worth.
First Guaranty filed for bankruptcy protection in the spring, while Sprout Mortgage simply shut down this summer.
In documents related to the bankruptcy filing, First Guaranty leaders said that once interest rates began to rise, loan volume fell, leaving the company with more than $473 million in creditors.
Meanwhile, Sprout Mortgage, which relied heavily on NQMs, abruptly shut down in July. And real estate tech startup Reali has also closed its doors.
Other non-bank lenders are being forced to streamline to stay afloat. A HousingWire report says private lenders Angel Oak, Lower.com and Keller Mortgage have all had to introduce layoffs given the difficult market conditions.
Are NQMs signaling another housing collapse? Probably not
Most housing market watchers believe that the current conditions – led by tighter lending rules – mean the US is likely to avoid a 2008 housing market collapse.
But failures of non-bank lenders can still have a significant impact. NQM share of the total first mortgage market is starting to rise again: NQMs made up about 4% of the market in the first quarter of 2022, doubling from its 2020 low of 2%, according to CoreLogic, a data analysis company specialized in the housing market.
Part of what has contributed to the recent popularity of NQMs is the government’s stricter lending rules.
Today’s NQMs are largely considered safer bets than the ultra-risky loans that fueled the 2008 collapse.
Still, many NQM lenders will be challenged when loan values begin to decline, as many are now with the Federal Reserve’s moves to raise interest rates. When values fall, non-bank lenders don’t always have access to emergency funding or diversified assets they can tap like larger bank lenders.
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Banks can also lean on more securely qualified loans because they take into account traditional income verification, stricter debt ratios, and lack features such as interest-only payments.
Major US banks, however, are starting to see things cool thanks to slowing mortgage lending. The Fitch report points out that Citi, JPMorgan and Wells Fargo each had to reduce staff and operations, while Satander exited the US mortgage market early this year and teamed up with another company to provide mortgages to customers.
It is important to note that if you have a mortgage through a lender that is now bankrupt or defunct, it does not mean that your mortgage will disappear.
Typically, the Federal Deposit Insurance Corporation (FDIC) works with other lenders to pick up orphaned mortgages, and the process happens quickly enough to avoid interruptions in loan repayments.
One number rules them all
While many factors drag on the real estate market, one data point is most important: interest rates.
With the Fed’s laser focus on raising rates to cool inflation, there is little reason to believe that the effect on lending and the broader housing market will diminish any time soon.
Higher mortgage rates will determine how much house they can afford. In mid-December, the average 30-year fixed rate fell slightly from its peak of 7% at the end of October to 6.31%.
(This also affects sellers, many of whom will eventually become buyers and likely rely on loans.)
Between a potential shakeout among non-bank lenders, tighter credit rules being forced on banks, and the Fed’s higher rates, there are many reasons for caution on all sides.
Buyers – especially those who bring traditional loans to the offering table – will have to be buttoned up. In addition to ensuring their credit meets more stringent bank lending standards, they may need to consider other tactics, such as offerings higher than the seller’s asking price and other concessions, such as waiving repair costs for problems revealed during inspection come.
On the other hand, sellers may be more motivated by all-cash offers, which typically speed up the closing process by removing traditional mortgages — and rising interest rates — from the picture.
Potential sellers may want to consider waiting to list their homes until the next upswing. Despite geographies of rising values and high demand, a broader nationwide cooling trend could make staying a wise choice.
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This article provides information only and should not be taken as advice. It comes without any kind of warranty.