By Mike Miles
Remember sub-prime loans? The remembrance of those can be just as eerie as the little girl in the Poltergeist movies saying “they’re back”. It’s most likely that we will never see true sub-prime loans again. While it’s true there are some loan programs available to risky borrowers, categorically speaking, none of those loan programs come close to what we know as sub-prime loans. Sub-prime loans of the past were targeting borrowers who posed a significantly higher risk of repaying the loan but without requiring much (if any) equity. Without equity, banks (or asset companies) didn’t have any safety net for when a borrower(s) defaulted.
The idea of loans being available to riskier borrowers never went away after the financial crisis over a decade ago. What changed was how banks measured the ability for these borrowers to repay the loan in addition to requiring them (borrowers) to have much more skin in the game (equity).
What are these loans called if they are not sub-prime? These loan programs are referred to as non-QM loans. What is a non-QM loan? It’s a loan that doesn’t fit into the QM (Qualified Mortgage) rule. What’s the QM rule? It’s a set of guidelines adopted by the Consumer Financial Protection Bureau (CFPB) in 2014 requiring lenders to:
- Determine a borrower’s ability to repay
- Restrict risky loan features typical of sub-prime loans
- Cap points and fees charged to borrowers
- Limit how much income can go towards the mortgage payment (debt-to-income ratio)
Each of these has pages of guidelines and requirements as set by agencies such as Fannie Mae and Freddie Mac. At the end of the day, a QM loan is one that’s underwritten to how most of you(us) think should be underwritten with common sense.
Non-QM loans are for those borrowers who don’t fit within the guidelines outlined for the bullet points above. There is a growing market for non-QM loans (both on the consumer side as well as on the banking side). More and more non-traditional consumers are wanting to buy houses. Non-traditional meaning borrowers that may have alternative forms of income and/or credit challenges.
Banks are starting to gain interest as well. Yes, it’s totally fair to assume a banks’ desire to make money is the main reason for the interest. However, it’s more calculated now than before. Non-QM loans are performing almost as strong as conforming loans. According to the Mortgage Bankers Association (MBA), as of late 2018, non-QM loans were reporting a 60-day delinquency rate of just under 4 percent. That’s compared to a delinquency rate of 3.45 percent for conventional loans and 8.7 percent for FHA loans.
Non-QM loans certainly have room to operate in the mortgage marketplace. We will take the next few weeks to post about a couple non-QM products.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain Mortgage today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268