March 3, 2021

Jumbo loans, private loans and alternative doc (Non-QM) mortgage loans are disappearing

The alternative loan space is taking a big hit

After March 13, 2020 everything in the non-agency lending space changed.  Almost overnight the big California private lending companies and Non-QM Lenders stopped lending leaving many home buyers at the closing table without the funds to close.

It wasn't long before large institutions like Wells Fargo and other national banks stopped or considerably tightened lending for jumbo loans which in most of the country is a loan exceeding $510,400.00.

What kinds of loans were stopped?

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

What happened to non-QM lending?

Lenders don’t usually keep the mortgages they make. Instead, they sell them to investors willing to take the risk that may or may not earn a profit from the interest. A portion of  those investors get even riskier and make moves on non-QM mortgages specifically. This is typically how non-QM lending survives, but as the Covid-19 outbreak continues to torment the country, many non-QM lenders still have loans sitting in their arsenal but simply have no investor-buyers.

As the Covid-19 outbreak continues to torment the country, many non-QM lenders still have loans sitting in their arsenal but simply have no investor-buyers.

Understandably, Investors and lenders have been wary regarding non-performing loans due to the economic shock the country is currently enduring. No one wants to take that risk. Furthermore, lenders have cut back on jumbo lending due to the rising unemployment rate which in turn forces them to reinforce their lending standards.

Let's say a mortgage borrower loses their job before an investor purchases a loan, that loan will get stuck with the lender. This is why lenders are not even offering QM loans, why would they if investors aren't buying them.

When will the non-QM hiatus end?

According to Angel Oak (one of the largest U.S. mortgage firms that caters to riskier borrowers), “The pandemic has continued to cause turmoil in the worldwide economy. Due to the instability of the market and the inability to effectively evaluate credit risk, we are pausing all loan activity for two weeks. This includes fundings and any new loan activity.”

Most of the non-QM lenders are hopeful that these changes are temporary but the truth is, no one truly knows what will happen next.

Angel Oak shut down for two weeks and alongside them was another non-QM giant in Citadel Servicing, but they did so for 30 days. Most non-QM lenders have been halting their services.

The pandemic has caused a state of instability and total shock in financial markets that has impacted the entire real estate industry, and is projected to be worse than the 2008 recession which has forced investors to play the waiting game on market developments as they figure out their next move.

What exactly are non-QM mortgages?

They are regulations that provide safer and more sustainable home loans for consumers and are usually for borrowers with unique income qualifying circumstances.

Qualified Mortgages are parallel to the borrower’s debt, income, credit, loan-to-value ratio, and other aspects. If the borrower checks all the boxes then it ensures their “ability to repay” and are meant to make lending less risky. Not everyone fits the criteria however, even those who are perfectly able to repay a home loan.

Non-QM loans came to be because of mortgage borrowers who were unable to check the boxes that were mentioned above.

Typical suspects for Non-QM loans:

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

What is the next step if you were affected by the decrease in non-QM loans?

Before the pandemic broke loose, there were more than 40 lenders projected to fund $10 billion in mortgage volume in 2020. If you were interested in these loans, then your lender has already probably notified you. If not, you must reach out and ask for a sense of direction. They probably won't be able to give you a specific date that your loan will come back but they may give you tips on how to deal for the time being. You should ask a lot of questions, specifically: what happens to your rate lock, how your interest rate may be impacted, and any other terms or conditions that may have changed. One thing to remember in these tough times is that the whole nation, and world, is going through the same thing. Stay patient and be ready for the day that things return to normal.