In part one of "The Surge," we discussed the tailwind forces that will reach a tipping point and help drive the housing market into its next surge. Those forces include the domino effect from an expanding population, household growth and the trends in housing needs. In part two, industry experts weigh in on how the industry can better prepare for a surge in homeownership rates and mortgage adoption. [paragraph] There are critical steps that the mortgage industry must take to meet the demand--such as loan products that serve more borrowers' needs; a return of private capital to take on alternative lending investments; and new technologies that bring speed, visibility and lower costs to the mortgage process. [paragraph] Let's delve into these one by one.
Loan products to meet the demands of borrowers
The ink was barely dry on the Qualified Mortgage (QM) rules in 2014 when lenders began brainstorming non-QM options to address the large segment of creditworthy borrowers left with few options to obtain a mortgage--particularly those in the jumbo market. While alternative products continue to pop up in an attempt to serve this segment, investor appetite remains sluggish and cost-prohibitive.
Several lenders have developed non-QM products and platforms to address the conforming and jumbo market of customers with good credit needing alternative income verification. As we mentioned in part one of this series, Gene O'Bryan, chief executive officer of Orange County, California-based Solutions Lending, pointed out that good-credit borrowers continue to be rejected even with solid down payments because they nearly miss QM standards.
Even when these loans are being made--typically held by private investors or banks--the interest rates have not always been appealing to borrowers. Some lenders have been tempted to layer in risk of good, but not stellar, credit on alternative documentation products, stepping out on a slippery slope that could contribute to loan performance woes.
Loans designed for high-credit-quality borrowers with alternative documentation have proven to perform well historically, and these loans should be made available to meet borrower needs. But what will it take to close the gap and get these non-QM mortgages back in demand with investors?
Ensuring greater loan-level transparency and confidence that these loans will perform should drive investors' appetite for non-QM loans. The high cost of maintaining compliance and evolving regulatory concerns make the absence of loan-level transparency a pressing issue for investors, which is critical to understanding the performance of the loan, and ultimately, the portfolio.
Ample opportunity exists for the industry to produce non-QM loans that are still quality loans, but the obstacles hindering their production must be addressed.
Federal Housing Administration (FHA) lending has historically taken on borrowers with lower credit scores and little money for a down payment, and it saw a sizable resurgence after the demise of subprime lending in 2008. FHA became the primary outlet for loans that a few years earlier may have been considered nonprime. Today the FHA program has clawed its way back...