When it comes to the non-QM or non-prime mortgages of today, originators might not know the different product categories that are available versus those that are used for standard, prime loans.
One of the most prevalent is alternative income documentation loans. With the gig economy expected to grow, stated income is fast becoming a thing of the past.
“There’s a lot more self-employed borrowers, but we consider your tax returns not necessarily the best way for the lender to evaluate someone’s ability to repay a mortgage,” Tom Hutchens, senior vice president of sales and marketing at Angel Oak Mortgage Solutions, said on a WebCast hosted by Originators Connect. “We’ve seen an overwhelmingly positive response around bank statement loans. They’re still documented, these are a documented ability to repay, it’s just an alternative document type.”
One of the biggest misconceptions around the new non-prime loans (apart from the fact that the loans being serviced are of poor quality) is that they’re much more difficult to process and get approved. The reality, however, is that while an originator might have to do a little extra work on the front end, these loans can go through the system just as efficiently as any other loan. Hutchens said that the majority of borrowers using alternative documentation for their loans aren’t a credit concern.
“The majority of [them] are A paper borrowers that are self-employed, and simply their adjusted gross income is not enough to qualify for the mortgages . . . These aren’t generally first time homebuyers, they have proven their ability to repay other mortgages, so we factor that all together. That manual underwriting decision making, that’s how we go about it.”
Citadel Servicing has had a bank statement loan available for about five years, and Will Fisher, Citadel’s senior vice president, said that they love it.
“It gives you a real picture of what the borrower brings home every month; what they’re actually living on. And with that information, we can make a much better judgement on call on their ability to repay,” he said. “You can approach bank statements in a very interesting way, and it gives you a much bigger playing field, a much wider swath of Americans that can qualify for this program.”
Another product category features alternative amortization products. You may not be able to qualify on an interest-only payment, but there Fisher says that there are some ways to qualify with some of the interest-only products, such as using the note rate. There are also One Month Bank Statement and VOE-only (Verification of Employment) products, which target bartenders, waiters, and other individuals in the service industry, whose true income isn’t reflected on paper.
“There’s a large swath of borrowers out there who can qualify for these programs and that shouldn’t be denied a loan because we can show that there is an ability to repay,” Fisher said. “And I can tell you this – from the MBA conference, from what I’ve heard and what I’ve seen, there are a lot of folks who are not around anymore . . . I can tell you they may not have been the companies that have embraced non-prime. It’s a space you need to be in, you want to be in. And if you’re not, the future is going to look very rough.”
The important thing to keep in mind is that the products are only good if they’re matched with the right borrower in the right circumstance, and that’s not what was happening in the “bad ol’ days,” according to Rick Sharga, executive vice president at Carrington Mortgage Holdings.
“Giving the average marginal borrower a negative amortization loan was like giving a 4 year old a loaded bazooka and hoping nothing bad would happen,” he said. “That ability to check on somebody’s track record of being able to make those monthly housing payments is a pretty good indicator of what they’re going to do going forward.”