VOT Research Desk
Nov1,2022
Market Analytics and Considerations
With a low inventory of resale homes and rising interest rates making it harder for buyers to justify making the move, the real estate market is just unable to catch a break.
Additionally, the rise and fall of “non-qualified mortgages” and the financial difficulties of mortgage lenders can now be added to the factors that exacerbate an already uncertain market.
In comparison to the previous year, new mortgage originations decreased by 55% in the second quarter of 2022, according to a report from Fitch Ratings. Non-bank lenders, particularly those that deal in non-qualified mortgages (NQM), are feeling the brunt of the market downturn.
But what exactly is the problem with these NQM mortgages? And what implications does this have for non-traditional buyers attempting to enter the market?
Non-traditional methods of income verification are used by NQMs, which are frequently utilized by individuals with unusual income circumstances, who are self-employed, or who have credit issues that make it challenging to obtain a qualified mortgage loan.
In the past, they were touted as an alternative for creditworthy borrowers who would not otherwise be eligible for conventional mortgage loan programs.
However, real estate professionals are beginning to question the value of First Guaranty Mortgage Corp. and Sprout Mortgage, two companies that specialized in non-traditional loans that were not eligible for government backing. Both of these companies recently ran aground.
While Sprout Mortgage simply went out of business in the early part of this summer, First Guaranty filed for bankruptcy protection in the spring.
First Guaranty executives stated in bankruptcy filing documents that as interest rates increased, lending volume decreased, leaving the company with over $473 million in debt to creditors.
In the meantime, in July, Sprout Mortgage abruptly went out of business. a real estate technology startup, has also closed its doors.
Other non-bank loan specialists are being compelled to smooth out to remain above water. According to a HousingWire report, Angel Oak, Lower.com, and Keller Mortgage—all retail lenders—have been forced to implement layoffs as a result of the challenging market conditions.
Do NQMs suggest a resurgence of the housing crisis? Probably not The majority of people who keep an eye on the housing market believe that the current circumstances, led by stricter lending regulations, suggest that the United States is unlikely to experience a housing market collapse similar to that of 2008.
However, non-bank lender failures may still have a significant impact. The NQM share of the total market for first mortgages has begun to increase once more: CoreLogic, a housing market data analysis firm, found that NQMs made up about 4% of the market in the first quarter of 2022, doubling from their 2% share in 2020.
The government’s tighter lending regulations have contributed to the recent popularity of NQMs in part.
Today’s NQMs are generally regarded as safer bets than the extremely risky loans that contributed to the 2008 financial crisis.
However, when loan values begin to fall, as they are currently due to the Federal Reserve’s actions to raise interest rates, many NQM lenders will face difficulties. Non-bank lenders do not always have access to emergency financing or diversified assets, as do larger banking lenders, when values fall.
