The lessons to be learned from the growth of alternate mortgage products
Late in the Fall of 2018 traditional mortgage brokers scrambled for new ways to generate loan volume as average home mortgage rates spiked. In late 2018 refinance transactions began to fall leading many brokers to focus more on alternate loan products such as non-qualified mortgages and in some cases HECM loans.
Sound familiar? When market conditions or regulations were not ideal lenders innovated.
Qualified Mortgages generally meet these four requirements:
- Traditional documentation of the ability to repay the loan from income sources
- Restrictions on exotic mortgages features such as loan terms longer than 30 years, negative amortization, interest-only installments, and balloon payments
- Caps on fees and points paid
- Limits on how much of the borrower’s income is consumed by both mortgage and consumer debt (debt-to-income ratio DTI)
“Consumers should understand that every loan made today is subject to the ability-to-repay rule; non-QM loans just have a different way to get there,” said Mike Fratantoni, chief economist with the Mortgage Bankers Association in a Bankrate column in November 2018. He added that lenders have to jump through more hoops to qualify non-QM borrowers.
Unlike a private jumbo reverse mortgage traditional non-QM applicants must be screened first to see if they qualify for a government-backed or Fannie/Freddie loan. Unlike? Yes, unlike the reverse mortgage market non-QM loans are inclusive of most low and median home values and loan amounts. Today the majority of proprietary or private reverse mortgage offerings are targeted for homes above $726,525 (FHA’s national lending limit).
*Recently one reverse mortgage launched a proprietary loan for properties as low as $400,000.
As FHA considers further structural changes to the Home Equity Conversion Mortgage and calls for decreased dependence on FHA-backed reverse mortgages, our industry finds itself at the crossroads of a unique opportunity- to develop a robust non-HECM mortgage portfolio. HECM-alternative mortgages for median-priced homes could be a draw for cost-conscious borrowers wishing to avoid costly FHA insurance premiums or those who don’t wish to undergo the rigorous financial assessment which may include a large lifetime expectancy set-aside.
If history is one thing it is cyclical. The HECM was launched from the concerns of a largely unregulated private shared appreciation mortgage market and the need for older homeowners to fund their retirement.
Today FHA is nudging revere mortgage lending toward private loan programs. A clear signal that we could, in fact, learn a few lessons from our traditional lending counterparts in developing a diverse alternate private market.