As interest rates rise, mortgage refinances continue to fall, marking the possible beginning to a comeback in non-qualified mortgage loans, according to the U.S. Residential Mortgage Review and 2018 Outlook from DBRS, a credit rating agency.
But the decrease in mortgage refis isn’t the only reason DBRS is predicting an increase in non-QM loans. The company explained increasing home prices and the shortage of housing inventory will also result in more lenders expanding their loan offerings to include products outside the QM space.
“DBRS has observed the loosening of certain underwriting guidelines for some non-conforming prime programs in 2017,” said Kathleen Tillwitz, DBRS managing director of operational risk. “The areas with the most changes have generally been as follows: minimum FICO score requirements were reduced to 640 from 700, maximum loan-to-value ratios rose to 95% from 85%, maximum debt-to-income increased to 50% from 45% and compensating factors and the amount of required reserves were lowered to a range of six to 18 months from six to 24 months.”
“DBRS has also noticed more tolerance from lenders toward borrowers with previous credit events such as a prior mortgage delinquency and shortened time periods for the discharge of a bankruptcy, deeds in lieu and short sales,” Tillwitz said. “DBRS believes that throughout 2018, the U.S. market will continue to see more lenders widening the credit box.”
The report showed reduced compliance concerns, standardized representations and warranties and more confidence surrounding their loan underwriting processes are some of the reasons lenders are less concerned about originating non-QM loans.
While most non-QM lenders are targeting borrowers with high FICO scores, typically 700 and above, low loan-to-value ratios, generally below 80%, and a certain amount of liquid reserves, the report showed there were some non-prime programs being introduced in 2017 where FICO scores as low as 500 were acceptable when coupled with certain other criteria, such as there being no prior bankruptcy or foreclosure in the last four to seven years.
Last year, the GSEs announced they were increasing their debt-to-income ratio to 50% in an attempt to open the credit box further. However, mortgage insurance companies are fighting back against the lower standards.