Unconventional loans are on the rise, according to an article in The Wall Street Journal, and this could be a problem.
Also known as non-qualified mortgages, or non-QM, these loans accommodate borrowers whose unusual circumstances mean they don’t have a standard proof of income.
While unconventional loans comprised just 3% of the overall mortgage market in the first three quarters of 2018, according to the WSJ, this is notable because at the same time, traditional home loans declined.
And, while traditional mortgage volume has been lagging, non-QM volume has taken off.
Credit agency DBRS said last year it predicts a comeback for these loans as lenders try to boost business, which has stalled thanks to a decline in refis, an increase in home prices and a shortage of inventory.
The WSJ said a resurgence of loans with loose credit standards is potentially worrisome, as “a flavor of mortgage once panned for its role in the housing meltdown a decade ago is making a comeback.”
But it noted that credit-ratings firms point out that non-QM loans are vastly different – and safer than – their pre-crisis counterparts, thanks in part to “ability-to-repay” rules that require lenders to determine a borrower can pay off their debt and improved underwriting and due diligence practices.
The WSJ also said that these loans could bring renewed risks to the housing market as an increasing number of traditional mortgage lenders look to non-QM loans to shore up profits in a tough mortgage market.
But Wall Street isn’t flinching, scooping up these bonds because of their promise for high returns. There were $12.3 billion of these residential-mortgage-backed securities sold in 2018, the WSJ said, nearly quadruple 2017’s total.
The article quoted Scott Astrada, director of federal advocacy at the Center for Responsible Lending, who said the uptick in these loans could be risky for borrowers if their financial situation was put under stress.
“While they might not be as toxic as some of the loans pre-crisis,” Astrada said, “You still have a host of affordability concerns.”