After the housing crisis, the credit box shrank with the installation of the Qualified Mortgage lending standards. In recent years, some lenders have begun to expand on the credit box, as seen by a recent increase in non-QM lending.
But that’s giving rise to some of the types of mortgage products that haven’t been seen since before the housing crisis, and one credit ratings agency is now expressing caution about how risky some of those loans may be.
Eyebrows were raised in April when 360 Mortgage Group announced that it was launching a no-income, no-asset mortgage pilot program, which the Austin, Texas-based mortgage banking firm calls the “Agency NINA.” The loan does not require borrowers to prove their income or assets in order to be approved for the loan.
Key to the program is the fact that the loans are only available for investors. The Agency NINA is not available for owner-occupied properties.
But there’s another type of loan that’s on the rise that has caught the eye of Fitch Ratings: the alt-doc loan.
According to a newly released report from Fitch, the volume of loans with alternate documentation has more than doubled in the last two years among loans included in mortgage-backed securities.
And while alt-doc loans have performed well since the crisis, Fitch is still concerned about their strength should the economy take a turn for the worse.
“Although alternative document residential mortgage loan products that were introduced in the US after the financial crisis have performed better than our expectations, we maintain a cautious approach to these loans because of their limited history,” Fitch said in its report.
As Fitch writes, non-QM lending has evolved recently from loans that just missed the Fannie Mae, Freddie Mac lending standard to an environment becoming more increasingly dominated by alt-doc loans, which include bank statements for owner-occupied properties and non-traditional debt service coverage ratios for investor properties.
According to Fitch, these types of loans appeal to borrowers who may be seeking a streamlined loan closing process and to borrowers who are unable to qualify for a loan using traditional underwriting.
“Bank statement loan products may attract borrowers who do not fully disclose all of their taxable income, increasing the risk of income disruption in the future,” Fitch writes. “Non-traditional DSCR loan products may attract borrowers that are not eligible for a GSE loan with a lower coupon because of a high personal debt-to-income ratio.”
In its rating of non-QM mortgage-backed securities, Fitch said that it is treating these loans similarly, or worse than, the “stated income” programs that became common in the run-up to the crisis.
“Alt-doc loans performance to date has been strong even after taking into consideration the unusually supportive housing and economic environment experienced since the products were introduced,” Fitch writes, noting that actual defaults to date remain “well below lifetime expectations.”
Aiding in the loans’ performance is the Ability-to-Repay rule and other protective measures.
“The ATR rule combined with increased third party due diligence and improved alignment of interests with issuers have all contributed to better than expected performance,” Fitch writes.
But Fitch cautions that considering the “lack of stress” in the market since these loans were introduced, the agency needs more evidence before feeling more confident in the long-term prospects of these loans.
“Fitch will likely need to observe continued strong performance over a longer horizon before making any significant changes in its approach to the programs,” the agency concludes.