As unemployment claims soar due to shelter-in-place mandates in cities across the nation, lenders who offer non-qualifying mortgage loans are also shutting their office doors. There have been several headlines recently about lenders suspending non-QM loans which could impact real estate investors.
An article in HousingWire on March 20th suggested that non-QM lending is the latest victim of the coronavirus. (1) Non-QM loans had become more common in recent years for borrowers who don’t have a traditional income source, and need alternative methods of income verification. Many real estate investors fall into this category. And due to the uncertainty created by the virus, several lenders have recently announced they are suspending non-QM loans.
Non-QM Lending on Hold
HousingWire listed several lenders doing this including Sprout, Citadel Servicing Corporation, Arc Home, Angel Oak Mortgage Solutions, theLender, Nations Direct Mortgage, Orion Lending, and JMAC. Timelines and policies will differ, and some may be accepting new loan submissions with funding on hold. Sprout had announced a plan like that saying, “Please be advised that effective immediately we will temporarily suspend the funding of all loans until April 1st.” Citadel announced a 30-day suspension along with a stay-at-home policy for employees. Angel Oak announced a two-week suspension.
ACC Mortgage is apparently braving the storm and is reportedly still funding non-QM loans. The lender was quoted in HousingWire as saying, “We are funding non-QM loans and we have no plans to stop!” You might also ask “at what price.”
Much of this news happened right before the passage of the massive virus rescue package. It was billed as a $2 trillion dollar package to help consumers and businesses, but it also includes an aggressive bond-buying plan that could hit $4 trillion, for a total of $6 trillion rescue funding. The bond-buying will inject liquidity into the lending environment, but it’s not clear if it will bring back non-QM loans right away.
Non-qualifying mortgages gained a bad reputation in the days of the financial crisis because they included people in the subprime category and the not-so-reliable “stated income” category. Many of those loans went belly up, and helped fuel the housing meltdown.
The Dodd-Frank Wall Street Reform Act changed all that with an ability-to-pay rule and strict requirements for a Qualified Mortgage or QM. (2) By determining a borrower’s “ability to pay,” the lender can fulfill the underwriting requirements for a Qualified Mortgage. There are several criteria for doing this including evaluation of assets, income, employment status, expected monthly mortgage payments, other debt obligations, monthly debt-to-income ratios, and credit history. If a loan doesn’t meet all the underwriting requirements for a QM loan, it’s called a non-QM loan but that doesn’t mean it’s a risky loan, as it did during the financial crisis. The “ability-to-pay” rule still applies, but with alternative methods of determining income.
Real estate investors may need this kind of loan program if they are getting rental income instead of a W-2 paycheck. In this scenario, lenders might verify rental income through business tax returns or bank statements, for example. Non-QM loans might also be issued against assets such as stocks, bonds, bank accounts, or other liquid assets. This kind of loan is also good for retirees or self-employed borrowers.
New American Funding defines a non-QM loan as:
- A home financing solution for responsible borrowers with unique financial circumstances.
- A flexible home loan that covers a variety of consumer needs. (3)
Chief economist of the Mortgage Bankers Association, Mike Fratantoni says of the non-qualifying mortgage, “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.” That includes a little more work on the lenders part, to qualify those non-QM borrowers.
Commercial loans are at highest risk today due to so many businesses being forced to shut down to honor social distancing mandates. Empty businesses will struggle to make loan payments.
The Federal Reserve’s role stepped in to provide what appears to be unlimited “support for the flow of credit to American families and businesses.” This basically means, the printing presses are on high gear to create liquidity needed to keep banks afloat.
The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, they will purchase mortgage-backed securities since there appear to be no other buyers for these risky assets.
Still, even with $4 trillion flowing from the Federal Reserve and into bank reserves to keep banks lending, it may be wise to take preventive actions. If you have a credit line, you may want to cash it out and put those funds in a separate bank account. If you have a construction loan you are counting on, you may inquire if you can access the funds early in order to complete the project. And if you are in contract to purchase property with a portfolio lender, you may want to give your mortgage broker a call to make sure the deal is still locked.
Investor loans backed by Fannie Mae and Freddie Mac appear to be backed by the U.S. government, and to date, investors can still get up to ten Fannie or Freddie investor loans for income property.
(2) National Review Article: Changes to QM
(3) Characteristics of non-QM Loans: CoreLogic