by Sanjeev Dahiwadkar, December 8, 2014
New Subprime Loans Use Less Technology
Many professionals in the mortgage industry are paying close attention to the non-QM market to see if it will indeed provide a path back to subprime loans of the past. Subprime loans heavily made up the millions of loans that were defaulted upon, ultimately driving the industry into a downward spiral from which we have yet to recover.
Whether you refer to it non-QM, nonprime or even subprime the unfortunate fact is more and more lenders have begun lowering their standards because there are just not enough qualified leads as a result of recent regulations. And what is even more startling is the fact they are returning to manual underwriting and using less technology in the process.
There is no doubt that there is a need for loan products that can meet the needs of qualified borrowers who are not able to meet the stringent criteria of QMs. The delicate balancing act for the industry will be to open up credit streams to qualified borrowers while paying close attention to the appetites of investors and not relaxing standards that were put in place to keep us from repeating the previous market implosion.
Understandably the industry swung from stated-income, no-doc loans for people who really did not fit the original intent of the products to rigid credit requirements which drastically narrowed the pool of qualified borrowers.
There are multiple lenders that offer non-QM products by using manual underwriting. However, this method, while good for looking at each loan on an individual level and for quality control checks, greatly impede the origination process and runs the risk of increasing the cost of originations. It seems that the industry is going backwards in more ways than one right before our very eyes.
In an effort to successfully move forward with non-QM products while mitigating risk, lenders need to ensure they avoid excessive risk layering, which could put us in the same position as we were before the last downturn. With products that have relaxed credit score requirements, it imperative to have solid underwriting and quality control.
With some of the products offering a debt-to-income ratio ranging anywhere from 35% to 43% and relaxed credit score requirements, lenders should avoid piling on multiple risks, such as high DTI that could affect loan performance. This is where the use of technology will be most important in alerting lenders of when a specific risk level has been reached or exceeded.
Another approach lenders could take is referring potential borrowers who do not currently qualify for QM products to HUD-certified counseling agencies such as National Community Reinvestment Coalition, Homeownership Preservation Foundation, HomeFree or other agencies for pre-purchase counseling. These agencies have the systems and processes in place to effectively educate consumers on what is necessary financially to own a home.
In addition, lenders can use technology to monitor the process as well to ensure counseling agencies are consistently following through with potential borrowers with necessary financial coaching to get them to the QM status. With this approach a lender is working with a third party to fix the financial the issues that are causing potential borrowers to become non-QM.
While this approach may sound like it will take longer, it certainly will yield a better, richer and more stable pool of potential borrower converting to the actual home owners. Plus, after going through the counseling process there will be a confirmation of the borrower's ability to repay, which means no loan issues in the future.
Unfortunately, there might be some potential borrowers who will not qualify for non-QM even after counseling. With the proper use of systems to help determine risk tolerances, lenders will be able to more clearly understand the potential risk probability. The consumers could be converted into borrowers with mandated counseling for a year or two post-closing.
These approaches allow for the safe return of subprime under the guise of non-QM; not in the original form but in a more responsible form. It is possible to offer viable non-QM loan products but the key to their success will be for lenders to properly apply risk, prepare homebuyers and incorporate the use of technology.
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