NICHE FINANCING FOR THE
BE CAREFUL OF THE NEW
Following the financial collapse of 2008, regulations were legislated to
“protect” future borrowers from what some perceived as lender
abusive behavior. Regulations initially resulted in tougher qualifying
standards, denying some would-be home borrowers the ability to purchase.
Gradually, the qualifying guidelines became more flexible and while some still
complained of their eliminating some buyer prospects, the lending climate became
more buyer friendly and protective.
One portion of the new rules related to Qualified Mortgages, called QM
loans. This required lenders to apply old fashioned qualification standards to
determine a loan applicant’s Ability to Repay (ATR). After early
adjustment, the new requirements seemed to work. But from the beginning there
were those who complained that adopting ATR compliance stifled many potential
In 2018 the protective rules were mostly discarded and a
banks were again granted relief from oversight and he door was opened
for what became known as the non QM loans, sometimes referred to as sane
subprime or non-conforming financing. Loans became available for the borrower
with "less than perfect credit" or who may have a special circumstance
and unable to acquire the QM financing. (see below for
commen t about these new loan instruments)
A little history may assist in understanding the reluctance of some lenders
to move into this easy qualifying loan arena. This kind of easy qualifying loan
had become a very important "niche" in the real estate arena prior to
the financial collapse of 2008. There have always been "hard money"
or "equity" lenders available but these sources had been
traditionally used only in desperate situations. The rates, fees and
pre-payment penalties made these loans a "last resort" effort.
Lenders developed what they called portfolio or niche loan products
available to accommodate the borrower who needed special attention. While these
loans may have had better rates and fees than the old hard money alternatives, there
were some potential difficulties that many chose to ignore.
Some aspect of these loans were:
It was more expensive in rate and, often, in fees than the more conventional
The grades (Ax, A-, B+, B, C, D) referred to
seriousness of the credit blemishes resulting in the lenders
The more serious the credit blemishes, the lower the
Loan-to-Value (LTV) was likely to be.
When counseling a potential borrower, loan officers considered this kind of
financing as "short term". It required that a "plan of
action" be prepared so that the borrower could presumably refinance into a
less costly loan within 2-3 years. It was important to consider pre-payment
penalties and make sure that if one existed the borrower considered how it
might impact his/her ability to refinance into a better loan in the future.
As more flexible, automated underwriting guidelines were introduced, lenders
were encouraged to first try to acquire a "conforming" loan. If it
was determined that a borrower was unable to acquire a conforming type loan,
they were supposed to be counseled very carefully regarding the risks involved
with a niche loan. It was difficult to know exactly what loan would be
obtainable for a borrower with very blemished credit. The loan package was
typically submitted seeking the highest (Ax or A-) grade rating. Often, an
investor determined the actual loan to be "offered" to the borrower
only after reviewing the entire package. This was viewed as a "counter
offer" for the borrower to either accept or reject. By carefully preparing
the package, fully explaining credit difficulties and anticipating possible
questions/problems in the file, if the borrower proceeded to a niche type loan
the lender hopefully always tried to obtain the best possible loan option for
More conservative lenders counseled the borrower to improve their credit,
acquire additional down payment funds or to improve their loan profile
sufficiently to obtain more conventional financing. The bulk of the niche
financing loans were fixed only for those first 2 or 3 years and were designed
to change to adjustable rate loans with substantially higher rates and
payments. Too often borrowers were not adequately advised regarding whether
they would be in a position to refinance at the conclusion of their initial
loan period or that they would be able to afford the future adjustments to
their payments. As it turned out, that is exactly what happened and many niche
loan borrowers faced serious problems including the loss of their home to
foreclosure. . In retrospect, we are
pleased to say that we simply refused to make such loans and none, to our
knowledge, of our past borrowers are among who faced foreclosure.
As with the old niche loans, most lenders, including Humboldt Home Loans, are
"full service" to the extent that they have some form of niche
products. Thus, if a borrower does not quite meet the criteria for an A paper
loan, they need not go elsewhere and start the process all over again to obtain
some form of financing. Any niche product must always be a very last
alternative approach to funding a loan and not automatically the first option.
Too frequently in the past, that was not the case for many lenders and the
housing crisis was a result. Again,
Humboldt Home Loans is proud not to have been a party to putting people into
loans that they could not afford.
There is always some anxiety when one wants to purchase a home and is told
they do not qualify. Understandably, these would-be buyers can be seduced into
ultimately what can turn out to be less than desirable financing Many of the
problems noted above with the old niche loans are present in the non QM loans
are adjustable rate mortgages – same may begin as fixed but convert to
adjustable at some point in the loan term
rates and sometimes additional fees accompany the loan based upon the
lender’s perceived risk with the borrower (low credit scores, no
reserves, higher qualifying ratios)
clauses usually accompany these loans
borrower does not know the actual loan terms until they submit a loan package
and receive the “offer” from the lender.
borrowers are counseled as to what is the next step into a better loan option
– are they going to be able to refinance into better rates and terms?
Humboldt Home Loans has lender sources for the new niche products, we remain
reluctant to make the loans for the reasons sited above. We suggest instead
that there are still many good loan options available for borrowers but it can
require "research" to determine the appropriate loan for a particular
borrower's needs. If you feel you may require some special counsel in
preparation for home financing, call Humboldt Home Loans today for a FREE
consultation interview. We will help you explore all of your loan options.
Be Cautious With the New Non-QM
The new “more flexible” loan instruments are
called variously non-QM, non-prime or sane sub- prime. By any name, these new
loan options are a step back toward the days prior to the 2008 through 2012
recession. The selling point of the new loans is their willingness to accept
borrowers with low credit scores, recent bankruptcies or foreclosures and late
mortgage and credit payments.
Typical conventional home loans require somewhat rigid
qualifying requirements to assure the borrower’s ability to repay the
mortgage. These Qualified Mortgages (QM loans) provide some safety to both
borrowers and lenders as they focus on credit scores, borrower assets and
stability accompanied by adherence to qualifying ratios. Thus, borrowers obtain
competitive interest rates and terms.
In contrast, the new non-QM products are riskier and
therefore require greater down payment amounts, higher rates and cost, shorter
terms and are mostly adjustable rate mortgage loans. Granted, the new market
does require some “skin in the game” with down payments (whereas
the past sub-prime often included 100% financing) and the borrower pays for the
greater risk via higher interest rates. Down payments also tend to reduce the
risk that the owner will end up with no equity even n the event of a downward
turn in the market.
The shorter terms, some as short as three years, can be
alarming. The anticipation is that borrowers can within the three year term
improve their credit while the property increases in value allowing for a
refinance into a “better” loan after the initial period. This was
the same expectation with the old sub-prime loans but too often credit
wasn’t improved and appreciation wasn’t obtained, especially when
the market unexpectedly and suddenly declined.
To complicate a potential refinance is the fact that these
non-QM loans can include a pre-payment or early payoff penalty which acts as a
sort of lock-in period before they borrower is eligible to pursue a refinance.
In spite of the intentions, a refinance may not be possible due to market
changes during any lock-in period.
Like any loan instrument, these more flexible loans MIGHT be
useful to some borrowers. Self-employed borrowers, for whom
fully documented loans are more difficult, might use this type of financing.
The concern is for those who use the riskier loan options only to discover that
they have placed themselves in a precarious position with adjusting rates,
declining values with lack of equity and other aspects that caused sub-prime
loan borrowers to lose their homes to foreclosure.
It is recommended that would-be home buyers acquire a
pre-qualification during which they learn about the various loan options
available to them. If there are credit issues, learn how to correct them.
Determine your personal “road map” to home ownership. Postponing a
home purchase and patience with the loan process may be the safest route to
obtaining the American Dream.