The real estate market can’t escape, with resale home inventory remaining low and rising interest rates making it difficult for buyers to justify jumping in.
And now we can add mortgage defaults — and the rise (and fall) of “non-approved mortgages” — to the factors exacerbating an already uncertain market.
But what does the problem around these NQM mortgages really mean? And what does it mean for non-traditional buyers trying to get a foothold in the market?
An “inappropriate” mess?
NQMs use non-traditional income verification methods and are often used by people with unusual income scenarios, are self-employed or have credit issues that make it difficult to get approved for a home loan
They have previously been touted as an option for creditworthy borrowers who may not otherwise qualify for traditional home loan programs.
But as First Guaranty Mortgage Corp. and Sprout Mortgage — a pair of companies specializing in non-traditional loans ineligible for government support — have recently collapsed, real estate experts are beginning to question their value.
First Guaranty filed for bankruptcy, while Sprout Mortgage simply folded in early summer.
In documents attached to the bankruptcy filing, First Guaranty leaders said that once interest rates began to rise, the volume of loans declined and left the company with more than $473 million owed to creditors.
Meanwhile, Sprout Mortgage, which relied heavily on NQMs, abruptly closed in July.
Does the NQM signal another housing crash? Probably not
Most housing market watchers believe today’s conditions – driven by tighter lending rules – mean the US is likely to avoid a 2008 housing collapse.
However, failures among non-bank lenders could have a significant impact. NQM’s share of the overall first mortgage market has started to rise again: NQMs made up about 4% of the market in the first quarter of 2022, doubling from a low of 2% in 2020, according to CoreLogic, a data analytics firm specializing in the housing market.
Part of what has contributed to the recent popularity of NQMs is the government’s tighter lending rules.
Today’s NQMs are largely considered safer bets than the ultra-risky loans that helped fuel the 2008 meltdown.
However, many NQM lenders will be challenged when loan values begin to fall, as many are now with the Federal Reserve’s moves to raise interest rates. When values fall, non-bank lenders don’t always have access to emergency funding or diversified assets to draw on like larger bank lenders. Banks can also count on safer loans because they take into account traditional income verification, stricter debt ratios and don’t have features like interest-only payments.
It’s important to note that if you have a mortgage through a lender that is now bankrupt or out of business, that doesn’t mean your mortgage goes away.
Typically, the Federal Deposit Insurance Corporation (FDIC) works with other lenders to underwrite orphan mortgages, and the process is done quickly enough to avoid loan payment interruptions.
One number rules them all
While many factors affect the real estate market, one data point matters the most: interest rates.
With the Fed laser-focused on raising interest rates to reduce inflation, there’s little reason to believe the effects on lending and the broader housing market will ease anytime soon.
Higher mortgage rates — the average 30-year fixed rate was still above 5% as of Aug. 24 — will dictate how much home they can afford.
(This also affects sellers, many of whom will eventually become buyers and likely depend on loans.)
Between a potential turmoil among non-bank lenders, tighter lending rules imposed on banks and higher Fed interest rates, there are plenty of reasons for caution on all sides:
Buyers — especially those moving traditional loans to the offer table — should buckle up. In addition to making sure their credit meets stricter bank lending standards, they may need to consider other tactics, such as offers that are higher than the seller’s asking price and other concessions, such as waiving repair costs for problems discovered during the inspection.
On the other hand, sellers may be more motivated by cash offers, which typically speed up the closing process by taking traditional mortgages — and raising interest rates — out of the picture.
As for would-be sellers, they may want to consider waiting to list their homes until the next boom. Despite geographic pockets of rising values and high demand, a broader cooling trend nationwide may make staying a prudent option.
What to read next
This article provides information only and should not be construed as advice. Provided without warranty of any kind.