Two factors are set to drag the US real estate market to even deeper lows in the coming weeks. Several mortgage lenders recently declared bankruptcy, and the meteoric rise and sudden fall of non-qualified mortgages have complicated matters for the already volatile industry.
What are non-qualified mortgages?
Non-qualified mortgages (referred to colloquially as NQMs) are financial instruments that use non-traditional or unconventional modes of income verification.
These are commonly used by freelancers, the self-employed, others with unusual sources of income, and those who have low credit scores or other credit issues that prevent them from getting standard housing loans or mortgages.
In the past, NQMs were considered an option for borrowers who could be allowed to borrow, but would not be qualified for conventional loan programs. However, with the recent failure of First Guaranty Mortgage Corporation and Sprout Mortgage – two companies that offered non-traditional loan programs for those who did not qualify for government support – many real estate experts wonder if these mortgages are still worth considering.
First Guaranty recently filed for protection against bankruptcy. In documents related to the filing, its executives stated that lending volume dropped when interest rates began to rise. This resulted in the company sinking into debt, owing over $473 million to various creditors.
The heavily NQM-reliant Sprout Mortgage, on the other hand, simply terminated its operations and closed shop back in July.
Are NQMs are a risky bet?
Despite these adverse events, NQMs remain a much safer financing option than the high-risk loans that drove the North American real estate crash back in 2008.
Indeed, NQMs continue to hold a sizable share of the total first mortgage market, making up 4% of it in the first quarter of this year. As of press time, that figure is steadily rising once more.
But while experts agree that tighter lending rules imposed by the federal government have driven the popularity of NQMs, they warn that some lenders will be questioned when loan values begin to fall in light of the Federal Reserve’s recent drive to hike up interest rates.
When these values drop, non-traditional lenders may not have access to emergency financing or diversified assets like major banks and lending agencies do. Likewise, banks may rely on more secure qualified loans that consider traditional income verification, as well as stricter debt ratios.
