The housing bubble of 2006 and 2007—the prelude to the years-long period of economic decline known as the Great Recession—was, in part, exacerbated by a fundamentally restriction-less handout of mortgage loans.
In this haste to lend money, banks and other institutions provided mortgages to many who would not have typically qualified. The result? A multitude of homeowners struggled to pay off their loans, ending in default—a substantial weight that helped tip a delicate market.
Now, as the stock market swings, volatility is stoking fears that another crash is on the horizon. The predominant question: Are these the same loans that led to a destructive housing bubble, predicting another recession is just ahead, or is this a purely reactive concern that hasn’t been substantiated?
Today’s real estate experts largely say there is a difference between today’s unconventional loans and previous models that were based on predatory lending practices.
Marc Demetriou, branch manager at Residential Home Funding Corp., based in New Jersey, experienced firsthand the downturn, and doesn’t feel there is a commonality between pre- and post-crisis loans.
“Being that I started in the business in August of 2005, and worked through the housing meltdown and financial crisis, I can say calmly that today’s housing market is stable—frankly, there is no housing crisis on the horizon,” says Demetriou.
According to Jacqueline Balza, a broker salesperson with United Real Estate in New Jersey, today’s mortgages are simply filling a need in a niche sector of the industry: consumers who are largely self-employed or have nontraditional income histories looking to purchase homes.
“I have definitely seen a lot more unconventional mortgages,” says Balza. “The demand of unconventional lending programs is really based on the different factors people struggle with to get approved for a mortgage—factors such as verifying cash income, credit or someone that is self-employed. These unconventional loans are helping more consumers purchase homes.”
What Are Unconventional Mortgages?
They come in various formats, but often use alternative verification methods to meet the needs of those who have spotty freelance/self-employed backgrounds or insufficient income histories.
“[Unconventional mortgages] allow for lower income ratios, higher debt-to-income ratios and alternative ways to come up with income for a loan (e.g., 12-month bank statements or even using assets to derive more income via formulas),” says Demetriou. “They even allow someone who had a bankruptcy, foreclosure or short sale to apply for a loan sooner than the typically required waiting time.”
For example, Embrace Home Loans, a mortgage lender with branches across the East Coast and in Missouri and Louisiana, has loan options for those who own a business or are self-employed, have reported a low adjusted gross income on their tax returns, have some history of bankruptcy, have FICO scores lower than 700, or have a prior foreclosure, modification, short sale or deed in lieu on their credit.
Broker Mortgages, a network of lending professionals, provides information on various niche or unconventional mortgages that the industry offers, as well:
- Non-Qualified Home Loans: These offer fewer conditions and are often used for self-employed borrowers.
- Alternative Home Loans: This category includes a variety of options, such as Non-Prime lenders, High Balance Alt-Doc loans, equity-based lending, and more.
- Non-Qualified Mortgages: These consider alternative forms of verification instead of traditional income documentation.
According to the Wall Street Journal, several lending institutions are allowing consumers to qualify for home loans through a variety of other methods, such as providing a year’s worth of bank statements and letters from clients if the consumer owns a business.
Another available method, reports WSJ, is an asset-depletion or asset-dissipation loan, which divides the borrower’s assets according to the loan term to calculate a number that will represent their monthly income.
“The demand for unconventional loans is here,” says Balza. “There is no need to be alarmed because these loans are different. I believe it is meeting the demands of our current shifting market and helping consumers qualify for a loan they normally would not quality for.”
Different From Pre-Crash Mortgages?
Today, mortgage lenders must abide by the post-crisis regulations enforced by local and national laws. Each state, for example, has its own banking- and lending-related laws. Mortgage Compliance Magazine provides a state-by-state resource of mortgage regulations across the country.
The key difference between these and predatory lending? According to Demetriou, today’s lenders face strict underwriting policies that have led to a much healthier real estate lending environment.
“Loans that fall outside the box are still underwritten very carefully,” says Demetriou. “There are still reserve requirements, credit requirements, job history requirements, down payment requirements and even debt-to-income requirements that come into play; however, not necessarily all of them on the same loan. There are measures in place to make sure that there is minimal risk for a client to default on a loan. Basically, it is smart underwriting.”
Balza agrees, stating loans during the pre-crisis era differed greatly from today’s options.
“The applications are different in the sense that lenders are asking for more documentation and questions to make sure applicants qualify with reassurance,” says Balza. “Lenders also have new regulations and verification strategies for the loans not to default; therefore, these loans are not the same and are regulated better than in the past.”
Demetriou stands behind today’s less-traditional loan options, as they help more consumers achieve the homeownership dream.
“They allow good, deserving borrowers to obtain a loan regardless of a blemish or two, and the cons are really only the rates, which are generally a little higher for these types of loans,” says Demetriou. “Let’s be clear: These are not the no-income and no-asset type of loans that caused the housing crisis.”