The Rise of Unconventional Loans

Home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to get credit as strict lending requirements put in place following the financial crisis are beginning to erode, according to the Wall Street Journal.

WSJ states that risky lending is making a return, as subprime and Alt-A mortgages are rebranded into non-qualified loans. 

Borrowers took out a record number of these loans in 2018, at $45 billion, the most in a decade, and are likely to take out more in 2019. Proponents state that mortgages became too hard to get post-2008, and unconventional loans, such as non-QM loans, could open the housing market to sound borrowers who had been shut out of it. 

“There are some weakening standards and weakening practices,” said Eric Kaplan, Director of the Housing Finance Program at the Milken Institute on Wall Street Journal. “It doesn’t rise to the same level yet, to my knowledge, of some of the things taking place just prior to the crisis. But we have to be vigilant.”

Nonbank lenders are largely the ones extending non-traditional loans, but big banks such as JPMorgan Chase & Co., Credit Suisse Group AG and Citigroup Inc. have recently been arranging mortgage bonds backed by unconventional loans.

Big banks’ mortgage arms are still avoiding riskier borrowers, leaving them to nonbank lenders. Despite the rise in unconventional loans, the market for unconventional home loans is still smallcompared with the rest of the mortgage market, as well as its precrisis past, when unconventional borrowing peaked at more than $1 trillion. 

“Still, the increase in unconventional loans shows that lenders are looking farther afield for customers,” WSJ’s Ben Eisen states. “As the U.S. economic expansion ages and home prices rise faster than incomes for most Americans, the mortgage industry is finding that there is a limited number of cream-of-the-crop borrowers.”