A Mortgage Lender's 'New' Subprime Pitch Get Ready for More
It sounded like a sales pitch from the bubble years — "Subprime: The New Normal."
But an account executive at the Atlanta mortgage lender Angel Oak Home Loans sought to draw a clear distinction between the subprime products being pitched today and the infamous stated-income loans of yore, which dispensed with traditional documentation.
"The borrowers [today] have skin in the game, [and] this is the game-changer," Eric Morgenson, a Western regional sales manager at Angel Oak, said on a webinar pitching mortgage brokers last month. "Income is absolutely documented via bank statements."
Anticipation of rising interest rates has stirred more talk among mortgage lenders about the need to originate loans to borrowers with low credit scores or dinged credit histories. And it has conjured up some old ghosts — not to mention questions from skeptics about the risk of repeating precrisis sins — that have to be confronted.
Whitney Fite, the president of Angel Oak, said there was an internal debate about the strategy of using the word "subprime" in advertising a webinar. He says the market for home loans that fall outside the Consumer Financial Protection Bureau's definition of "qualified mortgage" has ramped up in the past 12 to 18 months.
"This is responsible subprime lending and we shouldn't hide from that," Fite said. "We're not talking about no income, no asset loans, but fully documented lending. This is more similar to subprime lending done in 2003 to 2004."
Just a couple of weeks ago, Angel Oak lowered its underwriting guidelines and now allows for a minimum 10% down payment on home loans rather than 20% down, Fite said, citing increased competition from other non-Qualified-Mortgage lenders.
"The credit box has been opening prudently, and it makes sense to increase the [loan-to-value ratio] on certain types of borrowers," Fite said. "We wanted to be proactive in looking at another prudent tweak to our guidelines to serve an underserved area of the market."
Angel Oak, like other non-QM lenders, is targeting the 9.4 million Americans who went through a short sale or foreclosure during the recession. It also sees opportunities among self-employed borrowers who have plenty of cash and good credit scores but a complicated income stream.
On the webinar, Morgenson hit directly on one of the problems afflicting self-employed borrowers, who typically underreport their income for tax purposes.
"What makes more sense, what you're telling the IRS you're making or what you're depositing in your checking account each month?" he said.
Angel Oak plans to offer non-QM loans in 49 states — all except New York.
"We are not going to offer non-QM, nontraditional-income loans in the Empire state," Morgenson said, citing New York's lengthy foreclosure process as the reason. Borrowers can be delinquent but live in their home for up to three years without paying their mortgage, he said.
One slide on Angel Oak's webinar described how there is "a lack of understanding of 'new' subprime products." Another stated that "the money center banks (Chase, Wells Fargo, Bank of America, etc.) turn down hundreds of borrowers each day."
Angel Oak Home Loans is the retail arm of Angel Oak Cos., also an Atlanta-based company that operates several diversified financial firms and was founded by Michael Fierman. He was a co-founder of Southstar Funding, a subprime lender that was one of the first casualties of the mortgage crisis; it shut down in 2007.
Fewer than 15% of Angel Oak Home Loans mortgages are non-QM. A separate wholesale arm, Angel Oak Mortgage Solutions, originates only non-QM loans through brokers. It has five main mortgage products including investor loans and loans to foreign nationals. The mortgage rates range from 5% to 9%, which can be a tough sell for borrowers who have been conditioned for the past decade to expect rates at 4%.
Fite estimated the companies have closed in excess of $300 million of non-QM loans in the past year.
Many non-QM lenders have been hampered by high origination costs and a wariness among warehouse lenders and investors to fund non-QM loans. But a separate affiliated company, Angel Oak Capital Partners, holds the non-QM loans on balance sheet with the goal of securitizing them down the road as a potential exit strategy, Fite said.
Still, it can be incredibly tough for non-QM lenders like Angel Oak to compete against Fannie Mae and Freddie Mac. The government-sponsored enterprises have the legal authority to back non-QM loans with debt-to-income ratios above 43%, while still calling them "qualified mortgages." That wrinkle in the mortgage market has kept private capital on the sidelines waiting for rates to rise.
Gradually rising interest rates are expected to put a damper on refinances. Overall origination volume is expected to drop 9% next year to $1.3 trillion. Refinances are projected to drop 35% to $415 billion in 2016, while home purchases are expected to rise 10% next year to $905 billion, the Mortgage Bankers Association has projected.
"There are bunch of people sitting on a boatload of equity but they can't tap into it unless they have a 680 FICO score," Morgenson said. "We cater to that audience."
Morgenson was blunt on the webinar about the obstacles to originating non-QM loans, primarily the fact that mortgage rates remain at historic lows. Though the loans are manually underwritten, he admitted: "Candidly some of these get a little hairy."
"We like to see skin in the game, and we'll go down to a 580 FICO score, one day out of a short sale, one day out of a foreclosure, even one day out of a bankruptcy," Morgenson said.