Carrington Mortgage Services' decision to offer subprime mortgage loans was a natural progression from its decision four years ago to concentrate on borrowers with credit scores under 640.
It had been serving lower credit score borrowers through its capabilities as a Ginnie Mae issuer to do Federal Housing Administration, Veterans Affairs and U.S. Department of Agriculture mortgages, Ray Brousseau, Carrington's president, said in an interview. "We've been growing year over year over year; it's treated us very, very well."
The introduction of the non-qualified mortgage program is the natural evolution of that program. It is not a return to the subprime lending programs and standards that existed prior to the housing crisis.
These products are manually underwritten. Rather than feeding the application into a machine to tell if the borrower is a good risk or not, an underwriter with credentials and expertise looks at the loan and figures if it makes sense and is the borrower going to be able to perform on this loan going forward, he said.
Many of the Ginnie Mae loans it originated had credit challenges "and our underwriters have proven by the performance of that portfolio, that they can separate a good loan from not a good loan," Brousseau continued.
Carrington will also be retaining the servicing rights on these loans. Its servicing shop is accustomed to working with borrowers under stress and keeping those loans performing.
"It is not just making the loan but making sure that loan performs over time," he said.
This is Carrington's first non-QM offering and Brousseau said it is not a stretch given the company's client base. "The line between QM and non-QM is relatively fine. A borrower could be QM because he meets Ginnie Mae's guidelines. One [credit score] point difference or one debt-to-income ratio percentage difference and all of sudden he's non-QM."
Carrington will be originating these loans through its retail branch network as well as through mortgage brokers.
It will underwrite borrowers with credit scores as low as 500. Loan amounts are up to $1.5 million, except for cash-out refinances, which are capped at $500,000. Self-employed borrowers can use bank statements instead of tax documents. It will also underwrite borrowers that have had a recent credit event like a foreclosure, bankruptcy, missed credit card payment or late mortgage payment.
"We're doing it because it's an iteration, an evolution of something we started four years ago and we have the benefits of that background and results to help us approach it the right way," Brousseau said.