With the big drop-off in refinancing, lenders are beginning to realize there is a whole world of would-be borrowers who have been unable to find financing for their deals, business they can address to offset lost production.

More than 110 million people have credit scores below 620, which makes them all but ineligible for agency loans purchased on the secondary market by either Fannie Mae or Freddie Mac, according to Jamie Billingham of Angel Oak Mortgage Solutions, an Atlanta-based lender that's active in 35 states.

That translates into "$150 billion out there in potential business," Billingham said at the annual Regional Conference of Mortgage Bankers Associations in Atlantic City, N.J., earlier this week. "There's definitely a need."

Angel Oak bills itself as an alternative lender whose products fall in the gap between tight Fannie-Freddie guidelines and hard-money lenders who will finance just about anything as long as the rate is high enough. "There are great borrowers out there who don't qualify for one reason or another," Billingham said.

Loan quality is still king, added Michael Vitali, chief compliance officer at LoanLogics, a Trevose, Pa., firm which works to improve the transparency and accuracy of mortgages. "But there are lots of opportunities. The game has changed and lenders need to play differently."

Angel Oak will finance jumbo loans that are above the maximum amount Fannie Mae and Freddie Mac can purchase, nonprime loans to "challenged borrowers" who have suffered through a recent housing event such as a divorce, major illness or even a foreclosure, loans to investors who own more than 10 properties and loans to foreign nationals.

Some of these might sound like the types of mortgages that helped bring the housing market to its knees in 2008. But "they are totally different" from what was being peddled by lenders before the meltdown, said Billingham, who is the company's Eastern regional sales manager.

To date, he said, "you can count on one hand" how many of the company's loans have gone beyond being 30 days late. And only one loan has gone into foreclosure.

Angel Oak also has discovered there is a secondary market for alternative financing. It recently rolled some of its loans into a $150 million security that was snapped up by investors. "Buyers want them (because) they perform," according to Billingham.

Lenders also are showing more interest in Fannie Mae and Freddie Mac's low down payment programs, HomeReady and Home Possible, according to John Castiello, managing director of secondary marketing for Radian Guaranty, a mortgage insurer.

When Home Possible and HomeReady were rolled out almost two years ago, many lenders turned up their noses at them as simply affordable housing programs, Castiello said. But now that they are looking for ways to offset lost business, they have discovered the programs have "a whole bunch of great bells and whistles," Castiello said.

For example, borrowers no longer need to be first-time homebuyers. Also, loan level price adjustments have been waived. And buyers need not bring any of their own money to the settlement table. But best of all, rates are lower than those Fannie and Freddie charge on their top-tier mortgages.

In other cases, lenders are paying more attention to investor-borrowers who "fix and flip" houses and, in at least one case, fix and hold. And others are moving into funding federal loans for small businesses.

Steven Marshall, director of renovation business at HomeBridge Financial Services in Irvine, Calif., said his company will lend up to 91% of the renovated value of the property. And it "will close within 25 days" after the borrower accepts a contractor’s bid for repairs.

First Equity Funding also offers short-term financing for investor-buyers, whether they are professional fix-and-flippers or inexperienced mom-and-pop investors who are rehabbing a house for the very first time.

The Sea Girt, N.J., lender will cover up to 90% of the purchase price plus up to 100% of the construction costs for as little as 1% a month for up to 12 months — with three-month extensions "as needed."

Similar terms are available to investors who want to fix up a property and then rent it out. Once a borrower has a history of being a successful landlord, a company spokesman said, he can refinance with a less expensive 30-year mortgage.

In another example of "it is no longer business as usual," the Normandy Corp. of Rochester, N.Y., is offering funding for people who plan to build their own homes without the benefit of an on-site supervisor or contractor. The company also will finance lot and land sales, teardowns and even bridge loans for borrowers who are switching from one mortgage to another.

Better yet, according to loan manager Rodney Buchbinder, the company is more than willing to consider borrowers "with less than perfect credit...borrowers with short sales or foreclosure are not automatic turndowns."

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