Low document loans. The name alone sounds a little scary. These are exactly the type of loans that got us into the housing crisis and subprime mortgage bust in 2006 and 2007. But now, money managers including large investment companies such as Pacific Investment Management Co. and Neuberger Berman are proposing just that. Wall Street appears to want to bring back these low document loans. These loans are beneficial for those that may not be able to fully document their income such as self-employment but even that sounds a little fishy to me. Many of these management companies are urging "lenders to make more of what's called "Alt – A" loans, even buying loan origination companies to control more of the supply themselves."
These type of loans may offer higher yields but pose riskier assets and several may come with interest rates as high as 8%. They are sought out by investors because of the high interest rate but most of these type of loans are prohibitive to most borrowers. Most of these loans are being bought by private equity firms, mutual fund companies and hedge funds instead of larger banks. These loans going into private funds are sold to institutional investors and wealthy clients.
However there is a difference to these crisis era loans. They do require borrowers to show good credit and substantial assets even if they cannot produce exact verification on income. Each lender has its own requirements on these "Alternative A" mortgages so investors should do their own research on individual lenders.
You will find a lot of these mortgages out there because many lenders consider these "nonqualified mortgages". There such a stigma with these types that many steer clear but not all. Many money managers are proving these loans for borrowers that have good credit and are self-employed or may report income sporadically.
These large businesses as I mentioned previously in the article, are rolling out private funds that will invest in these alternative type of mortgages over the next couple years. Many of these companies are finding lenders that are more than willing to issue these type of loans if they have the right type of borrower. It is a niche product and not one to enter into lightly. However, they are increasing rapidly. Just $17 billion in loan money was facilitated for these type of loans in 2014 compared to $767 billion for conventional loans but that rose to nearly $20 billion in 2015 for these types of loans. They are higher risk but working with the right lender and investor might be worth the risk.
After the housing market crisis, the Dodd Frank financial overhaul law required some lenders of mortgage-backed securities to hold some of the loans. It created a harbor for all mortgages that meet government guidelines. Many of these mortgages that fall outside of the rules such as these Alt – A loans can be vulnerable to lawsuits from borrowers, adding risk to lenders. [Source]
This type of loan is not for everyone but it is interesting that investors are rolling these out slowly and cautiously. For more information on these types of home loans, conventional or otherwise contact my office today.
As a certified Realtor® for the top-rated Columbus Realty Firm - Vision Realty, with 32 years of dedicated real estate experience, I can help buyers, sellers, investors, short sale sellers and more find, sell or invest in the right property, at the right price, at the right time. Contact me anytime for updates and information on the Columbus OH Real Estate market.