Non-Traditional Loans Are Increasing but Still Difficult to Obtain

It's true that traditional loans are still difficult to obtain but other more non-traditional loans are becoming easier to obtain from nom non-traditional lenders. A review of deals analyzed by Morningstar Credit Ratings, LLC finds that rebounding home prices and in the instance of reperforming and nonperforming transactions, repaired borrower credit, have reduced credit risk in these transactions. In an otherwise moribund market, Morningstar expects interest among originators to securitize single-property investor loans.

But otherwise, the market for home loans and investment loans remains tighter than it was in the past.

The Off Market

Nonagency issuance of residential mortgage-backed securities totaled $26.6 billion through June, down 41.3% from the same period last year, according to the Securities Industry and Financial Markets Association (SIFMA).

Some of the newly originated nonqualified mortgages have made their way into private-label securitizations, but most are being held by the lenders in their portfolios. Investment in rental markets has been high during the early year but Morningstar is expecting that to drop off significantly later in the year. The reason being is that housing and apartment prices have gotten higher than responsible investors think these should be.

If nothing else, the market remains in constant flux.

Opportunist Investors are Back in the Market

Foreclosures in the wake of the subprime crisis led opportunist investors to flock to the housing market and invest in properties with the hope of capitalizing on home price increases. The properties are usually rented out during the holding period. Larger institutional players with a portfolio of these single-family houses partially financed their investments via single-family rental securitizations, while individual investors typically funded their investments through traditional routes such as cash, agency loans, or bank loans. Mortgage loans made to individuals for their investment purposes typically are underwritten as consumer loans. The property’s rental income may be part of the income used to calculate the borrower’s debt-to-income ratio, but the focus is primarily the borrower’s creditworthiness and income from other sources.

Resecuritization issuance remains well below 2015 levels. Issuance to date amounted to $1.97 billion, down 83.6% from same period last year, according to SIFMA. Morningstar has rated four resecuritizations this year and analyzed many more. We find that issuers have adopted accretion-directed structures and other mechanics to increase their advance rates on the senior class. Accretion-directed structures divert interest from subordinate classes to pay principal to the senior class, increasing the proportion of the senior class that can be issued.

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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.