Most borrowers, whether they are purchasing property or refinancing their home, focus on their mortgage rate and loan terms rather than the type of lender they choose.
Yet the landscape of the lending market has shifted dramatically over the past few years from domination by big banks to a market where more loans are made by non-banks — Non banks being defined as financial institutions that only make loans and do not offer deposit accounts such as a savings account or checking account.
If your documentation is not 100% than a non bank lender may be right for you. If you want to avoid the headaches of dealing with a large institution you may also prefer the help of a lender that can provide the best customer service with a loan product that better fits your needs.
In 2011, 50 percent of all new mortgage money was loaned by the three biggest banks in the United States: JPMorgan Chase, Bank of America and Wells Fargo. But by September 2016, the share of loans by these three big banks dropped to 21 percent. That is a huge drop in their market share. The problem is that most people have some issues in their background. When a bank hits an issue the loan is typically dead. With a non qm loan or a loan from a mortgage company their are typically options to help the borrower get the loan closed.
Before the financial crisis, mortgages were the last thing that a consumer would think of defaulting on. all of that changed in 2009 when people started to default on their loans first not knowing how they were going to keep up with the payments or drops in valuations. Lenders had no way to handle the fallout and some didn’t even try. They just turned to the government for a bailout.
The aftermath of the collapse created regulations that made it much more expensive for loans to be made. There would be no more risk or exceptions from your major lenders. If your loan didn’t fit into a perfect underwriting box, it was thrown out. The overregulation not only hurt the banks but the borrowers and the economy. If you look at mortgage paperwork today the amount of paperwork is monumentally I would say stupid. Creating regulations for the sake of regulating and not addressing the real issues in the mortgage market. In any event this created a big opening for non bank lenders to step up their game, which they continue to do.
In addition to all of the new government regulation, in the initial aftermath of the housing crisis and the debacle of loan defaults, banks began to add their own overlays, which are loan-approval guidelines and fees that go beyond the requirements of Fannie Mae and Freddie Mac. Talk about more stringent guidelines and even more regulation. How could anyone get approved for a loan.
Not only have banks reduced their mortgage loan volume, but the entire private market of investors in mortgages initially disappeared in 2007 and 2008 and, unlike other financial markets took longer to come back. Once the private mortgage market matured in 2009 and 2010 those investors came back with a fervor. The non conventional and non qm mortgage market as well as the conventional mortgage market started to turn to these non bank institutions that had more options, knowledge and flexibility than banks. In other words they actually helped the borrower, their customer attain their dream of home ownership. While still having to comply with the over regulation they developed more Non QM loan products to service the consumer. Without having a government backed loan product the regulations became much less burdensome. The fees and rates they could charge became higher. The borrower was getting their home and the investor was getting returns that were once reserved for hard money lenders.
In the initial aftermath of the housing crisis and the debacle of loan defaults, banks began to add their own overlays, which are loan-approval guidelines and fees that go beyond the requirements of Fannie Mae and Freddie Mac. .
Not only have banks reduced their mortgage loan volume, but the entire private market of investors in mortgages disappeared in 2007 and 2008
Banks were forced to pay fines and to take back loans that were considered flawed. At the same time, they were required to meet stress tests and have more capital on their books in case they have to handle more defaults
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Many large banks have reduced their FHA loan business. Burns says FHA loans were created to serve people with a riskier profile, but she says the recent zero-tolerance policy of the Justice Department has undermined this loan program.
Lenders were supposed to use good judgment on FHA loan approvals, such as looking at the continuity and stability of the borrower’s income, The problem is that the market from bottom to top is fee driven and the goal to push as much money out as loans as possible. It was not about protecting the public or their own companies finances but earning the fees on the loans for themselves.
FHA loans appeal to first-time buyers and lower-income borrowers, who are perceived to be more likely to default on a loan, Once a primary loan product for the banks this has now fallen to the non bank lenders who are dominating the market with these aggressive 3.5% down loan products that almost noone but a government agency would think to offer. We also have to remember from the governments perspective it is better for everyone to own a home. More taxes, more home purchases better for the economy and their coffers.
Many banks now limit their loans to conventional 30-year fixed-rate loans for borrowers who neatly fit into the approval box. They will also approve jumbo loans for high net worth individuals. If all goes well and they get approved they will typically hold these loans and try to cross sell other banking services to those customers.