US mortgage lenders are starting to go bankrupt — how this one factor could be triggering the worst surge of failures since 2008
The real estate market just can’t catch a break, with inventory of resale homes remaining low and rising interest rates making it harder for buyers to justify making the leap.
And now we can add mortgage lender bankruptcies — and the rise (and fall) of “non-qualified mortgages” — to the factors aggravating an already uncertain market.
But what does the trouble around these NQM mortgages really mean? And what does it mean for non-traditional buyers trying to get a foothold in the market?
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A “non-qualified” mess?
NQMs use non-traditional methods of income verification and are frequently used by those with unusual income scenarios, are self-employed or have credit issues that make it difficult to get a qualified mortgage loan
They’ve previously been touted as an option for creditworthy borrowers who can’t otherwise qualify for traditional mortgage loan programs.
But with First Guaranty Mortgage Corp. and Sprout Mortgage — a pair of firms that specialized in non-traditional loans not eligible for government backing — recently running aground, real estate experts are beginning to question their value.
First Guaranty filed for bankruptcy protection while Sprout Mortgage simply shut down early this summer.
In documents tied to its bankruptcy filing, First Guaranty leaders said once interest rates started to climb, lending volume dropped and left the company with more than $473 million owed to creditors.
Meanwhile, Sprout Mortgage, which leaned heavily on NQMs, abruptly shut down in July.
Do NQM’s signal another housing meltdown? Probably not
Most housing market watchers believe today’s conditions — led by stricter lending rules — mean the U.S. is likely to avoid a 2008-style housing market meltdown.
But failures among non-bank lenders could still have a significant impact. The NQM share of the total first mortgage market has begun to rise again: NQMs made up about 4% of the market during the first quarter of 2022, doubling from its 2% low in 2020, according to CoreLogic, a data analysis firm specializing in the housing market.
Part of what has contributed to the recent popularity of NQMs is the government’s tighter lending rules.