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Demand for Non-Qualified Mortgages Improves a Little Despite Tightening Standards

Last updated 03/15/2024 by

SuperMoney Team

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Demand for non-qualified mortgages remains very low. However, it did improve slightly in Q2 2023 despite increasingly tight eligibility standards.
When it comes to mortgages, especially non-QM loans, there are two key measures that we can analyze to gain insights into market trends: the demand for these types of loans and the standards used by lenders to approve them. But what do these measures mean, and how are they quantified? Let’s delve a little deeper.

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Demand for Non-Qualified Mortgages

The demand for non-qualified mortgages is typically gauged by monitoring the interest and application rates among potential borrowers. However, a more specific way banks and financial institutions measure demand is by analyzing their own internal data, which includes loan application numbers and qualitative feedback from potential borrowers.
The Federal Reserve tracks the “Net Percentage of Domestic Banks Reporting Stronger Demand for Non-Qualified Mortgage Non-Jumbo Mortgage Loans,” which gives us a snapshot of demand. The percentages reflect the net number of domestic banks that reported increased demand for these types of loans during each quarter. Positive percentages indicate a net increase in demand, while negative percentages signal a net decrease.

Standards for Non-Qualified Mortgages

The “standards” for non-qualified mortgages, on the other hand, pertain to the set of criteria or guidelines that lenders use to determine who can qualify for these types of loans. These can include borrowers’ credit scores, debt-to-income ratios, employment history, and other financial health indicators.
In this article, we look at the net percentage of domestic banks tightening standards for non-qualified mortgages, which offers a picture of how these standards are changing. The percentages here represent the net number of banks that reported tightening (i.e., making more stringent) their lending standards for these types of loans each quarter. Positive percentages mean a net tightening of standards, making these loans harder to qualify for, while negative percentages indicate a net loosening of standards, making these loans easier to qualify for.
By analyzing these measures, we can better understand the dynamics between borrower demand and lender supply in the non-qualified mortgage market and how they affect the overall housing market and economy.

The Flux of Non-Qualified Mortgages Demand

Non-qualified mortgages, also known as non-QM loans, cater to borrowers whose financial profiles don’t fit the traditional mold. The demand for such loans has experienced significant ups and downs due to changes in economic conditions and regulatory environment.
Between 2015 and 2023, the net percentage of domestic banks reporting increased demand for non-QM loans has seen considerable variation. While the demand had its ups and downs in the early years, there was a noticeable dive starting from the second quarter of 2022, reaching a low point of an 84.6% net decrease in the first quarter of 2023. This drastic dip could indicate a shift in borrower preferences or changes in economic conditions that impact borrowers’ ability to secure these loans.
Despite the plunge, the second quarter of 2023 signals some improvement. Even though the demand remains low, it has shown a less steep decline compared to the previous quarter, indicating potential signs of recovery.

Tightening of Non-Qualified Mortgages Standards

Just as the demand for non-QM loans fluctuates, the standards for these loans also experience significant changes, reflecting the lending institutions’ willingness to absorb the perceived risks associated with non-QM loans.
Between 2015 and 2019, the standards were generally loosening. However, 2020 witnessed a significant shift with a sharp increase in the tightening of standards. By the second quarter of 2020, there was a 14.3% tightening, peaking at 63.6% in the third quarter of that year.
This tightening trend continued through to 2023, with the net percentage of tightening rising to 16.7% in the second quarter. The increasing tightening of standards, coupled with the decrease in demand, creates a challenging landscape for potential borrowers of non-QM loans.

Key takeaways

  • Non-QM loan demand has experienced substantial fluctuations, with a major drop starting in 2022 and signs of recovery by the second quarter of 2023.
  • Standards for non-QM loans have witnessed a trend of increased tightening since 2020, presenting potential barriers for borrowers seeking non-QM loans.
  • The shifts in both demand and standards can impact borrowers’ access to non-QM loans and may mirror wider economic changes.

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