Mortgage market dries up for unconventional home loans

Unconventional borrowers and lenders without government backing are struggling

Angel Oak Cos. CEO Michael Fierman and Flagstar Bancorp Inc. CEO Alessandro DiNello (Credit: Angel Oak, Flagstar, iStock)
Angel Oak Cos. CEO Michael Fierman and Flagstar Bancorp Inc. CEO Alessandro DiNello (Credit: Angel Oak, Flagstar, iStock)

Unless the government’s backstopping the risk, unconventional homes loans are drying up.

Borrowers that don’t qualify for traditional mortgages have been able to find alternatives in recent years. But now those lenders are cutting back originations — some are even halting operations full stop — as investors shy away, the Wall Street Journal reported.

Some of those lenders include Angel Oak Cos., which told the Journal that one of its lending units had laid off 70 percent of its workforce and put a two-week pause of originations; Citadel Servicing Corp., which has halted originations for 30 days; and Sprout Mortgage.

Flagstar Bancorp Inc., a lender that relies on credit lines from banks and others to get the funds for its home loans, pulled back on funding for unconventional and jumbo mortgages last week, while continuing full-steam ahead for funding government-backed mortgages.

It comes as thousands of Americans are losing their jobs or being put on furlough as the pandemic slows the economy. Last week, 9,500 layoffs were announced in New York in one day. That’s leaving unconventional borrowers who were looking to lock in low rates high and dry.

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Investors are still buying home loans guaranteed by the government, however, since the Federal Reserve announced it would buy mortgages sold through Fannie Mae, Freddie Mac or Ginnie Mae, in close to unlimited supply.

The trend mirrors what occurred in the aftermath of the 2008 financial crisis, where the mortgage market without government backing vanished.

“Right now no one other than the government has the balance sheet to fix this,” Tom Pearce, who leads Maxex, a residential mortgage loan trading platform, told the Journal. [WSJ] — Erin Hudson

Correction: An earlier version of this article reported incorrectly that Angel Oak Cos. laid off a majority of its staff. Rather, one lending unit of the company has done so.

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