Before the Great Recession in 2007, traditional banks were responsible for most of the mortgages in our country. However, by 2016, almost half of the mortgage loans issued were covered by nonbank lenders. These lenders don’t offer traditional banking services such as savings and checking accounts, providing them with a little more freedom and flexibility when it comes to mortgage lending. For nonbank real estate lending, what does the future hold?
Nonbank Mortgages on the Rise
While nonbank mortgages accounted for almost half of all mortgages in 2016, they have continued to rise since then, and in 2020, nonbank mortgages made up 68% of all mortgages. These nonbank mortgages are financed by selling the mortgage to investors, while the nonbank entity retains the responsibility of collecting payment from the homeowner.
Benefits of Nonbank Mortgages
There are several benefits for consumers when working with a nonbank entity on your mortgage. They include:
Following the Great Recession of 2007, new regulations were placed on traditional mortgage lenders to change the way they loan money to consumers. Nonbank lenders were not affected by most of these regulations, allowing them to grow and prosper. Fewer regulations mean less time and expense for nonbank lenders, making it easier to get a mortgage loan
Nonbank lenders don’t have to follow the same guidelines as traditional banks, allowing more flexibility in qualifications. Traditional lenders tend to look at the borrower’s credit history, including his or her credit score, to decide on approval or nonapproval of the mortgage. Nonbank lenders can look past a low credit score, opening up mortgages to some who may not be approved through a traditional lender.
Nonbank lenders tend to approve many government-backed loans, such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans. These loans are usually aimed at high-risk borrowers, so a nonbank option increases the likelihood of approval.
Streamlining the application process came from nonbank lenders, making the application process much more convenient for consumers. Those looking to take out a mortgage through a nonbank lender can do almost the entire process online. These nonbank entities often offer a quick survey online that allows you to input a few pieces of information in order to receive a speedy rejection or approval before starting the application process. This process is faster and more convenient for both lender and borrower from start to finish.
What to Consider With Nonbank Lenders
While there are several benefits to taking out a mortgage loan with a nonbank lender, there are also a couple of things you need to consider before signing for your loan. Primarily, the difference will be evident in the fees and interest rates associated with a nonbank mortgage. You can expect to pay a higher-than-average interest rate if you’re a high-risk borrower. Lenders need to minimize their risk by maximizing the fees they can collect and raising the interest rate to help protect them if you default on your loan.
What Does the Future Hold?
Nonbank real estate lending is still on the rise, and it’s predicted to stay that way in the future. Nonbank lenders are also spreading out into other areas of financing, including:
- Credit cards
- Consumer finance
- Small and medium enterprises (SME) lending
- Peer-to-Peer lending
- Mortgages for consumers with poor credit
- Buy-to-let mortgages
- Higher loan-to-value (LTV) mortgages
The nonbank lenders recognize a consumer need for financial services that traditional banks are shying away from due to new regulations, and they are taking advantage of that need. That need isn’t going away anytime soon.
The only advantage traditional banks have over mortgages is the interest rate they can offer consumers is typically lower. Consumers notice that these cost savings are not always offset by the extra costs of dealing with the bank and their application process and requirements. Nonbank lenders have access to plenty of investor capital to provide them with a higher market share of loans.
Attractive Investment Option
Investors know that there’s a risk with stocks and bonds that don’t exist when investing in loans backed by real estate, making it an attractive investment option. If investors start to shift some of the capital currently spent on stocks and bonds to the nonbank real estate lending area, it could result in dramatic growth for nonbank lenders.
Banks Will Get In On the Trend
Banks recognize the increase in nonbank lending and want a part of this growing industry. Although banks don’t have the ability or flexibility to move with the speed and freedom that nonbanking lenders do, they have low-cost capital available. This makes them a natural fit for nonbank lenders that achieve success.
We may see international investors express interest in nonbank lending. Other countries may have interest rates that are even lower than the United States, making this type of investing even more attractive. The U.S. economy and rules of law are perceived as stable versus other countries with single-party or single-person control that have more uncertainties in their economy.
While most nonbank lenders have an office or two that they work out of, most of the application process is done online, so having a branch or retail location hasn’t been necessary. We may start to see a rise in brick and mortar retail locations in the nonbank lending world to fill consumer and investor needs. Nonbank lenders may find it beneficial to have street-level walk-in branches in cities with a lot of lending activity.
It’s inevitable that nonbank lenders will see an increase in regulations as banks and their lobbyists fight to level the playing field. Banks have tremendous lobbyist resources, which they can use to successfully impose more regulations on nonbanks or remove some of their own regulations. Banks want to be seen as competitive in the real estate lending market and the lack of regulations on nonbank lenders tends to make them more appealing.
If you’d like to learn more about nonbank real estate lending, contact the team at Titan Funding. We offer private money lending options, including hard money loans, residential bridge loans, commercial hard money loans, and fix-and-flip loans. Give us a call at 855-912-8313 or complete our secure online contact form to get started today.