As we near the halfway point of 2024, interest rates remain elevated and observers, including our Chief Economist Mark Fleming, believe they are “more likely to remain ‘higher for longer’ this year.” While 7% interest rates have dampened traditional first-mortgage volume, they have had significantly less impact on alternative loan categories, like non-qualifying mortgage (non-QM), investor loans, and home equity. These categories have been gaining traction in the first half of this year and are on pace for dramatic — in some cases more than 2X — growth in 2024.
As a business that has spent more than two decades focused on fraud detection and loan quality, we believe that this trend, while a potential opportunity, still needs to be viewed through the lens of potential risk. Depending on the loan product(s), this risk could take several forms: fraud for property vs. profit, misrepresentation—of income, employment, and/or undisclosed debt—and collateral valuation relative to LTV/CLTV. Having said that, it’s worth pointing out that mortgage fraud, in general, continues to be at historical lows: the result of lower volumes in general and the widespread use of more advanced loan quality tools in origination processes of traditional first mortgage lenders.
To date, the non-QM and home equity markets have been dominated by specialty and portfolio lenders, respectively. However, as non-QM and alternative loan sectors expand, traditional mortgage banks (including wholesale and correspondent players) are likely to participate, seeking volume to offset lower volumes in conventional lending. Given the differences in the profile of alternative and conventional borrowers, and the prevailing underwriting standards used in non-QM and home equity, this raises the question: will these new entrants be exposing themselves to higher levels of risk?