Denis G. Kelly is senior vice president of correspondent/
national wholesale for Sprout Mortgage, a leading non-agency/non-QM lender with broker/correspondent-friendly
platforms focusing on loans in the following categories:
jumbo/super jumbo “near miss,” no-income verification
investment loans, self-employed borrowers/bank-statement
loans, recent credit events/challenging FICOs — all up to
$20 million. Reach Kelly at (888) 943-2833 or
Don’t Drown in the Sea
of Lending Sameness
Specialty lending can help to bulletproof your business
by making you stand out from the competition
By Denis G. Kelly
The definition of “good enough” is a mov- ing target. Specific to the mortgage loan originator, what was considered “good enough” 12 months ago is likely not good
Considering the compressed profit margins, the
significant decrease in overall loan originations, rising
production costs and other negative industry pressures now afoot, a successful mortgage originator
must be proactive in order to successfully navigate
these dynamic market conditions.
The first step begins with a comprehensive audit —
an audit of everything. Ask yourself deep, probing
questions about your business practices. What can —
and must — you do better? Consult your peers to
determine if there are nuggets that are easy to implement and also move the production needle.
Although there are myriad considerations, one
focus should be on the loan solutions that must be
part of a modern mortgage originator’s arsenal to
properly support business-development initiatives.
With the scarcity of leads and the increased competition,
modern originators must leave no stone left unturned.
If there is a reasonably accessible loan solution, then
originators need to be empowered to close and fund
with this solution.
There are many innovative lending products and
terms for these products (such as non-QM, non-agency,
nonprime, to name a few). Instead of dissecting the
differences between the terminology (which provides
no value to business-development initiatives), let’s
consider all of them under the umbrella of specialty
Which solutions are “must-haves” for the modern
loan originator? As the varying names for specialty
residential-lending products indicate, there are a variety of solutions.
All else being equal, why not close larger loans?
If margins compress, then it may be possible to mitigate
some of this overall negative effect by increasing your
revenue — and consequently profit — per funded
loan. In general, near-miss jumbo loans are designed
for borrowers who don’t quite qualify for mainstream
The following are among the typical reasons for disqualification from the commonplace, restrictive jumbo-underwriting box: a slightly higher debt-to-income
(DTI) ratio, limited reserves, late consumer and/or
housing payments, a significant credit event without
adequate seasoning, substantial reserves but minimal
qualifying income, FICO credit-score issues and/or a
loan-to-value (LTV) ratio that exceeds threshold limits.
The following are near-miss jumbo features that
originators need in place in order to serve this market:
maximum loan size of $20 million; maximum DTI of
59 percent; no maximum cash-in-hand requirement;
cash-out funds that can be utilized for reserves;
reserves allowed from various accounts, including
retirement and business accounts (without haircuts);
late consumer and housing payments acceptable;
utilization of the primary wage-earner’s FICO score;
and an asset-depletion program for borrowers with
significant liquid assets.
Business owners typically — and legally — take advantage of Uncle Sam’s tangled tax-policy web. As such,
true income for self-employed individuals frequently
is considerably more than what is reported to the IRS.
Traditional lenders do not account for this discrepancy
between true income and reported income, which
leads to many truly qualified borrowers not qualifying
for traditional loans.
This flaw in the system is unfair to self-employed
borrowers, but it creates opportunities for forward-thinking originators. If a self-employed borrower does
not qualify utilizing the full documentation calculation
methodology, rather than saying “no,” it is best to provide a potential solution — which is typically a bank-statement loan program.
The essence of a bank-statement program for self-employed borrowers is to forensically extrapolate
income based on deposits (revenues) and deduct
expenses (typically via an expense ratio) to derive true
income. There are many different types of businesses
and lenders have various methods through which to
stabilize income via bank statements.
Following are some key factors for originators to
consider when working with bank-statement loans.
Profit-and-loss statements from accountants should
be the exception, not the rule. Lenders must have
a bank-statement desk to help stabilize borrower
income at the beginning of the process — for purchase scenarios, this is prior to opening escrow or
executing a purchase-and-sale contract. Why enter
into an agreement and submit a loan to underwriting
if the income does not qualify? And finally, there
must be an ability to utilize personal or business bank
statements, or both.
There are life events — such as divorce, illness, death
and/or job loss — that may result in financial duress and
also negatively impact credit. The “timeout period” for
traditional financing is typically fairly lengthy — but it
is dependent on the specific program. This results in
an underbanked market of qualified borrowers.
From a risk perspective, borrowers who have experienced significant credit issues should not be in the same
loan programs as borrowers who have demonstrated
timely payments — until they have re-established a
history of on-time payments. This doesn’t need to be
a go or no-go equation, however. There is a middle
ground in which lenders offer intermediate financing
solutions, whereby the risk is measured and mitigated.
Such loans frequently feature lower maximum LTVs,
higher reserve requirements and/or higher interest
rates (as compared to conventional financing). Many
borrowers elect to proceed with these terms because
the alternative is to wait a considerable period to
re-establish a timely payment history. Borrowers may
choose to accept these more burdensome terms initially — understanding that with continued timely
payments for 12 to 48 months, they likely will again
qualify for the market’s most favorable terms.
Owner-occupied (or consumer) loans are required to
pass the ability-to-repay (ATR) test per both responsible lending and the Dodd-Frank Wall Street Reform
and Consumer Protection Act. Business-purpose loans,
however, are not subject to the same test, and this
paves the way for no-income verification, business-purpose financing.
Some 30 percent of real estate transactions are
non-owner-occupied transactions, according to the
National Association of Realtors’ 2018 Home Buyer and
Seller Generational Trends Report. So, it stands to reason that a well-equipped mortgage originator should
provide solutions that address this large market. Borrowers purchasing investment properties tend to be
rather sophisticated, and this product uniquely provides such borrowers financing tailored to their needs.
The main no-income verification products are
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