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Alt-A is here to stayDavid DePodestanon-conforming, sub-prime, unconventional financing, financial planning As a direct result of the post-refinance boom, many brokers today are enlisting nontraditional methods of lending in the face of increased competition. Along these lines, a category known as alt-A, the alternative to A-paper loans given to borrowers with good credit, is quickly increasing in popularity for brokers across the country. For a variety of reasons, alt-A loans don't conform to the lending guidelines set forth by Fannie Mae and Freddie Mac. Stated-income mortgages, interest-only loans, high loan-to-value ratios and increased cash flow all fall under the alt-A umbrella. Many borrowers benefit from this type of unconventional financing, including the growing majority of self-employed workers, those relying on commissions, tips or bonuses, and those who have difficulty documenting their full income, often because of tax-related complexities. Despite the buzz surrounding alt-A, some brokers are hesitant to accept this as a legitimate product offering. Many have been paying close attention to appraisals and income statements and have noted an existing product gap. Because alt-A is non-conforming, income statements and appraisals become especially important in lieu of normal verifications. Brokers should invest the time it takes to learn how alt-A paper may benefit their operations. A litmus test survey of a handful of brokers in the industry indicates that alt-A will be a long-term mortgage instrument. Craig Montgomery, branch manager for Middleburg Heights, Ohio-based Allied Home Mortgage Capital Corporation, has found alt-A programs to be extremely accommodating for borrowers who do not qualify for conventional financing. "Alt-A programs provide borrowers financing options that would otherwise not be available to them because they may not meet standard conventional guidelines," said Montgomery. "Alt-A loans currently comprise 65 percent of our entire pipeline, which is a significant increase from the 40 percent it occupied last year." Allied Home Mortgage Capital Corporation, which closes five million loans per month, has used alt-A programs for two-and-a-half years. "I was approached by a retired couple who had been turned down many times due to their high debt-to-income ratio," said Montgomery. "This couple was on a fixed income but had proven over time to be credit-worthy borrowers. This couple was approved through a no-ratio alt-A loan program and allowed an interest-only payment option to be attached to the loan for a 10-year period. This program allowed the couple an additional $100 per month of disposable income for the next 10 years, which helped them out tremendously." Larry O'Neil, president of Hingham, Mass.-based Custom Financial Mortgage, has been in the business for 11 years. Custom Financial Mortgage has traditionally handled both A- and B-paper loans and, over the last few years, has begun using alt-A loan programs that enable the company to reach more borrowers. "Borrowers generally receive pricing on par with that of other A-paper lenders, without all of the paperwork that may be required elsewhere," said O'Neil. "It also allows borrowers who may not have traditional income documentation to purchase or refinance without being penalized by high mortgage rates. This is especially helpful to our self-employed borrowers." Borrowers who have used Park City, Utah-based Turnbury Mortgage have experienced the benefits of streamlined, no-documentation loans with interest-only options on all programs. "I have had multiple borrowers who would otherwise have been forced to a B/C program were it not for alt-A programs," said Kyle Arnold, president of Turnbury Mortgage. "Borrowers love the fact that I can process an no-income, no-asset at a 65 percent loan-to-value with as little as a .25 percent fee." Each broker surveyed has experienced an increased volume of alt-A loans over the last two years since interest rates have risen. The borrower may pay a higher interest rate up front, but will likely benefit from increased cash flow in the long term. Conforming products don't offer interest-only options that allow for increased cash flow. Due to higher cash limits, people are starting to use equity in their homes. Alt-A is an important topic for borrowers in light of financial planning. It isn't always about cash flow. For many brokers, this presents an expanded thought to mortgage lending. Brokers market alt-A products differently than conforming loans. Because alt-A presents the opportunity to fold over into financial planning, many brokers are shifting their focus when approaching referral sources. Brokers are now obtaining referrals that can benefit from an array of products to accommodate individual needs. Alt-A is an up-and-coming loan program type and brokers in the mortgage industry are ready for a change. The current mortgage market is ripe with opportunities for brokers who join the scores of others who are enjoying the benefits that come with alt-A financing. David DePodesta is executive vice president of wholesale lending at Union Federal Bank. He may be reached at (260) 434-8662.