Is This the Return of the Exotic Mortgage?

man in purple suit jacket using laptop computer

For the local residents who succeeded in finalizing their home loan or refi back in January 2021, the figures verify that they now hold the title of Mortgage Frugality Champs. Their monthly payments reflect the all-time low-interest rates that were then being cinched: Freddie Mac says the national average 30-year conventional loan then averaged 2.65%. Needless to say, the lenders were swamped with business.

Thus, it was no surprise that Mortgagegrader.com could characterize conventional mortgage refinancing volume as having “fallen off a cliff”—a not-unexpected result of rates being more than a full point higher than last January’s. The question was how lenders would continue to do business since “…the mortgage machine must be fed.”

The answer was beginning to appear in the form of “exotic” mortgages making their reappearance on the market—most strikingly, a ‘No credit report, no job’ deal for tough-to-qualify borrowers. Those whose memories stretch back to pre-Great Recession days may shudder to recall the wild loan-issuing days of “no Doc” mortgages. They had some threadbare relatives: the “NONA” (NO income, No Asset) loans, and their worrisome cousins, “NINJA” (No Income, No Job, no Assets) loans. The mortgage meltdowns that ensued were directly related.

Thankfully, the exotic mortgages that are beginning to appear today are less likely to trigger meltdowns (or another Great Recession}. Some examples highlighted in the Orange County Register are intended to enable investment property financing when the applicant would rather not rely on employment or credit report credentials. Wags have taken to dubbing these “NADA JOB, NADA CREDIT” mortgages—but that’s a bit misleading. Even given their seemingly lax standards, qualifying isn’t a slam dunk. Investors who qualify might not be able to pass muster in employment income or credit score terms, but if an outstanding court judgment or current bankruptcy is part of the picture, no loan will happen.

One loan the Register described is for a one-to-four-unit investment property (owner-occupied units aren’t allowed). A lot of collateral is key, especially considering the 30% down payment requirement. Add in the prerequisite that four years’ worth of principal and interest mortgage payments must be deposited in a bank account the mortgage servicer can tap, and even the sternest auditor would have to admit that this ‘exotic’ bears little similarity to those pre-Recession, easy-money loans. Exotic loans may help to keep the lenders’ wheels in motion, but more familiar home loans still comprise the lion’s share for most of today’s home loan applicants.