What Mortgage Market Niche Are You In?

October 19, 2002, Revised November 9, 2006, January 20, 2011, January 9, 2012

"I recently found what appeared to be the best deal on a 30-year fixed-rate mortgage from ads in the newspaper, but when I told the loan officer exactly what I needed, the price rose and the amount I could borrow fell. I figured he was pulling a bait-and-switch on me, and broke it off. Then I found an equally good quote by a mortgage broker on the internet, but when I contacted him the exact same thing happened…What's going on? I need the loan to buy a condominium to rent out."

Market Nichification

You're befuddled by a unique feature of the US mortgage system that complicates life for mortgage shoppers. I call it "market nichification". It simply means that lenders vary the terms they offer borrowers based on a large number of loan, borrower and property characteristics that they believe affect the risk or cost of the loan to them.

Your case is an example. Lenders consider loans that are used to purchase a property for investment riskier than loans used to purchase a property that will be occupied as a residence by the borrower. To compensate lenders for the risk, these loans carry a rate higher than that on loans for personal occupancy.

In addition, the maximum amount you can borrow on an investor loan is smaller than the amount you can borrow on a loan for occupancy. While the precise figures will vary a bit from lender to lender, you will find yourself paying more and able to borrow less no matter which lender or mortgage broker you solicit.

Some Market Niches

Here are some other factors that could have the same effect. A more complete list is shown further below:

* The borrower does not have permanent residency in the US.
* There is a co-borrower who won't live in the house.
* There will be a second mortgage on the house.
* The house is a condominium with more than 4 stories.
* The borrower wants to avoid tax and insurance escrow payments.

The potential number of niches is enormous because of all the different combinations of the features that define niches, such as those listed above.

Implications of Market Nichification For Mortgage Shopper

Shoppers need to understand that no lender operates in every niche, and the narrower the niche, the fewer the lenders. In a survey of 15 national lenders that I did in response to the letter cited above, I found that all 15 made investor loans on 30-year fixed-rate mortgages. However, only 9 of them made investor loans to borrowers who were doing a cash-out refinance, and only 4 were also willing to waive standard loan documentation requirements. On adjustable rate mortgages, furthermore, the number fell to 2.

Another thing shoppers need to understand is that the lender offering the best deal in one niche is very unlikely to be the one offering the best deal in another niche. In a study of 13 lenders operating in 19 niches that I did some time ago, I found that 12 of them offered the best deal in at least one niche. Further, no one of the lenders offered the best deal in more than 3 of the 19 niches.

Nichification is a major reason why mortgage brokers have become such a major part of the market in recent years. Since mortgage brokers deal with multiple lenders, usually 30 or more, they are well positioned (as consumers are not) to identify the lenders who operate in a particular niche, and select the best of the available deals.

To shop effectively, consumers need to locate themselves in the correct market niche beforehand. (This is what the letter-writer did not do.) Otherwise, the shopper does not know whether the information collected reflects niche pricing or not. It also helps to have some idea of how your particular niche is priced. Below is a list of the major niche factors, and some selected illustrations of niche pricing.

Comment on January 20, 2011.

The financial crisis had a major impact on mortgage pricing in the post-crisis period, which I discuss in other articles. For example, see Evolution of a Financial Crisis, and Shopping For a Jumbo Mortgage In a Distressed Market.

Nichification continued as before with two major changes. Some niches were simply eliminated, meaning that loans were no longer available. This was the case for all the various forms of alternative documentation that are listed below. In the post-crisis market, all mortgages must be fully documented.

The second major change is that the price adjustments for riskier niches are much larger than they had been before the crisis. In many cases, they are 3 to 5 times larger than those shown below. I nonetheless decided to retain the niche adjustments shown below, which come from 2006, for historical reasons.

Nichification on the Professor's Certified Lender Network (CLN)

On the professor's new shopping network, the system finds your niche automatically from the information you enter and the pricing that comes directly from lender pricing systems. Loan officers are not involved in the process, so there can be no gamesmanship regarding the proper niche and how it is priced. For a more complete discussion, see Finding a Mortgage on the Professor's Certified Lender Network.


Transaction Characteristics:

1. Loan Amount

2. Desired Lock Period in Days

3. Down Payment (As Percent of Property Value)

4. Term

Property if Not Single-Family Detached:

5. Two-Family

6. Three-Family

7. Four-Family

8. Co-op (Building Is Owned by a Cooperative Association in Which Members Own Shares)

9. Condominium (Borrowers Owns Unit in a Project in Which Some Facilities Are Owned in Common)

10. Condominium More Than Four Stories High

11. Manufactured (House Was Not Built on Site)

12. Attached ("Twin", "Triplex", "Row")

13. Planned Unit Development (House Is Located In a PUD With a Homeowners Association That Charges Dues)

Loan Purpose if Not to Purchase for Occupancy as Permanent Home:

14. Purchase Second Home (Vacation Home)

15. Refinance

16. Cash-Out Refinance (Loan is Larger Than Old Loan Balance By an Amount Larger Than th e Settlement Costs)

17. Investment (Home is Being Purchased to Rent Out)

Documentation If Not Full:

18. Alternative Documentation (Borrower Wants to Provide Payroll and Bank Statements Rather than Wait For Verification of Information from Employer and Bank)

19. Documentation for Self-Employed (Borrower Wants to Use Special Documentation Requirements Available for the Self-Employed)

20. No Income Verification (Borrower Doesn't Want Reported Income to Be Verified by the Lender)

21. No Asset Verification (Borrower Doesn't Want Reported Assets to Be Verified by the Lender)

22. "No Docs" (Borrower Doesn't Want Reported Income or Assets to Be Verified by the Lender)

23. No Income Ratios (Borrower Doesn't Want Income to Be Used in Determining Qualifications)

24. Streamlined Refinance (Borrower Wants the Reduced Documentation Requirements Available on Refinances Only)

Special Borrower Characteristics

25. Non-Occupant Co-Borrower (One of the Borrowers Won't Be Living in the House)

26. Subordinate Financing (There Will Be a Second Mortgage On the Property When the New Loan is Made)

27. Non-Permanent Resident Alien (Borrower is Employed in the US But Is Not a US Citizen or Permanent Resident )

28. Non-Permanent Non-Resident Alien (Borrower is Not a US Citizen and is Not Employed in the US)

29. Waiver of Escrows (Borrower Wants to Be Responsible For Payment of Taxes and Insurance)

Some Examples of Niche Pricing on a 30-Year Fixed-Rate Mortgage

Any of the factors listed above, alone or in combination with others, may affect the interest rate, points, maximum ratio of loan amount to property value, and sometimes other qualification requirements. Below are a few common examples, but the actual numbers shown may vary from lender to lender. They also change over time, and since those below are a few years old, readers should view them as rough indicators. All the adjustments shown are relative to the following "reference" loan:

* Loan Amount: $200,000
* Rate Lock Period: 30 days
* Purpose of Loan: Purchase for occupancy as permanent home
* Type of Property: Single-family detached
* Maximum Ratio of Loan to Property Value (LTV): 95%.

  Adjustments to:
Niche Feature Interest Rate Points Maximum LTV
Loan Amount      
         $50,000 +.125%    
         $460,000 +.25%   90%
         $900,000 +.375%   80%
Lock Period      
        60 days   +.125 Points  
        90 days   +.375 Points  
       120 days   +.750 Points  
Purpose of Loan      
        Refinance     90%
        2nd Home Purch     90%
        Refi Cash-Out .125%   75%
        Investment +.375%   70%
        Refi Cash-Out/Investment +.50%   60%
Type of Property      
        2-Family     90%
        3/4 family     80%
        High-Rise Condo +.25%    
FICO Score      
       681-720  +.125%    
       621-680  +.375    
       580-620  +1.25%    
        No Income Verification +.25%   70%
        Escrows Waived +.25%   90%

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