NEW YORK (MainStreet) — Traditional bank mortgages are losing ground to nonbank lenders, especially in cities with a hot housing market.
Seth James Ellis, 33, and his husband, Jared Ellis, 32, along with a third investor turned to Social Finance, Inc., a San Francisco-based online lender, for a jumbo mortgage to purchase a $1.1 million, three-bedroom duplex in Berkeley, Calif.
”We didn't expect to get this house, " said Seth James Ellis, who works as a fundraiser in the Bay Area. "The emotional feeling in this market is that you're never going to get the house that you want, because someone is going to come in with a higher cash offer.”
Non-traditional, non-bank lenders, such as SoFi as the online lender is commonly called, offer less conventional underwriting for residential mortgages and typically a shorter period to close because of the design of the loans, mortgage experts say.
”Your offer is as good as a cash offer in terms of the speed, and that was very important to us as a competitive advantages," Ellis said in terms beating out other buyers in a sellers' market.
The Ellis couple and their third-party investor closed on their Bay Area home within 15 days — a much shorter timeframe than the typical 30 to 45 days undertaken by traditional bank lenders.
”Traditional services are often slow and unresponsive and they cause a problem for some borrowers," said Gregory Garrabrants, CEO and president of Bank of Internet USA (BofI), who adds a slow response time could cause borrowers to lose the ability to purchase a particular home.
Smaller and nonbank lenders are often not subject to the same federal safety and oversight that apply to larger traditional banks, such as Citigroup (C) or Wells Fargo (WFC) , according to the Federal Housing Financial Association.
The FHFA reports that nonbank lenders have increased their share of overall mortgage originations in recent years. Inside Mortgage Finance, a publication that tracks mortgage data, estimates that nonbank lenders accounted for 37.7% of mortgage originations in the first quarter of 2014 -- an uptick of 26% from the same quarter in the previous year.
Only five of the top 20 mortgage originators in 2006 are still active in today's mortgage market, according to a recent Fannie Mae report.
Online lenders are changing the mortgage experience in the rapid sharing of information on mobile and online, said Bob Walters, chief economist at Detroit-based lender Quicken Loans.
”These lenders are not bound by geography or a brick-and-mortar network," Walters said. "[They] look to gain the broad base that the internet brings," Walters said.