Lenders are relaxing standards. This is why (most) analysts are not worried
The share of mortgages using alternative lending practices accounted for almost 6 percent of all home loans granted in 2025, the highest share since the housing crisis of two decades ago, according to real estate data company Inside Mortgage Finance. That number has more than doubled in the past three years.
The increase is not caused by desperation on the part of borrowers. This is mainly caused by the volume pressure on the part of the lenders.
With transaction activity stalled and hampered by the lock-in effect of millions of homeowners still tied to 2020 and 2021 rates well below 3 percent, mortgage lenders are opening up a look at who qualifies.
The newest target group: 1,099 earners and the growing residential investor class, which will account for 30 percent of all single-family home purchases by 2025. according to data from Cotality.
A recent one Wall Street Journal report highlighted the increase in non-conforming loans and alternative lending as a growing share of a “risky, unconventional mortgage market.” Inman spoke to mortgage experts to demystify the trend and whether it’s cause for concern.
What ‘non-compliant’ actually means
A non-conforming loan is a loan that does not meet the standards of Fannie Mae and Freddie Mac, the government-sponsored entities that purchase loans from lenders and remove the liabilities from their balance sheets.
If a loan does not meet Fannie or Freddie guidelines, the lender must either keep the loan in its own portfolio – with the immediate risk of default – or sell it on the private market, which is less liquid and more volatile.
What disqualifies loans varies, but the current wave of non-compliant activity is largely about the way income is counted. For W-2 earners, income verification is clean: wages are documented, taxes are withheld, and lenders can calculate a reliable net figure. For 1099 contractors it’s messier.
“If you make $100,000 on a 1099, it’s a bit of a black box when it comes to what’s left at the end of the year,” Briggs Elwellco-founder and CEO of RLTYco, shared Inman. “Banks generally view income as what you get after taxes.”
The complication goes beyond simple math.
Elwell noted that many 1099 earners, including real estate agents, do not pay estimated quarterly taxes on time, do not file their returns through October, and write off enough expenses that their taxable income appears significantly lower than their actual income. That creates a structural qualifications gap that traditional underwriting cannot bridge.
For real estate agents like Jan Bruno, who spoke The WJthe gap was wide. Her taxable income was less than half of her actual income, and a variant loan allowed her to qualify for up to $1 million, which was more than she would have qualified for under a traditional mortgage.
What compensates for the risk – and what doesn’t
Lenders are compensating for income uncertainty with stricter requirements elsewhere: higher down payments, stricter credit score thresholds and lower loan-to-value ratios.
Colin Robertson, founder of The truth about mortgagenotes that this layered risk management differentiates today’s non-compliant market from the pre-2008 crisis era, when lenders piled risk upon risk without offsetting factors.
“Importantly, the vast majority of loans today are still agency-backed and require full underwriting,” Robertson told Inman. “And non-conforming loans are often used only by investors, rather than spreading to the average home buyer as they did 20 years ago.”
LenDepot told The WSJ Between 2024 and 2025, the company experienced a 68 percent increase in non-conforming loan production. The company says it is careful to match borrowers with the right products.
But analysts look at the product mix, not just volume. The mortgage that causes the most concern is the interest-only mortgage.
“Interest-only mortgages have come back in a pretty significant way in 2020,” Elwell said. “It’s a great product if you buy a house and the market is rising. But if you put 10 percent down on an interest-only mortgage and the market drops 15 percent, not only do you have no equity, but you actually owe the bank more than the loan you took out.”
The math gets harder when rates reset. Most IO mortgages convert to full repayment after seven to ten years and reset to a higher interest rate.
Elwell went through a scenario where a $5,000 monthly payment could increase to $12,000 upon conversion. Because the majority of IO mortgages were closed in 2020 and 2021, these resets will start in 2027 and continue until the early 2030s.
That wave won’t arrive all at once and is unlikely to cause a crash. But Elwell says it will move inventory.
“I think you’re going to see a lot of people who took out an IO mortgage at the time and are hitting their resets which will most likely free up some inventory and create some movement in the market,” he said.
Pressure to close more deals
For every story about relaxing credit standards, someone has to say it’s not 2008. In this case several people.
The evidence largely supports them. According to Inside Mortgage Finance, non-conforming loans – which fall outside Fannie Mae and Freddie Mac’s standard guidelines – made up 22 percent of the market at the height of the housing boom in 2007.
Today, this broader category still accounts for roughly a fifth of new loans, but its riskiest portion, loans that use alternative income documentation and other non-traditional insurance, is only 6 percent.
There is still no government guarantee for these products, but acceptance is also not the same. NINJA no-doc, fixed-income loans – the truly toxic products that defined the mid-2000s – are not the driving force behind this cycle.
“I don’t think the WJ The article suggests a new ’08 project because that crisis was much more than just one group of buyers,” Elwell said. “But because of the low volume, banks are looking for ways to help buyers qualify and handle higher interest rates.”
Cristian deRitis, deputy chief economist at Moody’s Analytics, was more moderate in his assessment The Wall Street Journal: “They are inherently riskier loans. Those borrowers are more likely to withdraw or default on their loans.”
Default rates on non-QM loans originated in 2023 and have already risen faster than on traditional mortgages. according to Court Lake, senior director at Fitch Ratings.
The concern is not that any particular lender is taking on too much. It’s that low volume creates institutional pressure to stretch.
“If you have a mortgage operation and you have fixed costs that you have to cover, there’s definitely going to be some pressure to do more deals or be more creative,” deRitis shared. The Journal.
Stuck sellers, creative lenders
As DeRitis pointed out, the number of non-compliant originations is increasing because the traditional buyer pool has largely come to a standstill.
Homeowners who lock in an interest rate below 3 percent face a brutal moving cost calculation. Elwell put it plainly: Going from a 2 percent mortgage to a 6.5 percent mortgage on a slightly nicer home could mean paying 70 to 100 percent more per month.
That keeps a significant portion of potential sellers in place, suppresses inventory and maintains high prices despite declining transaction volume.
The non-compliant product push is partly an attempt to produce volume from a previously unreached buyer pool: 1099 earners with real incomes who look bad on paper, and investors who do cash flow calculations based on rental yields rather than traditional income verification.
“Banks don’t wake up and say they want to figure out a way to help 1099s buy more homes,” Elwell said. “They’re just trying to make more loans.”
Elwell said that once rates normalize and sales increase – whenever that happens – the pressure to tighten underwriting standards will likely ease.
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