The share of mortgages using alternative lending practices will account for nearly 6% of all mortgage originations in 2025, the highest percentage since the housing crash two decades ago, according to real estate data firm Inside Mortgage Finance. That number has more than doubled in the past three years.
This rise is not driven by desperation on the part of borrowers. It is mainly caused by volume pressure on the lender’s side.
Mortgage lenders are narrowing down who is eligible as transaction activity slows down due to the lock-in effect that leaves millions of homeowners tied to 2020 and 2021 interest rates that remain well below 3%.
Latest target market: According to Kotality data, 1,099 income earners and a growing housing investor base will account for 30% of all single-family home purchases in 2025.
A recent Wall Street Journal report cited the rise in nonconforming loans and alternative financing as a growing share of the “risky, nontraditional mortgage” market. Inman spoke to mortgage experts to shed light on this trend and find out whether it’s a cause for concern.
What does “nonconformity” actually mean?
Nonconforming loans are loans that don’t meet standards set by Fannie Mae and Freddie Mac, government-backed organizations that buy loans from lenders and move debt off balance sheets.
If a loan does not meet Fannie or Freddie guidelines, lenders must choose between holding the loan in their own portfolio, at direct risk of default, or selling it into the illiquid and volatile private markets.
While there are many different things that can make a loan ineligible, the current wave of nonconforming behavior primarily has to do with how income is counted. For W-2 earners, proof of income is clear. Wages are documented, taxes are withheld, and lenders can calculate a reliable net amount. It’s even trickier for 1099 contractors.
“As a 1099, even if you make $100,000, it’s a bit of a black box as to what’s actually left over at the end of the year,” Briggs Elwell, co-founder and CEO of RLTYco, told Inman. “Banks typically consider income to be after-tax income.”
The complexity goes beyond simple mathematics.
Elwell noted that many 1099 earners, some of them real estate agents, do not pay their quarterly taxes on time, file their returns in late October, and write off expenses that make their taxable income appear significantly lower than their actual income. This creates a structural eligibility gap that traditional underwriting cannot fill.
For real estate agents like Jean Bruno, who spoke to WSJ, the difference was stark. Although her taxable income was less than half of her actual income, the nonconforming loan made her eligible for up to $1 million, which was more than she was eligible for with a conventional mortgage.
What offsets risk and what doesn’t?
Lenders are offsetting income uncertainty by tightening requirements on other fronts, such as higher down payments, stricter credit score standards, and lower loan-to-value ratios.
Colin Robertson, founder of The Truth About Mortgage, points out that this multi-layered risk management is what distinguishes today’s misfit market from the pre-crisis era of 2008, when lenders piled risk upon risk with no compensation element.
“Importantly, the majority of loans today are still agency-backed and require full underwriting,” Robertson told Inman. “And nonconforming loans are often only available to investors, rather than trickling down to everyday homebuyers like they were 20 years ago.”
Loan Depot told WSJ that the production value of nonconforming loans increased by 68% from 2024 to 2025. The company said it takes care to match borrowers with the right products.
However, analysts are focusing on product mix as well as volume. The biggest concern is interest-only mortgages.
“Interest-only mortgages have come back quite significantly in 2020,” Elwell said. “If you buy a home and the market goes up, this is a great product. But if you put down 10 percent on an interest-only mortgage and the market goes down 15 percent, not only do you own no equity, you actually owe more to the bank than the loan you took out.”
Calculations become even more difficult when rates are reset. Most IO mortgages switch to full amortization after 7 to 10 years and reset to a higher interest rate.
Mr. Elwell described a scenario in which a monthly payment of $5,000 could jump to $12,000 after conversion. The majority of IO mortgages were originated in 2020 and 2021, and these resets will begin in 2027 and continue into the early 2030s.
That wave won’t come all at once, and it’s unlikely to cause a crash. But Elwell says he will move inventory.
He said: “A lot of people who signed up for IO mortgages at the time are going to see a reset. It will probably free up inventory and create some movement in the market.”
Pressure to do more trading
For every talk about loosening lending standards, someone needs to say, “This isn’t 2008.” In this case, it’s multiple people.
In most cases, the evidence supports them. Nonconforming loans (loans that fall outside Fannie Mae and Freddie Mac’s standard guidelines) accounted for 22% of the market at the height of the housing boom in 2007, according to Inside Mortgage Finance.
Today, this broader category still accounts for roughly one-fifth of loans, but only 6% of them use alternative income certificates and other nontraditional underwriting, the riskiest part of the total.
While these products still lack government guarantees, neither do underwriting guarantees. The truly toxic product that defined the mid-2000s, the no-physician, income-specified NINJA loan, is not what is driving this cycle.
“I don’t think the WSJ article suggests a repeat of 2008, because that crisis was about more than just a group of buyers,” Elwell said. “However, due to low volumes, banks are looking at ways to ensure buyers are eligible and able to cope with higher interest rates.”
Christian Delitis, deputy chief economist at Moody’s Analytics, offered a more cautious assessment in an op-ed for the Wall Street Journal: “The loans are inherently risky. These borrowers are more likely to withdraw from their loans or default on their payments.”
Delinquency rates for non-QM loans originating after 2023 are already rising faster than for conventional mortgages, said Cort Lake, senior director at Fitch Ratings.
The concern is not that specific financial institutions are receiving excessive amounts of loans. That is, low production creates pressure within the organization to stretch.
“If you’re running mortgages and you have fixed costs that you have to cover, there’s definitely going to be pressure to do more deals or be more creative,” Delitis told the Journal.
Stuck sellers and creative lenders
As Mr Delitis alluded to, non-conforming compositions are on the rise as the traditional buyer base has largely stopped moving.
Homeowners who lock in rates below 3% will face tough moving cost calculations. Mr. Elwell said it plainly. If you go from a 2% mortgage to a 6.5% mortgage on a reasonably good home, you could end up paying 70% to 100% more each month.
This retains a large portion of potential sellers, keeps inventory in check, and keeps prices high despite reduced trading volumes.
The push for nonconforming products is, in part, an attempt to mass-produce from previously unreachable buyer groups: 1,099 earners whose actual incomes look bad on paper, and investors who run cash flow calculations based on rental yields rather than traditional income verification.
“Banks haven’t woken up and said they want to find a way to help the 1099 generation buy more homes,” Elwell said. “They’re just trying to make more loans.”
Elwell said pressure to tighten underwriting standards is likely to ease once interest rates normalize and sales increase, whenever that happens.
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