MortgageRegulatory

Non-QM optimism: ItÕ an actual thing!

Investors at ABS Vegas are already revving their engines

No, it’s not here yet.

Non-QM/non-prime/call-it-anything-but-subprime-please mortgage lending isn’t back. But by the looks and discussions taking place at ABS Vegas this week, at least, it may not be very long now. For all of the mortgage market hand-wringing about QM and the restrictive effects it may have on lending in the near term, it’s pretty clear the investors that power U.S. mortgage markets see things differently in the longer-view.

"Non-QM [mortgage lending] is a huge opportunity, the largest we've seen in 30 years," said one investor with a hedge fund, who asked not to be named. "It's going to take a little time to sort out the details as an industry, but once we do I see a strong market ahead."

While attendance at the first annual ABS Vegas show has been hampered by a snowstorm in the Northeast that stranded many would-be attendees, those mortgage investors that did make it to Vegas were hopping from meeting to meeting to discuss market structure and fundamentals outside of the QM definition.

"The lending box has always historically been defined by credit risk, and that’s always been a moving target," said a managing director at one non-bank mortgage lender that asked to remain anonymous. "Not any more. What QM did was cement those lending boundaries, giving investors much more clarity on what can be done ‘outside of the box.'"

And just what can be done outside the box? Pretty much anything — although don’t expect a return to the crazy lending days of the past, or that private-led loans will look anything like their low-rate, government-subsidized brethren.

"It will cost more to get these loans, but there is a huge universe of people who right now sit outside of QM and can afford this kind of lending," said one investor.

Investors told me the largest hurdle, outside of figuring out how to create enough lending velocity to legitimize deal flow in a securitization platform, has actually been getting a defining market structure in place to drive liquidity into this new, non-QM lending system.

One investor told me that the rating agencies didn’t sit down with regulators at the Consumer Financial Protection Bureau until June of last year, to start discussing non-QM lending structure. I don’t know if that’s true or not, but if so, it’s a big reason why lenders aren’t yet rushing in to fill the gap with non-QM products.

One of the investors I spoke with broke it down thusly:

"It all comes down to being able to attract capital, not from the smaller players, but the larger institutional money managers. That’s what will drive non-QM lending. And they won’t invest without the [rating agencies] putting ratings out there, using an agreed-upon system for non-QM loan securitization – a system that simply doesn’t really exist right now. The agencies need to coordinate their ratings activity in the non-QM space with CFPB input, and it’s taken awhile to get this process going."

Without ready access to capital, non-bank lenders remain largely constrained in how much they can lend — often relying on less liquid sources of funding that come at a relatively higher cost.

So, how much longer will it be like this? That appears to be anyone’s guess.

I heard some optimistic investors tell me they’ll be in market with full non-QM lending and/or funding programs by the middle of Q2, while others said the market for non-QM lending may not really pick up momentum until the fourth quarter or early 2015.

Either way, most investors appear to be jockeying quickly as all said they see a significant opportunity to provide capital to underserved markets in the U.S., now constrained by the new QM rule.

The ABS conference runs through Thursday, and a panel discussion tomorrow takes a more in-depth look at the return of private capital in U.S. mortgage markets — and takes the discussion dominating much of the hallway chatter directly to the conference’s main stage.

Regardless on what gets said on stage, one investor I spoke with perhaps said it best: "It doesn’t really matter to us if we’re looking at the back half of this year or sometime next."

"What we do know is that the capital is out there, more investors are gaining confidence in the structural aspects of the U.S. mortgage market — and when this all eventually comes together, the capital in the system will flow quickly where it’s needed most."

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