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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Lending

It’s time to get serious about Non-QM loans

Nonbank lenders need investors to help with risk

April 15, 2014
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Yesterday, I wrote on HousingWire about closing Qualified Mortgages for second homes. Today, I discuss the importance of taking non-QM loans seriously.

You may also have read the news that Raj Date, a former official at the Consumer Financial Protection Bureau, plans to start making non-QM loans via a newly formed joint venture with a firm called Ethos Lending.

There’s plenty of buzz in the mortgage market about whether originators should lend outside the Qualified Mortgage rule; and several large banks and some smaller players have already said they would.

Still, there’s trepidation. With non-QM comes more risk. There is no safe harbor and holding them on portfolio could mean boosting capital reserves. Nonbank lenders, meanwhile, need to find an investor willing to buy non-QM loans.

There are some very good loans that fall outside of the Qualified Mortgage rule that are a good credit risk for borrowers with the ability to repay using income or assets not authorized in the qualified mortgage rule.

However, before getting into non-QM lending, originators should understand their own risk profile. What types of loans are you comfortable doing in the non-QM space? It’s a wide area, so decide where you are comfortable taking on the additional risk.

For example, a lender might decide to lend to a borrower with a debt-to-income level above the QM limit of 43% in cases where the borrower has significant cash reserves to indicate a strong ability to repay the mortgage.

Once non-QM lending parameters and policies are determined, originators need to be sure their staff will stick to those internal requirements. Underwriters and originators should be trained so that the C-suite is comfortable that the company is providing the risk expectation to the potential borrower and lending to the risk profile.

Nonbank lenders will need to find an investor willing to take on the same risk. With very few participants in the secondary market currently purchasing the non-QM loans, investors will, at least initially, be holding these loans in their portfolios. As a result, they’ll want plenty of assurances of the loan quality and underwriting approach.

Due diligence will be crucial and will need to go beyond the typical review of financial statements, policies and procedures. They’ll want to know about your corporate culture and your approach to lending. Investors will need to be able to trust the originator. They’ll want to know that the mortgage originator has a culture of aligning themselves with the best interests of the borrower, not one of trying to find a way to just approve a loan and simply increase the rate for the additional risk because they see it as profitable.

Here at Guardian Mortgage, we believe in an empathy-based approach to lending that is built upon honesty and integrity. If we determine the loan isn’t in the best interest of the borrower, given their particular financial situation, then we are going to tell the consumer up front and provide guidance on how they can prepare for homeownership in the future.

Raj Date said there’s no magic bullet when it comes to non-QM lending. I agree. It’s all about making sound lending decisions – knowing what a good credit risk is and what isn’t.

[Editor's Note: Guardian is currently exploring the non-QM space and is talks with an investor about this potential]

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