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Do the GSEs need to start thinking about non-QM borrowers?

Executives at a non-QM conference say the need for bank statement mortgage loans will surge over the next decade

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Over the next decade, the distinction between non-QM and QM loans will be blurred and the government-sponsored enterprises (GSEs) may have to accommodate the growing market of non-W2 borrowers.

That is what mortgage executives and analysts forecasted for the non-QM market on Friday during IMN’s third annual Non-QM Forum in California as they took note of the rapidly expanding space and the revised Consumer Financial Protection Bureau (CFPB)’s General Qualified Mortgage final rule, better known as the QM rule. 

“One in three workers by the end of this decade will be on 1099s or running a small business,” said Nik Shah, chief executive officer at home,llc. “I think the need for bank statement mortgages, 1099 mortgages will grow exponentially. It could jump to 10, 20, 30% of the entire market share over the next decade.”

S&P Global estimated non-QM volume reached $28.6 billion, about 0.7% of the overall mortgage market. This year, industry players such as Angel Oak Mortgage Solutions believe the non-QM market could grow as much as four-fold this year, with origination volume ranging between $70 billion and $100 billion. 

“If the non-QM borrowers become a third of the market, I’d more likely expect the agency footprint will change and grow,” said Chris Marazzo, a vice president at Citi. “They have the duty to serve to accommodate those borrowers.”

Mortgage credit availability has remained low since the housing crisis in 2007. Since then, many lenders have been risk-averse and stuck to qualified mortgage originations as defined by the government-sponsored enterprises (GSEs), Fannie Mae, and Freddie Mac. With the non-QM market growing, GSEs are adapting to changing times. 

GSEs have been working to incorporate bank statements, which non-QM borrowers rely on as alternatives to payroll income, into their analysis for a long time, Marazzo noted. “(GSEs) opening the credit box, how do lenders, investors become more comfortable with affordability products that weren’t in the market before” are factors that are being closely watched, he added. 

“A lot of mortgage products are going to be QM,” said Pratik Gupta, head of collateralized loan obligation (CLO) and residential mortgage-backed securities (RMBS) Strategy at Bank of America Merrill Lynch, referring to the QM rule. “A lot of non-QM loans will meet this criteria,” Gupta added. 

The QM rule, which has a mandatory compliance date of October 2022, will remove the general QM loan debt-to-income (DTI) limit of 43% with a price-based approach that gives lenders relief for loans capped at 150 basis points above the prime rate.  

Regarding concerns about the Biden administration’s plan to close America’s housing supply shortfall, estimated at between 1.5 million units and 3.8 million units, depending on the source, Gupta raised concerns of potential oversupply of housing. 

“In terms of supply, the only thing that will crash the housing market is massive oversupply,” said Gupta. 

Gupta added: “Just increasing housing for the sake of housing supply will hurt the market. If demand drops, who is going to absorb the new units?” 

Earlier this month, the White House introduced the “Housing Supply Action Plan,” which aims to expand housing access for owners and renters through a combination of incentives, reforms, and financial mechanisms amid soaring inflation.

Starting with the creation and preservation of affordable housing units in the next three years, the administration said the plan would “help close America’s housing supply shortfall in 5 years.”

Analysts, including Logan Mohtashami, lead analyst for HousingWire, have brought up the need for improved housing inventory. In his recent commentary, Mohtashami noted that until the housing inventory is back up into a range of 1.52-1.92 million, the housing market will be “savagely unhealthy.”

While the inventory of homes for sale in May rose 8% over the prior year – marking the first rebound in three years – the median national home price also climbed to an all-time high of $447,00, according to Realtor.com‘s monthly report. 

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