With low interest rates and a booming refinance market, it is natural that loan officers and brokers are focused on agency loans and also a thriving purchase market. However, with a futures rate curve that has recently been increasing, only so many loans qualify for refinancing, and this customer base will continually shrink as rates ascend.
Getting experience now is the appropriate time for originators to consider expanding to non-QM products – not just to grow their business and diversify their production offerings, but also to ensure they are not missing out on an opportunity to better serve their customers.
Poised for Growth
“When rates go up, the QM market can have a visceral reaction when the supply disappears, fast, and I think that is a huge tailwind for non-QM,” said Keith Lind, Executive Chairman and President of Acra Lending. “Brokers are going to look for that next product – ‘Where can we still make money?’ – and it is going to be non-QM.”
Lind said he is already seeing people turning to non-QM products because of how busy QM originators are right now; non-QM lenders are not as backed up and have faster turn times.
“It is to the point where the QM market is saturated with increasing competition; there are limited resources to handle the demand,” he said. “We are getting the side flows, because people know that we can close in 30 days and it is not going to take them six months.”
Above all, Lind stressed the flexibility that non-QM offers for clients in unique or underserved situations.
“The guidelines for QM [loans] are pretty stringent,” he said. “We are that next outlet for people who have complicated scenarios. That is the beauty about non-QM – I call our underwriters master puzzle makers because they put together these complicated situations that a QM product is just never going to support.”
Acra Lending offers a variety of non-QM programs for borrowers in those complicated, unique situations.
For example, Lind noted that the number of non-traditional investors is increasing, but GSE guidelines around investment properties mean that some investors will not be able to get loans for those properties from the agencies. A Debt Service Coverage Ratio (DSCR) program, which entails looking at a borrower’s rental income versus the property’s expenses to ensure that the net money remaining covers their mortgage payment, could be a great fit for investors.
There is also an increasing number of self-employed borrowers, who can qualify with a bank statement loan product. Acra Lending offers both 3-Month Bank Statement and 12-Month Bank Statement program options – with much more stringent guidelines on the 3-month version. “The last three months are often more useful than the last 12,” Lind said, “especially in light of potential lost income due to COVID.”
Additionally, a bank statement loan could appeal to clients and brokers wanting faster times to close on their loans.
“As opposed to going through an agency underwrite and providing all the documentation, knowing it can take three to four months to get that loan done, [a borrower might] come to us and say, ‘I like this three-month bank statement program, I am a qualified applicant, and I would like to work with you because I know I could close in 30 days,’” Lind said.
For borrowers with enough liquid assets to pay off their home loan with cash, an ATR-in-Full program might be another ideal option.
“If you are looking to purchase a house, and – away from the down payment – the applicant has enough liquid assets to own that house, that clearly tells us that they have an ability to repay,” Lind said. “That is another loan where you are not going through bank statements per se because they are proving that they already have cash available to own the property outright if desired.”
There are also Interest Only programs that allow qualified applicants a defined period of time where they are only paying the interest on their loan rather than the interest plus principal.
“For that initial five-year period, the client could use that extra cash flow to do something else – maybe pay down consumer or credit card debt,” he said. “Again, very situational, but it gives people flexibility.”
Market conditions can contribute to the need for non-QM products as well. For example, the need for Jumbo non-QM programs right now is partially driven by the increase in home prices over the last year. “This means more loans are falling outside of the agency performing balance and into the jumbo realm, whether that is prime or non-prime loan,” Lind said.
In every case, Lind says Acra Lending works to ensure it is not putting the borrower in an untenable situation.
“In all of our underwriting, we are always thinking about the credit aspect. We want to make sure we are giving a loan that the client has the ability to pay back their loan,” he said. “It is easy to give a loan; it is hard to collect it. What we want to make sure is that if we are giving that loan to someone, they can afford it.”
Ultimately, non-QM is, “A niche that is getting bigger and bigger,” Lind said. “This market is not getting smaller, it is getting bigger. We want to fulfill the needs and dreams for all of the people that want to own homes or investment properties, just like people in the GSE space. We are just doing it to a different tune.”