HousingWire spoke to Tom Hutchens, EVP of Production at Angel Oak Mortgage Solutions, about the outlook for non-QM in 2023 and why lenders should keep an eye on the non-QM space.
HousingWire: How has the non-QM space evolved over the past year?
Tom Hutchens: The non-QM space has evolved quite a bit in the past year. There is some good news and some not so good. The good news is that the challenges this space has seen has nothing to do with demand. Demand from investors is still solid, albeit more guarded. But there is still tremendous demand on the borrower side. In fact, the number of borrowers that need non-QM is constantly rising due to the increase of people becoming self-employed or gig workers.
The primary challenge for non-QM has been the extreme volatility in the secondary markets. This volatility has led to extremely quick and dramatic changes in pricing. The volatility has also led to stricter guidelines in some of the non-QM programs. For years pricing and programs were stable with relatively few regular changes. That has evolved this year with how fast things have shifted. These fast changes have caused large pricing swings as well as guidelines to adjust often, making it more difficult to qualify borrowers.
HW: What is the outlook for non-QM in 2023?
TH: Despite a turbulent end to 2022, I feel strongly that the 2023 outlook for non-QM is quite promising. As I’ve said before, the demand from borrowers is growing every day. Self-employed borrowers, real estate investors and credit-worthy borrowers who have recovered from credit issues will always be in the market. So the outlook on the demand side is quite strong, even with higher rates.
Another key is that these loans are performing. The volatility is not a credit issue, but a pricing one. These loans performed through COVID and continue to perform. That’s good news for the future of non-QM.
To truly get back to the growth trajectory, however, what we really need is for the market to stabilize. It almost doesn’t matter where the rates settle, just as long as they do. Once that happens, the product and pricing of non-QM loans will stabilize, bringing with it more certainty about this part of the industry. And with more certainty will come better pricing and a return to where guidelines were in early 2022, before rates were on the rise.
The non-QM space will grow again as the need to serve the underserved borrower continues to increase. Product and pricing stability will return, allowing non-QM volume to return to when it doubled year after year.
HW: Why is it so important for lenders to keep an eye on the non-QM space?
TH: Originators need to keep an eye on the non-QM space for several reasons. First and foremost, because of the reasons mentioned earlier, non-QM is not going away as it is too important for a significant population of borrowers. Originators should be careful to not turn away potential borrowers that do not fit traditional loan options.
In today’s smaller marketplace, it is more important than ever for originators to have access to a wide variety of diverse product offerings. When they have a qualified borrower in their office, they need to be able to provide a solution to that borrower’s specific financial situation. If not, they will lose that borrower to a competitor.
With Agency refinances almost non-existent, non-QM can help protect volume and referrals. By having that diverse product set, your referral partners know they can count on you to save deals others can’t. And that’s why it’s so important to keep an eye on the non-QM space.
HW: How is Angel Oak moving non-QM forward?
TH: Angel Oak has always prided itself on being a technology- and service-focused lender. Everything we do operationally is built on that premise. We are continuing that focus by working to streamline the origination process for loan officers through technology and process improvement. We are working on new tools to ensure a better customer experience for our partnering originators.
From a service perspective, we have the largest AE sales force in the country to help educate and assist originators. Our account executives will work closely with originators to go over scenarios and will even accompany them on calls with Realtors to help talk non-QM.
We continuously push through volatile markets doing what we do best – educating on the benefits of non-QM. The market will be back and those who are learning how to do non-QM with us now will be ahead of the game. Our message to originators is simple – now is not the time to stand on the sidelines. Get in the non-QM game and win more business to help grow now and in the future.