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Non-QM lending is poised for growth in 2021

Non-QM serves a credit population that has always existed

HousingWire recently spoke with Mike Fierman, managing partner and co-CEO of Angel Oak, about the non-QM lending outlook for 2021 and how Angel Oak’s “originate to hold” model benefits originators.

HousingWire:  What sets you apart from other non-QM lenders and how does that benefit originators and investors?

non-QM 2021

Mike Fierman: One area that clearly differentiates Angel Oak is our vertical integration. At its core, Angel Oak is a vertically integrated alternative credit manager with a focus on the non-QM segment of the U.S. mortgage market. Our mortgage companies are the critical first step of our asset management process; namely, asset sourcing.

The mortgages we generate are to Angel Oak’s guidelines and 100% underwritten by Angel Oak underwriters. The loans are then sold to our affiliated asset management company where they are aggregated and securitized on behalf of our institutional clients [Angel Oak manages its non-QM loans for the entire life of the loan.]

The traditional mortgage model, especially for most non-QM lenders, is typically “originate to sell;” Angel Oak’s model is “originate to hold.” This key difference is what attracts investors to our asset management: the understanding that origination and asset management are aligned, and the alignment will produce attractive risk adjusted investment returns.

The vertically integrated partnership also yields benefits for Angel Oak wholesale clients through surety of execution. Our brokers know that because they are dealing with the end buyer, their loans are more likely to close.

Most lenders are originating to someone else’s guidelines and pricing model. Since we are vertically integrated, we can move quickly on guidelines and pricing when needed because the decisions are made exclusively by Angel Oak managers. 

HW: How did your integrated model help you in 2020 – particularly after the pandemic and pause in the spring? 

MF: Angel Oak’s vertically integrated business model gives us clarity into each step of the mortgage credit process, from origination, underwriting and closing through securitization. The knowledge these activities provide allowed us to make fast, informed decisions through the early days of the COVID crisis and minimized, to the extent possible, the volatility experienced by the entire market.

The capital managed on our investment side was patient and never lost its desire for non-QM credit. As such, Angel Oak was able to modify guidelines quickly and restart the non-QM origination effort after a brief pause. Business models that did not have this internal connectivity did not react as quickly as we did. Angel Oak is now well-positioned to capitalize on this dislocation and expand our market share going forward.

HW: What is your main focus when it comes to shifting back to pre-pandemic conditions or normalcy?

MF: Angel Oak’s focus is the same as it has always been: constantly build and improve our franchise. Our goal is to continue to underwrite good credit and provide mortgage solutions to strong borrowers.

In order to achieve this goal, Angel Oak will continue to invest in hiring the best staff and improving our technology. Intelligently scaling our business and maintaining our market leadership drives our decision-making process.

The past several months have proven that non-QM borrowers have not gone away, and we intend to continue to provide options for those borrowers who sit outside Agency guidelines.

HW: What do you expect looking forward and how do you plan to handle any future challenges or unprecedented circumstances?

MF: Angel Oak expects the non-QM market in 2021 to quickly grow as our economy recovers. In order to meet that challenge, we are continuously improving our processes and guidelines to mitigate risk and improve efficiency.

This comes down to what I mentioned earlier – our focus on hiring the best people possible and investing in systems that allow us to grow in a controlled manner. Our vertical integration with asset management provides a powerful, timely information feedback loop which we can deploy in our origination efforts when market conditions change. Couple these points with our disciplined financial management and we believe we have a winning combination.

HW: What is the non-QM lending outlook for 2021 and beyond?

MF: Angel Oak believes a healthy non-QM market should be about $300B in origination per annum. 2020 non-QM origination will be approximately $18B, so there is plenty of growth ahead of us. 

One of Angel Oak’s typical non-QM clients today is a self-employed borrower. Self-employed borrowers represent a large population that has been underserved from a mortgage credit perspective for many years. We are not creating a new marketplace, but instead serving a large credit population that has always existed.

Another current market dynamic affecting non-QM volume is historically low interest rates.  Many originators are focusing on agency refinances as rates remain very low. The low-rate cycle will eventually change and originators will need to add new mortgage programs to their offerings to remain relevant to their client base. 

Angel Oak will continue to educate the marketplace to our non-QM offerings and assist these originators when this eventual shift occurs.

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