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Should lenders look to non-QM when the refi boom slows?

Angel Oak executive discusses how non-QM lending passed the 2020 "stress test"

Last June, Angel Oak Mortgage Solutions was bracing itself for an influx of non-QM borrowers after the pandemic. Since then, there has been a healthy appetite for non-QM products. HousingWire recently sat down with Tom Hutchens, Angel Oak EVP of production, to talk more about the increased demand.

HousingWire:  We’ve seen multiple predictions of non-QM lending heating up in 2021. Do you agree with those predictions?

TH: I couldn’t agree more. We saw and endured COVID force a pause on the business and had to quickly respond and adapt to continue to lend. Angel Oak made it happen thanks to our close connection with investors who trust our loans and lending standards. Non-QM has since been revived and more lenders are offering these programs. We are still dedicated to being educators as we have for the past seven years. It is as important today as it was back then as many borrowers have changed financial circumstances due to the pandemic. Every day we receive calls from originators with borrowers turned away from other lending institutions because they couldn’t qualify for an agency loan. They come to us to save the deal. 

As well, there is a consistent forecast that the refinance boom is going to ease in 2021, and non-QM is the most effective way to replace that lost business. Refi business has been low-hanging fruit and an easy source of volume. However, through the years, we have learned that building and maintaining your business with mostly refinances is not stable. It’s going to fall at some point, and the originators who grew their purchase volume utilizing non-QM, while also closing refinance deals, will be well ahead of the competition. 

HW:  What are you taking away from 2020 and applying to new processes in 2021?

TH: In 2020 we confirmed that non-QM is here to stay due to demand and need for the products. I like to say that non-QM passed the stress test of 2020! These programs are here to stay for a significant population of people who cannot qualify for a home loan otherwise.

Take for instance the self-employed borrower. They often require a bank statement loan because their tax returns won’t satisfy the ability-to-repay rule. The current population of self-employed is around 18 million people, which is 30% of the U.S. workforce according to the U.S Department of Labor. As our most highly utilized product, we have made sure going into 2021 that our Bank Statement program is as competitive as possible. This year will likely be driven by a record purchase market. We have already prepared for that knowing mortgage originators will need solid non-QM loans to get deals closed. 

As far as processes are concerned, we know remote working is here to stay. We have made improvements to our systems so that our team has everything they need from resources and technology to be successful at home. Our focus has always been on relationships, customer service and delivering an outstanding client experience. And those have never been stronger.

HW:  Last June, you referenced an “Angel Oak 2.0” game plan. How has that been going?

TH: Angel Oak 2.0 signaled a reset and a new way of doing business during and after a pandemic. We spent time during “the brief pause” to examine every aspect of our business. Lessons from the pandemic led to new strategies and tactics that we implemented. They were successful and as a result, we have staffed up and are looking to continue to grow all areas of the business.

Our vertically integrated business model helped make this process easy to implement to start growing volume again by closing loans quickly.

HW:  How does vertical integration benefit a loan officer?

TH: Angel Oak is the lender AND the end investor. This means quick turn times for product improvements and surety in execution. Another excellent benefit is better service because we are not the middle-man. We do not have to wait on anyone outside of our company to provide answers or approval – it all lies within Angel Oak. We lend and hold the loans through securitization.

HW:  What are some key challenges you foresee in the road ahead for non-QM?

TH: The biggest challenge is getting the attention of lenders and loan officers across the country. Right now, originators are still closing a large volume of loans consisting of refinances. Our partners who understand the importance of utilizing non-QM for purchases are doing so right now. Others still are not giving non-QM the attention they should be because their book of business is not lacking at the moment. 

Our business thrives due to demand from the market. So, the challenge is not the need for the products, it is the continuous effort to balance demand and risk. We make loans that make sense. Since we are the end investor and lender, we have access to the performance data of the loans. We are constantly looking at performance and guidelines in order to create the best and safest programs in the industry.

Lastly, I would reiterate that the biggest lesson and confirmation for Angel Oak is the validity of non-QM in the market. It is here to stay and becoming more in demand due to more borrowers needing the products. Our challenge is to continue to invest in the right technology, improve our guidelines and remain one of the easiest and fastest lenders with which to close non-QM loans. After all, we are the leader in non-QM and we aim to stay in that top position.

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