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Mortgage

The big nonbanks stir up a non-QM turf war

Legacy non-QM lenders say that many new entrants will find the sector challenging from an operational perspective

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As the end of the first quarter of 2022 approaches, the expected blossoming of the non-QM lending space in the private label market is well underway. 

Some three dozen non-QM securitizations sponsored by about two dozen different entities have made their way to bond-rating firms so far in 2022. This year’s non-QM volume numbers are impressive, up nearly threefold over the first three months of this year, compared with 2021. The figures are drawn from the prime and nonprime (or non-QM) residential mortgage-backed securities deals tracked by Kroll Bond Rating Agency (KBRA). 

Year to date as of March 25, a total of 29 non-QM securitizations were completed or underway valued at $12 billion, compared to 17 deals valued at $4.8 billion over the first full three months of 2021, the most recent KBRA’s data show. An additional eight non-QM securitization offerings were active over the first three months of this year as well but didn’t show up among the deals tracked by KBRA — although they were rated by other agencies, such as Fitch Ratings. 

If those eight non-QM private label transactions are added into the mix, the total number of deals over the period rises to 37 valued at $15.2 billion. 

With mortgage rates now hovering around 5%, compared with 3% or lower for much of last year, the low-hanging fruit of the refinancing market is now pretty much picked over. Consequently, the hunt is on for opportunities in the purchase market, and that’s why non-QM lending is expected to become a sweet spot in the mortgage market, according to industry observers.

In fact, executives at several legacy lenders in the non-QM market said they fully expect competition in the space to heat up across the mortgage arena.

“Everyone, in one form or another, will look into the non-QM sector [in 2022] and figure out where their tolerances are in terms of trying to do the business, and across the board that will happen,” said Thomas Yoon, president and CEO of non-QM lender Excelerate Capital, based in Newport Beach, California. “I think the mega-platforms, like the loanDepots, Rocket Mortgages and UWMs — they will get into non-QM, but they will do it in a very small sector because of the manual nature [of underwriting non-QM loans] and the expertise needed. 

“It’s virtually impossible for them to do that at scale,” Yoon added. “They would have to reinvent a different department, a different company to actually do that properly.”

The sponsors and loan aggregators in the private label securities (PLS) deals that have come to market so far this year include affiliates of real estate investment trusts, private equity firms as well as more familiar names in the non-QM space, such as Verus Mortgage CapitalEllington FinancialAngel Oak and Deephaven Mortgage. Not on the list of PLS dealmakers so far are the large, publicly traded originators that Yoon referred to, like United Wholesale Mortgage(UWM) or Homepoint — both of which recently announced new non-QM product launches.

UWM recently rolled out bank statement loans targeting the self-employed as well as investor loans. Likewise, Homepoint is unveiling bank-statement loans as well as non-QM cash-flow loans for real estate investors. (Several other big nonbanks have investor loan products as well.)

Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through Fannie Mae or Freddie Mac. Non-QM loans typically make use of alternative-income documentation because borrowers cannot rely on conventional payroll records or otherwise fall outside agency credit guidelines. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners, gig workers and the self-employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies. 

“Non-QM guidelines iterate on a quarterly basis, sometimes on a monthly basis,” Yoon said. “Unlike agency loans that stay pretty stagnant for a period of time, non-QM is ever-changing as the market evolves. 

“So, that requires a lot of manpower and expertise. Imagine a mega-platform having to dive into that and move. It would be virtually impossible.”

Unlike the smaller nonbank lenders and investment firms specializing in non-QM lending, however, large platform lenders like UWM and Homepoint have a different agenda in pursuing that market. They see non-QM as an expansion of the product menu, not the main course. 

“I think people talk about non QM because it’s something different, but … run the numbers … and you’ll see that it’s like less than 5% to 10% of business,” said Mat Ishbia, president and CEO of Pontiac, Michigan-based UWM, in a recent HousingWire podcast interview. “…We’re not going to be doing $30 billion in non-QM, but at the same time, if it moves the needle a little bit and helps brokers succeed, then we’re going to do it.”

Will Pendleton, senior managing director and head of the non-agency segment for Ann Arbor, Michigan-based Home Point Financial, which does business as Homepoint, offered a similar take on why the lender is expanding its reach in the non-QM market. In a recent online interview, Pendleton agreed with Yoon in describing non-QM lending as “a very complex product set.” A major goal for Homepoint in expanding in the segment, he added, is to “nurture and protect” its relationships with its business partners, which include brokers, and to be a “one-stop shop” for them “to capture more of the marketplace.”  

“When you trust us with your loans, we’re going to deliver great service and execution, even if we have a very complex product set, and let’s face it, non-QM products are inherently complex,” Pendleton said.

Spokespersons for UWM and Homepoint each said company executives did not wish to comment further for this story.

For smaller shops specializing for years now in non-QM lending, the story is different. Non-QM loans are their lifeblood, not a simply a segment of a much larger product mix.

“The vast majority of the borrowers we offer financing solutions to are self-employed borrowers that are in small businesses,” said Mack Walker, vice president of capital markets for Deephaven Mortgage, a longtime non-QM lender based in Charlotte. “So, each business is slightly different and has a different story to tell there. You need underwriters with the experience to get in there and understand the story.”

For all of 2021, based on KBRA’s tracking, non-QM securitization volume hit about $27 billion, with volume estimates for this year expected to double. Several lenders in the non-QM space late last year forecasted a 2022 non-QM market just north of $40 billion. Based on the pace of deals so far in 2022, that $40 billion estimate could end up well shy of the actual yearend mark.

The PLS market mirrors some, but not all, of the origination activity in the non-QM mortgage origination market. Still, it’s a good indicator of the direction of the market, and some three months into the year, non-QM PLS deals accounted for nearly 50,000 mortgages based on the size of the loan pools in those deals. Given the self-employed who are part of the gig economy represent anywhere between 11% to a third of the U.S. workforce, depending on the source of the analysis, it appears there’s still plenty of room for the non-QM market to grow.

As more lenders jump into the non-QM space, regardless of whether their goals are to bolster product offerings or to focus exclusively on that growing market niche, it seems clear borrowers will have plenty of options to choose from in the coming year. And lenders will have plenty of opportunity ahead.

Manish Valecha, head of client solutions at Angel Oak Capital, part of Atlanta-based Angel Oak Cos., another veteran non-QM lender, says the non-QM market “as a percentage of the overall market is about 10% to 12% in a normalized environment” — adding that was the size of the non-QM market in the early 2000s, prior to the global financial crisis. That means the potential size of the non-QM market today, according to Velecha’s calculations, is about $175 billion to $200 billion. 

“There’s lots of people that I refer to as dipping their toes into non-QM, and there’s good and bad about it,” said Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutions, also part of the Angel Oak family of companies. “The good part is that it absolutely increases the exposure of non-QM to a broader swath of the market, but the downside is that it’s hard to dabble in non-QM.

“Agency [Fannie Mae and Freddie Mac] loans can be thought of as click a button and get a mortgage. Well, that’s not the case with non-QM. You don’t click a button and get mortgage.”

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