If there’s a bet to be made on the future of the non-agency lending space, it’s that the adjustable-rate mortgage (ARM) will become far more popular this year as purchase mortgages increasingly dominate a housing market pivoting to an up-rate environment.
That’s the consensus forecast of a panel of non-agency industry experts who spoke at the Mortgage Bankers Association’s (MBA’s) Secondary and Capital Markets Conference & Expo in New York City this week.
“There was too much 30-year [fixed-rate mortgage paper] out there in the market for a while because it was just so cheap, and it was the right thing for the consumer,” said Matt Tomiak, senior vice president of non-agency originations at Bayview Asset Management.
Tomiak was one of the four MBA panel members who addressed an audience of loan originators and other industry players gathered earlier this week in a sixth-floor room at the New York Marriott Marquis hotel near Times Square. The topic of the panel discussion: “What’s New in Non-Agency?”
“I think we’ll be seeing a lot more ARMs shortly,” Tomiak added.
Another panel participant, Shelly Griffin, senior vice president of client development at non-QM lender Deephaven Mortgage, added, “When I’m talking with loan officers, I get asked about ARMs a lot. ARMs came up at almost every meeting, so it’s very relevant.”
Maria Luisa De Gaetano Polverosi, associate managing director at ratings agency Moody’s Investor Services, said ARM mortgages are not yet showing up in significant volume in the mortgage-backed securities (MBS) private-label market “because most of the deals that we’ve seen so far this year are from 2021” — when low rates were feeding the refinancing boom. When ARMs do start showing up in securitization deals, however, she said Moody’s is well-equipped to assess the risk of those offerings.
“One thing I have to say positive about ARMs is that we’re not really concerned about them because we have a lot of data on those, and our models are built to assess that risk,” De Gaetano Polverosi added. “So, out of the many variations and new products that are going to come out of this [higher-rate] world … they [ARMs] are one that we’re not really concerned about in terms of the market’s ability to forecast the risk on this product. It’s a very well-trodden path.”
Beyond a movement toward ARMs in the nonagency space, it’s also expected to be a solid year for non-QM lending in general as the housing industry overall seeks to expand its reach in the purchase market, according to panel members.
“We’re excited to talk with you about what I think is the most pertinent topic of this conference, and that’s what the next six to 12 months are going to look like in mortgages in non-agency as we shift over to more of a purchase market,”’ said John Toohig, managing director of whole loan trading at Raymond James, and the moderator for the MBA panel. “Non-QM isn’t the 2006 product that it once was” — during the era of subprime mortgages.
Toohig stressed that the non-QM space includes a large swath of mortgage products that require more time and expertise to underwrite, compared with a standard agency loan — particularly the low-hanging fruit of refinance loans that, until recently, drove the housing market. He described today’s non-QM market as a “very large bucket.”
Toohig added that the non-QM space ranges from mortgages originated based on bank-statements or asset depletion analysis to debt-service coverage ratios [DSCRs] and more. “There’s a lot to unpack,” he said, in terms of the guidance for the products and the underwriting involved.
“We’ve seen it [non-QM] grow and evolve over time,” added Griffin of Deephaven, which has been lending in the non-QM space since 2012. “There’s extended prime, which is just outside the prime box; nonprime for borrowers that maybe … have more credit issues in the past; and debt-service coverage ratio.
“All of those products have features, maybe bank statement, asset utilization — you name it. There’s a lot of different reasons why someone falls outside the agency loans. … What we really focus on is meeting our customers where they are at.”
Tomiak quipped that loan officers are smart, and if given the choice between doing six streamline refinance mortgages or spending three days on one DCSR mortgage, they will, of course, focus on the higher payoff achieved with the refinance loans. As the market pivots away from the streamline refinances because of the dulling effect of higher mortgage rates, however, and moves toward purchase-mortgage products, the supply of non-QM loan products will naturally begin to expand to meet the increased borrower demand, he explained.
“We’re moving toward them [non-QM products] more aggressively at Bayview,” Tomiak added. “…Even with higher rates, moving into a mortgage loan is still a better choice than renting, and [many borrowers] have not been able to qualify, mainly because the industry has not been able to serve them,” due to the huge demand for other loan products that are popular in a low-rate climate — like streamline refinance mortgages.
“But I think it’s going to be a very good year for expanded [non-QM] products,” Tomiak said. “… It’s going to take time, and it’s going to take learning, but I think the right firms and the right loan officers are going to have a very nice year, with consumers getting houses.”