The looming non-QM commoditization question

While the space has become commoditized with different types of documentation accepted, underwriting still remains a challenge

An LO with a client at the closing table

The question was on the minds of many at the Waldorf Astoria in Dana Point, California on Thursday – will non-qualified mortgage products become more commoditized as the rising rate environment wallops agency lending?

“The way that we like to look at solving that problem is through a click of a button, distributing the loan at an even price to sell that to a cadre of investors,” Al Qureshi, managing partner at Blue Water Financial Technologies, said on Thursday during IMN‘s third annual Non-QM Forum in California. Blue Water Financial Technologies is a provider of asset valuation, mortgage servicing rights (MSR) distribution, MSR hedging and electronic solutions to mortgage lenders. 

Qureshi added: “For an originator to do all these things right now there are a number of fixed costs. Investors will have to figure out what the pricing eligibility requirements are, you’ll have to bend backwards to integrate that into your pipeline. That takes a lot of time. The way forward is streamlining the process all the way through.”

Non-QM loans, unlike subprime loans, are underwritten to a higher credit, income and asset standards and involve a range of buyers beyond individuals with low credit scores. The pool of non–QM loans today generally includes business owners, entrepreneurs, and self-employed people who don’t have traditional documentation, such as payroll income. 

As a result, non-QM borrowers rely on alternative documentation such as bank statements and assets.

“Leading up to today, you have a lot of different types of documentation,” said Corina Gonzalez, senior vice president at DBRS Morningstar. “So we see which I think is a pretty commoditized space at this point. Assets need to get verified so it really comes down to reviewing underwriting guidelines.”

Industry players such as Angel Oak Mortgage Solutions believe the non-QM market could grow as much as four-fold this year, with origination volume ranging between $70 billion and $100 billion. In 2021, S&P Global estimated non-QM volume reached $28.6 billion, which was just 0.7% of the overall mortgage market. 

The non-QM industry is still a fraction of the entire mortgage market and the challenges of underwriting a non-QM loan is what makes it difficult for lenders to expand into non-QM lending. 

That was also one of the primary reasons why mortgage executives said the non-QM will unlikely be commoditized. “It [non-QM loans] is a manual underwrite,” Robert Senko, president at ACC Mortgage, said. “Underwriters are trained as desktop underwriters (DUs). Scaling is hard.” 

Taylor Stork, chief operating officer at Developer’s Mortgage Company, agrees. “It can’t be commoditized from the origination.” Stork said every origination deal in the non-QM market is unique, hence the reason for hiring qualified underwriters who can prove borrowers’ ability to repay (ATR) is all the more important. 

“Under the Dodd-Frank Act, it says if you don’t prove borrowers can pay back their non-QM loans, lenders have to pay three years worth of interest,” Stork added. “That holds us accountable to hold our jobs.”

(Reforms created as part of the Dodd-Frank act include penalizing lenders that violate federal standards by prohibiting them from foreclosing on non-compliant mortgages or allowing the borrowers to recover damages as high as three years worth of interest payments.) 

What mortgage executives did agree on during the session was offering a broad product mix to maintain sustainability in a rate rising environment. 

“It’s been a challenge as an originator,” said Dusty Lloyd, branch manager at New American Funding.” “We’ll do non-QM loans and jumbo loans. We got into the CFI space to help people that don’t qualify any other way. Those really helped us replace a loss in mass volume.”

“We’ve been through these cycles,” said Senko. “It’s not subprime lending. It’s a nontraditional product to serve more clients. It shouldn’t be your one tool in your belt to serve the market.”

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