As the market shifts, interest in non-QM lending from traditional lenders and brokers has increased. We recently spoke to Bao Huynh, Director of Business Development at LoanScorecard, about these changes and the challenges of originating non-QM loans.
HousingWire: How is the shift from refi to purchase affecting the non-QM market?
Bao Huynh: In terms of borrower demand for non-QM, it’s still a little early to tell. Non-QM, like any mortgage product, is affected by interest rate fluctuations. But it may not be as sensitive as the more traditional refinance market. That’s because non-QM rates are generally 2 to 3 points higher than QM loans, and candidates for non-QM refinances probably aren’t being bombarded with refinance offers every time rates drop a quarter of a point. So, non-QM refinance may be a little more resilient.
What has definitely changed, as the market mix has shifted, is the interest in non-QM from traditional lenders and brokers. During the refinance boom, most lenders were content to harvest the “low-hanging fruit” and were happy to cede non-QM to specialty firms, like Deephaven, Sprout and Angel Oak. As GSE refinances dry up, many traditional lenders and brokers are aggressively adding non-QM programs to replace refi volume.
Non-QM also does well in a purchase market, because it serves borrowers who don’t fit into neat underwriting boxes: self-employed, professionals and gig economy workers. And their ranks are growing. According to latest numbers from the Bureau of Labor Statistics, the number of self-employed people in the U.S. is just under 10 million, a 4.6% annual increase.
Overall, I think the consensus we’re hearing from clients is that the overall non-QM market is going to continue to grow in 2022. Last year, non-QM originations topped $25 billion, which was ahead of 2020 and back up to pre-pandemic 2019 levels. Much of this volume was securitized in the 68 deals that came to market in 2021.
HW: What are the challenges of educating originators on these products of rapidly changing guidelines?
BH: There’s no question that non-QM is more difficult to originate than conforming or government loans, so many mainstream brokers and loan officers have been reluctant in the past to offer these products. But, as we’ve noted, necessity is changing this.
There is definitely a learning curve with non-QM: the products, the underwriting and documentation requirements (for example, bank statements vs. W-2s for income) are all different. And investor guidelines are continually evolving. Over the past year, as more investors got comfortable with non-QM again, credit boxes widened quite a bit and investors were aggressively relaxing their guidelines.
Keeping track of which wholesale lender or investor is buying what has been a challenge for originators. It’s also a significant pain point for investors, and the reason why there is a very high fall-out rate with non-QM, in some cases as high as 70%.
Technology is a big part of the answer to this education challenge. For example, major non-QM investors have been leveraging LoanScorecard’s technology to build originator-facing eligibility engines. These engines allow originators to instantly test loan scenarios, so they are not wasting their time or the investor’s.
The same technology behind the eligibility engines also drives our non-agency AUS that is being used by some large non-QM players to make underwriting decisions.
Recently we’ve enhanced our Bank Statement Analyzer platform which allows lenders to collect and verify bank statement data in less than half the time it takes to manually calculate income for non-QM mortgages: approximately 3 hours vs. 5-8 manually. With the new enhancement, lenders can search across values and key words (such as Venmo) and track deposits from a variety of sources, such as small businesses, professional practices, sales commissions and from gig-economy employers, like Uber and DoorDash.
HW: What are the most popular non-QM products and programs right now?
BH: Bank Statement programs are by far the most popular, and they are expected to become an even more important tool as self-employment and the gig economy grow. Other popular programs include investor debt ratio coverage loans, asset depletion for older borrower with assets but unpredictable income, and near-QM programs for borrowers who fall just outside of the QM definition. (Our technology is being used to originate all of these products.)
Many lenders also put fix-and-flip loans in this category, though technically they are business purpose and not consumer loans.
HW: How does LoanScorecard help non-QM lenders stay on top of rapidly changing guidelines?
BH: As we mentioned earlier, non-QM guidelines and rates have fluctuated quite a bit over the past few years. First the whole market shut down at the beginning of the pandemic. Then in the second half of 2020 it reopened, but cautiously. When it became apparent that non-QM loans were performing, credit boxes and guidelines began opening up again. Now we’re seeing more investors and originators coming into the space and competition on price and conditions.
The guidelines for a large national lender might run 200 to 2,000 pages, which could be intimidating for an originator. The last thing they want is to put a lot of work into a deal only to learn that there is no buyer for it and then have to go back to their borrower with the bad news.
But, as we noted, our technology is being employed by major specialty wholesalers and investors to solve for these challenges. A broker or correspondent can enter a handful of details on an investor portal and can a good indication of whether a scenario will work or not.