Why this small lender is running straight into the non-QM fire

While others are closing down or retreating from non-QM, Stronghill Capital sees an opportunity

Amid surging rates, declining volumes and a reduced appetite from investors in the secondary market, there are a growing number of casualties in the mortgage space, especially in the riskier non-QM segment.

First Guaranty Mortgage Corp. (FGMC), controlled by global investment management firm PIMCO, filed for Chapter 11 bankruptcy protection in June. Michael Strauss’s Sprout Mortgage shut down in July, laying off its staff without paying salaries and severance. Meanwhile, Athas Capital Group is winding down its operations and Impac Mortgage Holdings is backing off the product.   

But right when several companies are turning away from non-QM products, a Colorado-based lender has decided to launch a new division to cater to this market. The question is: why? 

Stronghill Capital – a small-balance commercial lender owned by the $20 billion-plus asset management firm ArrowMark Partners – announced last week it had launched a new residential lending division to provide borrowers with non-QM products, non-agency jumbos and investor programs.

“Probably it seems very counterintuitive when companies are running away from the flames in the fire, to see a company like ours making an announcement that we are going to go full bore running into the fire,” Dustin Wells, recently appointed as the co-president at Stronghill Capital, told Housingwire. 

Stronghill, however, is no stranger to the non-agency and investor loan space. 

Here’s what non-QM lending will look like in 2023

HousingWire spoke to Tom Hutchens, EVP of Production at Angel Oak Mortgage Solutions, about the outlook for non-QM in 2023 and why lenders should keep an eye on the non-QM space.

Presented by: Angel Oak

The company sells loans via brokers for clients – usually LLCs, C-corps or S-corps – to acquire residential real estate for commercial and investment purposes. Now, business owners can also apply for a mortgage loan as an individual.

“So, for example, if I’m a business owner working with a brokerage to buy five investment properties that I’m going to invest in my LLC, but I also want to buy a new primary residence or a second home, now we can be that one-stop-shop for this client,” he explained. 

According to Wells, Stronghill originates about $500 million a year to real estate investors, employing about 30 staff members, and has “trusted partnerships with warehouse providers in the space to provide credit facilities to fund loans on an ongoing basis.”

With surging rates, lenders are struggling to sell legacy lower-rate loans originated months ago in the secondary market as investors seek higher yields. This liquidity problem caused the implosion of non-QM lenders, but Wells said that by entering the market now, Stronghill “fortunately doesn’t have any legacy issues like these companies.” 

The company, which operates in wholesale and delegated and non-delegated correspondent channels, will outsource most of the back office work for the new division.

Wells said Stronghill is not competing with wholesale lenders with aggressive pricing, like United Wholesale Mortgage or Homepoint. He said Stronghill’s brokers deal with more “esoteric” cases, while these companies are “built on scalability through simplicity.” Consequently, Deephaven and Angel Oak would be the natural competitors.

Stronghill has licenses in five states for the new division – Arizona, Colorado, Florida, South Carolina and Texas – but is working on getting 44 licenses in total.

Looking forward, Wells said the new division will grow according to, among other things, the Federal Reserve funds rate.

“We’re saying somewhere between $400 million and $500 million is our projection for the residential consumer space heading into next year. And then, depending on where things track in 2023, we could see exponential growth into 2024,” Wells said.

Despite higher rates, Wells said borrowers are looking at purchase loans because there is currently less competition for houses compared to the past two years. 

“Now, you might be paying a higher rate, but you’re able to negotiate on those properties and can work through getting a lower rate in the future,” he said. “But right now, the focus is: Can I get the house at the right price, whereas before, was I going to pay too much?”

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