[Update 1: Some of the original figures and claims are now adjusted for improved accuracy.]
For years, fans of non-QM loans have been claiming that this year is the year the market will take off. It’s happening once again this year, and it’s difficult to separate the reality from the hype.
I say that because the non-QM market remains anemic, which is unfortunate considering how many homeowners cannot obtain conventional financing in spite of comparing favorably to prime borrowers. But for non-QM cheerleaders, 2018 really could be our year. Here are three reasons why.
1. There’s an Established Non-QM Market
These products exist. They only amount to $50 billion now, or about 3% of the market — but they’re growing. In fact, there is more activity in the non-QM space than ever. Mortgage shops are underwriting, pricing, securitizing and servicing non-QM loans, and more are planning to do so. Investors are buying these products, and some are having significant success.
The signs of progress are everywhere. Recently, Impac Mortgage Holdings reported year-over-year non-QM origination volume more than tripled. Angel Oak Capital (one of the largest non-QM investors, along with Citadel and Deep Haven) has been a consistent issuer of non-QM securitizations. Last year, they did about $550 million of non-QM issuance. And S&P Global Ratings is predicting the non-QM market could triple in size this year.
2. There are Diverse Products—and Borrowers
While there are not many non-QM loans with no down-payment requirements, there is variety in the market. A huge proportion of non-QM product are typically offered by big banks as portfolio products, and they offer decent margins.
How do non-QM borrowers stack up? A full two-thirds of non-QM loan borrowers used some level of alternative or limited documentation, and about one quarter were kicked out of prime loan ratings due to a prior credit event.
3.These Are Quality Loans
One thing about non-QM loans – they perform well. These aren’t the NINJA loans of 2006.
Today’s lenders are smarter and are layering risk much differently than they did before the housing crisis. All mortgage lenders must demonstrate good faith when determining a borrower’s ability to repay. Typically, providing compelling evidence that a borrower’s circumstance has changed from a past credit event can help mitigate the risk of underwriting a non-QM loan.
An outcome of these new underwriting standards is that non-QM loans have an excellent track record. Last year, Wells Fargo Securities announced that more than 97% of borrowers of non-QM loans more than two years old haven't missed a payment.
Of course, a surging non-QM market wouldn’t just be good news for non-QM players. It’s good for everybody. The housing market desperately needs a greater diversity of mortgage products and extending credit to deserving borrowers will produce a dynamic, vibrant and more efficient marketplace. That’s something we can all cheer about.