Tom Hutchens on GSE guidelines and the non-QM market
Today’s HousingWire Daily features an interview with Tom Hutchens, Angel Oak Mortgage Solutions’ executive vice president of production. In this episode, Hutchens talks about the reignited non-QM market, how new GSE guideline updates to Fannie Mae and Freddie Mac will increase supply for the non-QM sector, and what that means for the market at large.
For some background on the interview, here’s a brief summary of HousingWire’s latest coverage on the new GSE updates:
In Lender Letters issued on Thursday, Fannie Mae and Freddie Mac confirmed that loans purchased by the GSEs with application dates on and after July 1, 2021, must meet the standards of the Consumer Financial Protection Bureau’s Revised Qualified Mortgage Rule.
In the letters, the two government sponsored enterprises state that they will follow the directive laid out in their amended Preferred Stock Purchase Agreements with the Treasury Department, which forbid Fannie and Freddie from buying QM loans under the GSE Patch.
The guidelines in the letters stand in contrast to the CFPB’s most recent notice of proposed rulemaking, which seeks to delay the date lenders have to comply with the revised QM rule until October 1, 2022.
The CFPB final QM rule, issued in December, establishes a pricing threshold that effectively replaced the former debt-to-income limit of 43% with a price-based approach that gives lenders relief for loans capped at 150 basis points above the prime rate.
Before the revised QM was finalized, many lenders were able to circumvent the 43% DTI limit because the rule doesn’t apply to mortgages backed by the GSEs. This “QM Patch” would expire with the new rule going into effect on July 1. The CFPB threw a wrench into this timeline with their proposed rulemaking, but both Fannie and Freddie are bound by the amended PSPAs with Treasury.
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Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:
HousingWire: Hello HousingWire listeners. Today, I’m joined by Tom Hutchens from Angel Oak Mortgage Solutions. Thank you for joining us, Tom.
Tom Hutchens: Thanks, great to be here.
HousingWire: Awesome. Listeners, today, Tom will be speaking to us about the non-QM market which is reigniting following a pause in 2020 as liquidity drove up and bond investors ran for the hills. Tom will also address how new GSC guideline updates to Fannie Mae and Freddie Mac will increase supply for the non-QM sector and what that means for the market at large. Before we dive in, Tom, can you let us know more about you and your background in the housing finance sector?
Tom Hutchens: Oh, sure. Thank you very much. I’ve been in the business for well over 20 years. Got into it in the late ’90s. Then primarily in the wholesale and correspondent space with a focus in, kind of, what we’re doing today, the non-agency space. I’ve been with Angel Oak Mortgage Solutions for almost eight years now as we were kind of one of the first ones to reintroduce this non-QM space back to the market.
HousingWire: Thank you for letting us know more about you. It seems like you’re experienced in this market, so it’s awesome that we have you to discuss this topic today. I want to switch gears and focus on today’s main event, the non-QM market. Tom, in 2020, the non-QM market went on a pause due to impacts caused by the COVID-19 pandemic. Now, in 2021, the market is reheating and many say it’s experiencing a comeback. Has your company personally experienced an uptick in volume?
Tom Hutchens: Absolutely. You know, it started really kind of back in the latter half or late in 2020. We’re seeing continued growth in 2021 and, you know, really I would say we’re just kind of back to pre-COVID levels and pre-COVID expectations of where this market is headed. So, yes, lots of good things are happening in the non-QM space.
HousingWire: All right. So what we’ve briefly mentioned, the pandemic, and I want to focus on an aspect of the pandemic that impacted housing, which is record low rates, which increased home buyer demand and drove a refinance boom. In 2021, as the refi boom begins to taper off and volume falls, how should brokers think about non-QM? You mentioned your business has seen an uptick in volume. So, how does this correlate?
Tom Hutchens: Well, yeah, it’s a direct correlation to the refi boom tapering off. Most originators are not busting at the seams. They were in 2020. And really I think originators need to view non-QM as just another tool in their belt, and they really have to have all the tools in their belt because no one today can afford to miss on a loan, especially a loan that, you know, could be very easy to get done, but if you’re not aware of and somewhat educated on the non-QM products, you could let those deals just slip through your fingers and they’re going to land at your competitor’s shop just down the street.
HousingWire: Mm-hmm. Okay, which brings me to my next question. In the non-QM space, we’ve seen investor cash flow and bank statement products dominate. Can you talk about how these products work and what type of customer they’re best suited for?
Tom Hutchens: Sure. You know, the biggest product in the non-QM space has always been the bank statement loan, and that’s for the self-employed borrower who, you know, many self-employed borrowers… First of all, we’re seeing a huge growth in that. It’s really easy to become self-employed. The market just continues to encourage those to open up their own businesses. Now, certainly, 2020 had its challenges in certain industries, but we’re seeing that resurgence. But the bank statement loan is that self-employed borrower who has, you know, perhaps a lot of write-offs in their tax returns, and frankly their tax returns don’t really reflect their ability to repay a mortgage. And so what we do and what the non-QM industry does is, in lieu of tax returns, we don’t work with tax returns because we don’t believe that the tax code and someone’s ability to pay a mortgage, that those were not built together. So we look at bank statements and come up with a borrower’s cash flow, and that cash flow is what generates their cash that they used month in and month out to pay their bills, including their mortgage.
So it’s a really, you know, made sense kind of loan. We’ve been doing it for years. We’ve really perfected the process so that it’s easy to originate. And that’s, to me, the key is that, you know, when you’re doing a full-doc, self-employed loan, it’s pretty challenging and you really don’t know the answer of whether or not that loan’s going to work until it’s gone all the way through the underwriting process and that underwriter has determined what that borrower’s income is. Whereas on a bank statement loan, again, I’m not trying to get too technical but just so you, kind of, have an understanding is that we’re going to make that determination upfront. So a loan officer does not have to spend a lot of time on a deal if that loan doesn’t have a chance of getting to the closing table. Investor cash flow, it’s a very easy loan to close. It’s for that professional investor. They don’t have to be a professional investor, but we see a lot of those, the investors that own a lot of properties, and to document their income and full tax returns, it’s pretty difficult.
So this one’s so simple, it really…that’s why we call it a cash flow because we’re looking at the cash flow that this investment property is anticipated to generate based on an appraisal. And as long as their mortgage payment is at or below that, then they qualify for the loan. So, you know, really easy. You know, we’re not diving into that investor’s employment or sources of income. We’re looking at their cash flow of the property that they’re purchasing or taking cash out of. And that’s what’s going to drive their qualifications.
HousingWire: All right. Now, I want to switch gears and focus on some of the new regulations that have been embedded and what that means for these products in the non-QM space in general. New GSC guideline updates to Fannie Mae and Freddie Mac. These updates say that no more than 7% of mortgages that lenders sold to Fannie or Freddie can be tied to second homes or investment properties. This could pose an opportunity for non-agency lenders. What do you think brokers should know about these restrictions or opportunities? And how does it impact what products they’re using or how they’re getting business done?
Tom Hutchens: Sure. No, I mean, I think that’s one of the most significant things that’s happened thus far in 2021 because this is a new environment, and we’re still at the very beginning stages of it. So there’s still not a lot of clarity on how this is going to be enforced and implemented by different lenders, but non-QM… A perfect example is that ICF, that investor cash flow loan, that is such an easy loan for somebody to close. And if the agency is restricting the amount of volume that you can originate for investors, then obviously you need to have other outlets. And non-QM fits that bill very nicely.
The other piece that you didn’t mention, yes, there’s restrictions but, at the same time, they are tightening their guidelines on those products. So it’s not only that, you know, you can originate a smaller percentage of non-owner and second homes, but fewer borrowers are going to even qualify for those in the first place. So I think, you know, it’s a philosophical change from the agencies that, you know, their mandate has really been to expand homeownership, but should they offer government guarantee loans to investors and to those wanting to buy beach houses? And I think you’re seeing that being put into place and, you know, really who knows what’s next? I’m not sure that it’s just going to be investment properties and second homes, but, you know, time will tell.
HousingWire: Time will tell, which brings me to our last question today. Before we wrap, is there anything else you think our listeners need to know about the non-QM market—these restrictions or Angel Oak Mortgage Solutions in general?
Tom Hutchens: Well, you know, I think one thing is, and probably the biggest thing, non-QM is not…it’s not as big a niche product as people have made… about it. It’s a needed product. You know, we have lots of origination partners that have become let’s say investor specialists or they have become self-employed specialists and it’s a majority of their business. So, you know, I think a lot of times people put the non-QM as… Well, if it doesn’t qualify for an agency loan, then I think of non-QM. But, you know, one example is on bank statement borrowers, we have a lot of originators that will do a comparison of tax returns to bank statements to see truly what a self-employed borrower’s purchasing power is. And in almost all cases, the bank statements allow self-employed borrowers. It’s a pretty easy path for them, and they might be able to buy a bigger house or, you know, with home prices and everything that’s happening, those are some pretty important factors, but the biggest message is that non-QM is here to stay. It’s going to be a 10% of the overall origination market over the coming period of time. We know it’s going to happen. Don’t know exactly when. And so originators just need to understand it and get with a lender like Angel Oak. You know, we have salespeople across the country that can educate them and, you know, give them the confidence to learn more about these products.
HousingWire: Awesome. Well, Tom, I want to say thank you so much for joining us today. Listeners, join us back here tomorrow for more HousingWire daily. Thank you again, Tom.
Tom Hutchens: Thank you.