You’ve probably heard it before: Some umpteen million borrowers were shut out of the housing market due to tighter mortgage lending standards that were implemented in the aftermath of the financial crisis. By loosening standards a little bit today, the mortgage industry can give some of these creditworthy borrowers a new chance at homeownership and regain some lost business without taking a lot of risk.
Of course, things have changed in numerous ways since 2008 – a big one being that a larger share of American workers are now self-employed. The rise of the “gig economy” means borrowers potentially have multiple streams of income, creating an underwriting conundrum; many of these borrowers have the income necessary to make a mortgage payment – they have excellent credit histories and they pay their rent and utility bills on time – they just don’t qualify because they’re not traditional W2 wage earners.
As such, lenders (and the GSEs) are now looking to step “outside the credit box” and go after these creditworthy borrowers using alternative sources of credit data for underwriting purposes. It only seems logical that the use of alternative sources of credit data and automated underwriting will soon be applied to the now-fast-growing non-qualified (QM) mortgage market.
Meanwhile, several lenders have announced major non-QM securitization deals in the past year; the total number of securitized non-QM loans is now estimated to exceed $6 billion.
To learn more about the factors that will drive the growth of the non-QM market, as well as the obstacles that are holding it back, MortgageOrb recently interviewed Dane Smith, president at Verus Mortgage Capital, a full-service correspondent investor offering residential non-QM lending solutions.
Q: What are the main factors driving the growth of the non-QM market currently?
Smith: Several factors are contributing to strong growth in non-QM. First, credit has remained historically tight for the past decade. Second, many creditworthy borrowers are becoming aware that loan options are available to them, even though they fall outside conventional and government loan options. Third, a slow-down in refinance activity and borrower demand for non-traditional products have resulted in more originators entering the space.
Q: What is your forecast or prediction for growth in this market in 2018?
Smith: Our research indicates that there’s more than $200 billion annually in un-met demand from U.S. borrowers who are creditworthy but don’t fit in the conventional or government credit box. We’ve seen volumes increasing between 50% to 100% annually. We see the expanded non-QM origination market at approximately $30 billion in 2018 and over $50 billion in 2019.
Q: What are the main obstacles to growth?
Smith: Lack of consumer awareness is a big obstacle. Borrowers may not know that they have options and that attractive alternatives to conventional loans exist. Some consumers may not understand the differences between today’s responsible non-QM lending and the sub-prime loans of the past.
There’s also a learning curve for originators and LOs. Those who are new to the space should choose a partner who has non-QM expertise and is committed to providing the training, programs and ongoing support lenders need to succeed. As a correspondent investor that’s exclusively focused on non-QM, we take these commitments to our partners very seriously.
We also need to develop integrated systems that streamline and automate the manual processes and exceptions inherent with non-QM. Due to the tremendous surge in volume in recent years, we’re confident that technology solutions to support non-QM lending will emerge.
Q: What types/classes of non-QM products are growing in popularity? Any new innovations you’d like to mention?
Smith: Our firm is committed to consistently expanding our programs to serve a broader range of borrower profiles. For owner-occupied loans that must meet ability to repay laws, the following products are gaining momentum:
- Alternative doc for self-employed borrowers;
- Credit-repair products for credible borrowers with past credit issues; and
- Near-miss jumbo loans.
And for business purpose loans, which are not subject to Reg Z:
- Single-family rentals, based on both traditional and commercial style underwriting; and
- Residential transition (fix and flip) and bridge.
We also recently increased loan amounts to $5 million for several non-QM programs, and higher LTVs for interest-only loans.
Q: Approximately what share of these loans are currently being securitized and how much will this help drive the growth of the PLS market moving forward?
Smith: In 2006, private label securities accounted for nearly 60% of the market. We estimate that approximately half of expanded non-agency loans originated today will be securitized. Market expansion will be dependent on the overall growth of the market and the financing methods of the loan buyers.
Q: How does automated underwriting and auto-verification of assets factor into this space? Are there technology efficiencies to be gained – or is the non-QM space mostly manual underwriting for now? How to hold down per loan costs?
Smith: Automated underwriting and eligibility continue to drive decisioning for conventional and government loans, but certainly technology will become a larger factor in non-QM. At some point, non-QM pricing and eligibility tools will be introduced to simplify the complexity in qualifying a consumer’s ability to repay.
Verus has a highly skilled operations staff that provides underwriting, compliance, systems, and product training for its correspondent sellers. We’re investors, so in addition to loan quality, we’re looking at every opportunity to be more cost-efficient from origination to securitization.
Q: There are a ton of self-employed and credit-impaired consumers out there who are good non-QM loan prospects. Do you think the advent and use of alternative credit sources will help drive the non-QM market? If so, how and why?
Smith: There are more than 16 million self-employed individuals in the U.S., and that number is growing. It just makes sense to offer alternative doc loan products.
The need for alternative documentation methods is only going to grow with the “gig economy” and more millennials entering the market. Single-family residential buyers, renters and boomerang buyers can also benefit from non-QM options. As an industry, we need to stay current and look for ways to approve the loans, and not reject them because they don’t fit the traditional box.
Q: How important of a role does education play in spurring the growth of the non-QM market?
Smith: Awareness and education are the key drivers to success in non-QM. Education is extremely important across the board, and more so for faceted non-QM transactions.
Investors including our firm have committed to awareness and education programs for various stakeholders in the housing transaction, including originators, underwriters, real estate agents and borrowers.
Everyone benefits from understanding the nuances of how non-QM works, and with education, everyone can participate in its continued growth.