PERSON OF THE WEEK: Mark Hughes is chief operating officer of New Diligence Advisors (NDA), a new national mortgage due diligence firm backed by Selene Holdings LLC.
Selene’s principal investors include Ranieri Partners Management and OakTree Capital Management, LP.
NDA’s services include credit underwriting, property valuations, regulatory compliance, fraud, document, title, payment history and servicing activity.
MortgageOrb recently interviewed Hughes to learn more about what clients are looking for in a due diligence firm in light of shrinking origination volume, as well as how growth in the non-qualified mortgage (non-QM) market will drive the need for due diligence services.
Q: Mortgage origination volume was down last year and it’s predicted to be down again this year. Why is this a good time to launch a new due diligence company?
Hughes: Although overall volume may be down, many observers, including those at the rating agencies, expect that non-agency volume will increase this year, which is good news for the industry and for diligence providers.
From what we’re hearing, they’re expecting more prime jumbo business and less in the non-performing loan and re performing loan space. We’re also seeing prime jumbo deals that contain agency loans, because execution is better for those deals in some cases.
In addition to prime jumbo, more and more players are getting into the non-QM space. We’re expecting to see more non-QM activity this year from players that have already been doing deals in the space over the last couple of years, as well as new entrants that have been aggregating loans for securitization.
Regardless of volume, we believe this is a good time to launch a due diligence company. What we’re hearing in the client community is that the current providers aren’t meeting their needs – and that organizational changes at a few of the top due diligence companies have raised the question of whether they’re really committed, long-term, to the business.
In addition, there are concerns surrounding dependency on a couple of large service providers and concentration risk. All of this is leading many clients to consider diversifying their vendor list for due diligence reviews. If a new entrant can demonstrate that it’s committed to the business, has the right people and resources behind it, and good client-facing processes, then there’s an opportunity.
Q: What’s happening with non-QM? Are more banks and lenders considering these products now that the low-hanging fruit of refinance is going away?
Hughes: There’s no question that the non-QM market is expanding. People have been talking about it for a few years, but now there’s a fair amount of activity going on with some of the early adopters. A couple of non-QM securities deals have already come to market this year.
And the prime jumbo space, which was pretty saturated, has experienced close to zero delinquencies, and even more importantly, no credit losses.
There is an opportunity to expand the box a bit and still manage that risk. There are also a lot of potential borrowers out there – and a lot of volume to be had for people that are doing it right.
Generally, we see originators focusing on different niches within the non-QM product space. For example, bank statement programs, asset depletion, investor loans, or IO products. Up until now, the market has been more product-focused rather than credit focused. However, now we’re starting to see movement down the credit curve. The difference this time is that originators are making sure that there’s adequate documentation for non-QM borrowers and adequate compensating factors.
Q: Do you think non-QM lenders will expand the credit box, and if so, by how much?
Hughes: Credit rating agency DBRS recently came out with its 2018 forecast. It noted that “some non-prime programs being introduced in 2017 where FICO scores as low as 500 were acceptable when coupled certain other criteria … DBRS believes that throughout 2018, the industry will continue to see more non-QM originators widening the credit box.”
We are seeing that lenders are going down the credit scale. That’s going to continue to happen, because there’s just so much latent volume and demand out there from people that haven’t been able to get loans at all with non-growing credit.
It’s hard to predict exactly about how far they’re going to go, but this will create more demand for reviews. The further one moves away from the pristine products with 100% review scopes, the more critical due diligence review becomes. Investors need it in order to see the full picture behind the numbers. They want to be sure that people are actually documenting a borrower’s ability to repay and validating compensating factors – and not just expanding the debt/credit box. Documentation around income and other factors is more important as non-QM lenders take on greater risk.
Q: For years we’ve been hearing that the non-agency RMBS market is poised for a comeback, and then it doesn’t materialize. Any reason to believe that it is? What’s your outlook?
Hughes: So far, this year, we’ve already seen a couple of deals come out and move the non-agency market ahead of where we were last year. After years of saying that the market is coming back, I think it is. The fact that some agency-eligible products are making it into the non-agency RMBS deals is going drive the volume. It seems as though the investor market is getting more comfortable with these deals – and with non-QM products and performance.
The rating agencies are getting more comfortable, too, and third-party reviewers, including our firm, will help them in evaluating those pools. Better information will drive better subordination levels. The higher rates will help and the yield that’s available in those deals will certainly help draw more investors to the product.
We’re also seeing some new products being securitized. There’s a growing interest in various investor loan programs, and reverse mortgages. These are signs that the non-agency market is coming back.
Q: You’re on record as saying that there are “gaps” in the services that due diligence providers currently offer. What are some of the things that clients are looking for?
Hughes: Traditionally, due diligence providers have been focused on the credit-compliance-valuation-data integrity review, as required by the rating agencies for securitization. Today, clients are looking for more than these kind of static, rote, box-checking reviews. Clients are also having to manage multiple vendors (title search, valuation, etc.) to fully understand the assets that they’re buying. As a result, there are opportunities for diligence providers to expand their product menu, a bit, so that they can become a more comprehensive service solution.
Finally, clients want more consultative partners that are attuned to changing risk and market dynamics. This kind of insight comes with experience gained through various mortgage cycles.
