As refinances plummet and competition over limited purchase volume increases, mortgage originators are increasingly looking to diversify into non-QM lending. There are now more than 40 mortgage lenders originating non-QM loans and new ones are entering the mix practically every month.
Non-QM lending could surge by as much as 400% this year, growing to $10 billion in volume, up from $2 billion in 2018, according to the most recent State of the Originations Industry report from Altisource Portfolio Solutions.
As lenders increasingly enter the non-QM market, however, challenges are emerging. First, the non-QM market is relatively small, therefore, the more lenders enter this market, the more thinned-out it becomes. This creates a dilemma for new entrants, in that they must build the needed processes and infrastructure to support non-QM loans, yet non-QM will likely only represent a sliver of their overall business.
Adding to this challenge is the fact that production of non-QM loans is mostly manual, for now, and thus is expensive. There aren’t a lot of technology solutions available on the market as of yet that are tailored specifically for non-QM loan origination which can provide the desired level of automation.
And, within the technology realm, there is the extreme diversity and changing nature of non-QM loan products to consider. The challenge for mortgage software providers is how to develop platforms that are flexible enough to support a wide range of non-QM loan products.
Meanwhile, the non-QM market is growing steadily; originators apparently have just as strong of a desire to get into the non-QM market as investors. The central question for the lenders originating these loans is, what are the risks? Not only is there increased exposure in terms of rep and warrant risk, it could be argued that there is also a certain degree of reputation risk, should these loans begin to default in large numbers.
But so far, that has not been the case. Non-QM loan performance has, for the most part, been exceptional – and a big reason why is that these are not the same as the “liar” loans that led to the financial crisis. Today’s non-QM loans are underwritten using strict standards that ensure borrower ability to repay; they just happen to include certain characteristics that disqualify them from fitting the QM “box.” As this market matures, we can expect to see lenders and their technology partners develop new paths for serving the underserved market with non-QM loans – in particular, self-employed borrowers.
Interestingly, some of the major third party mortgage service providers, including Computershare, are also getting in on the non-QM game. In the case of Computershare, the firm is able to underwrite and fulfill non-QM loans on behalf of its lender clients and then sell them onto the secondary market, mainly using the existing infrastructure of LenderLive Network, a fulfillment and secondary marketing services firm which Computershare acquired at the end of 2018.
The acquisition of LenderLive, which had already been dealing in non-QM loan fulfillment prior to the acquisition, strengthened and expanded Computershare’s existing secondary services, provided also through its Capital Markets Cooperative and Credit Risk Solutions (formerly Altavera) subsidiaries. As such, Computershare is able to provide fulfillment and secondary marketing services on outsourced basis for lenders that do not wish to make the significant capital investment in in-house technology and process changes to support a non-QM business. What’s more, the firm services non-QM loans via its Specialized Loan Servicing division.
To learn more about recent trends in the non-QM market, as well as Computershare’s role in non-QM, MortgageOrb recently interviewed Tom Millon, CEO of Computershare Loan Services U.S., which includes divisions Specialized Loan Servicing, Credit Risk Solutions, Capital Markets Cooperative and Property Solutions.
Q: How did your firm end up getting involved in the non-QM market?
Millon: Computershare is a mortgage entity with a $10 billion market cap; we are a global financial services firm. It’s headquartered in Australia but we are pretty large in the U.S mortgage space. I am the CEO for everything that happens in the U.S. for Computershare Mortgage.
We have about a $100 billion mortgage servicing portfolio. And we have a whole range of businesses and services that touch the whole lifecycle of loan origination and servicing – all the way through to default and property preservation and REO marketing. So, we’re in it.
In the non-QM space, one of our businesses is called the Capital Markets Cooperative. We’re the largest leading cooperative of mortgage lenders, with over 500 patrons – we call our mortgage companies patrons – and many of them would very much like to originate non-QM product.
We also deal with almost any type of mortgage investor you can imagine – from Wall Street to home loan investors like Wells and JP Morgan Chase – and a bunch of those investors, as you might imagine, would like to buy non-QM product. So, we’re sitting in between these 500 or so lenders in our cooperative, our patrons, and an investor community that would like to buy non-QM product.
CMC’s job is to pull-in, underwrite, price, package and deliver these loans on behalf of our mortgage lenders into the investment community. So we have a non-QM channel, if you will. Full transparency, it is pretty small, at the moment, but it is growing quickly, as demand for the product grows.
The problem that we’re trying to solve for is that underwriting these loans is an expensive process; it’s a unique process. And we think we can solve that problem for our originators and our investors by standing in the middle with a platform that can underwrite and fulfill and deliver, etc. So, that’s what we do.
Q: Is your firm involved at all in the securitization of non-QM loans? Also, in terms of the non-QM loans you are servicing, what is the breakdown in terms of how many are securitized and how many are whole loans?
Millon: We service the loans, and, technically that’s our only involvement. We are underwriting and fulfilling on an outsourced basis and then delivering them up into the various investors. We do not get involved in the securitization ourselves – but once these loans have been securitized, we step in as a servicer. We’re servicing whole loans, as well. We are doing some subservicing for some Wall Street names that are both holding loans and have also securitized them.
Q: So far, the non-QM loans that have been originated during the past five years or so are performing just fine. But is there nonetheless additional scrutiny regarding how these loans will perform in the future?
Millon: I think the common starting point with these loans is that they’re going to perform. Now, maybe that’s because they are performing [laughs]. I don’t think the risk of them not performing factors into very many conversations. I think it’s really about, ‘These are loans with slightly higher note rates, and they’re performing just fine, so, gee I’d like to own some of that.’ That’s from the investor side of things. And sure, the analysts at these various shops do test for spikes in defaults – but it’s a Goldilocks world right now, all the loans are performing, non-QM and the rest.
From the originator’s side of things, they are sort of concerned about the un-tested rep and warrant risk. Technically, they are non-QM, so what risk is an originator really taking? Balancing that concern is the desire to expand production in a slow market. Our platform offers insurance to wrap the loans with, so, we do what we can to protect the originators from that rep and warrant risk.
Q: So, who is doing the deep dives on these loans? You say the originators and the insurance companies, but what about the investors and the servicers?
Millon: There is a pretty heavy level of QC going on – it’s just that the risk of default is not always the first topic of the conversation. And we are performing QC for some of our customers that originate non-QM. It’s a thorough QC process, particularly in terms of due diligence before securitization. No doubt, non-QM securities are receiving a much higher level of diligence. So, we’re being asked to look at every loan in the file, as opposed to every tenth loan in the file.
Credit Risk Solutions is the division of Computershare that does this non-QM due diligence. I’m also in charge of Credit Risk Solutions.
Q: How difficult is it to modify existing technology infrastructure and the processes for non-QM loans – in other words, is there a difficult conversion process in order to be able to originate and underwrite these loans?
Millon: Good question. It’s true that there are not a lot of systems designed for non-QM underwriting, at this point. It’s basically like jumbo loan underwriting with a few additional overlays. And it’s a largely manual process. So, it’s very expensive. But as this market grows, I expect to see the technology vendors start to introduce some non-QM solutions. Or, we might create better solutions in-house, as we go, automating some of the processes. It’s still in the early stages, in terms of technology solutions helping out with the non-QM process.
Really that is the issue that we’re having – and that the market is having – is that for originators to get into the space, you have to start off with one loan, or two loans, or maybe five loans, and build-out from there. So, it’s kind of a one-off process, and that’s tough to manage because the underwriter has to be up to speed on non-QM, and the processes have to be in place.
That’s why we built this centralized platform, so that our originators, which are largely middle-market originators, doing about $5,200 million a month, they can log a loan on our platform and not have to build the whole system themselves, just to stick their toe in the water.
Q: Do you see this market starting to “gel” in terms of the products that are available? Would you say it is becoming more standardized? Or is the idea to keep the non-QM market diverse and ever-changing? Will it become more standardized by design, simply because software and processes must be developed for all the loan types?
Millon: The alphabet soup of non-QM loan programs is not as bad as you might think – but it is pretty broad and it is not standardized. Interest-only makes non-QM, loan amount makes non-QM, term makes non-QM, so, there’s not a blizzard of these types of things. But on the other hand, it could use some standardization, and that will likely come about over time. I agree that it will likely happen by design.
Q: What types of servicers are servicing non-QM loans? Is it a niche or are these loans being serviced by all types of servicers?
Millon: The special servicers are handling it now – but it begs the question as to whether a regular subservicer or plain old servicer could handle these loans. They probably could.
Primarily, these are private-labeled securities, so, a securitizer or Wall Street firm is going to look to the special servicer community to get this done.