More than half of applications for non-qualified (non-QM) mortgages fail due to simple administrative issues, according to recent research from Computershare Loan Services, which underwrites and fulfills non-QM loans on behalf of lenders and then sells them onto the secondary market.
The firm’s research shows that 54.4% of applications for non-QM loans fail due to credit issues, while 38.4% fail due to compliance/regulatory issues and 7.1% frailty due to property/collateral issues.
Lenders are increasingly looking to get into the non-QM market, as it gives them the opportunity to go after “underserved” borrowers, which includes self-employed borrowers as well as those with little to no credit history.
However, these loans are nothing like the “no-doc” or “low-doc” mortgages that proliferated in the lead-up to the 2008 financial crisis. Rather, non-QM loans – although there are a great variety of them – hold borrowers to strict underwriting requirements.
More than $2 billion in non-QM loans were originated in 2008, according to data from Altisource Portfolio Solutions, and that number is expected to increase dramatically in 2019, as more lenders enter the market.
The challenge with non-QM lions, however, is that they originated using mostly manual processes. In other words, the origination of non-QM loans has not yet benefitted from the automation that is now widely used in the origination of QM loans. That’s because there is a much wider variety of non-QM loan types, which makes it challenging for technology firms to develop software and systems that standardize the origination processes for these loans.
In addition, the non-QM market is still a mere sliver of the overall market, thus, there is high barrier to entry for mortgage companies looking to get into this market with regard to technology investment. Many lenders are reluctant to invest in the technology infrastructure that would be needed to automate the origination of these loans.
This could be part of the reason why such a high percentage of non-QM loan applications fail.
According to Computershare’s research, approximately one in five (22.2%) of non-QM loans are unsuccessful because of incomplete information. This happens less frequently with QM loans, as borrower information is often collected and verified via automated systems.
The firm’s research also shows that nearly 40% of application failures were caused by incidences of non-compliance or other regulatory issues. Again, in the QM realm, automated compliance systems are able to more quickly and accurately check application data when compared with manual processes.
The research also shows that nearly 12% of application failures were due to missing evidence of the closing disclosure. This is also an area where automation has increased accuracy in the QM realm.
In addition, nearly 10% of non-QM loans that were identified as having credit issues were unsuccessful as a result of originators not updating the application to reflect final documentation – and 8.6% could not proceed as a result of insufficient or out-of-date documentation, such as bank statements that were more than 30 days old, Computershare’s research shows.
Issues with property or collateral, such as incomplete appraisals, were the third most common type of application failure (7.1%).
So does this mean that non-QM loans are inherently more risky? Not necessarily. A report from Morningstar Credit Ratings released earlier this year shows that the performance of these loans was strong through 2018.
Rather, Computershare’s research merely shows that originating these loans is challenging – particularly at the application stage.
“Our data help contradict the misconception that non-QM lending has parallels with the subprime lending that affected the financial sector a decade ago,” says Tom Millon, CEO of Computershare Loan Services, in a statement. “Clearly administrative issues affect both QM and non-QM loan applications, and it’s vital that borrowers and originators ensure that the Is are dotted and Ts crossed on their applications to avoid unnecessary problems.”