Everyone is talking about the growing non-agency/non-qualified mortgage (QM) market. While non-QM loans currently represent approximately 3 percent of the market, many industry experts, including the MBA and S&P Global Ratings, have predicted the non-QM market will again double in size this year.
Early non-agency/non-QM loans have performed well, with extremely low delinquency or default rates, and are being pooled into private-label residential mortgage-backed securities (RMBS). In Q1 2018, we saw $6.28-billion in the issuance of non-agency RMBS, which was more than double the activity in Q1 2017.
The trend isn’t driven by new entrants (yet), but larger players who have been in the market for the past few years issuing more securitizations. Caliber Home Loans, for example, issued its first 2018 securitization in January, nearly three months ahead of its 2017 deal. The $401-million transaction, dubbed COLT 2018-1 Mortgage Loan Trust, included 865 high-balance mortgages mostly originated last fall to borrowers with slightly blemished credit or loan terms that do not comply with the QM rule.
Today’s non-agency loans are not like the ones that went into private-label RMBS leading up to the crisis. In fact, the average non-agency borrower has a loan balance of $436,000; FICO score of 699; loan-to-value (LTV) of 79 percent; and debt-to-income of 38.7 percent. Also, these loans undergo not only a significant amount of underwriting to vet the borrower, the property, the numbers, etc. but also 100 percent QC. These borrowers are creditworthy. And their inability to obtain financing through conventional channels creates a significant opportunity for astute originators.
Secondary market takeout options continue to expand, both regarding the types of products offered and the aggregators offering them. In addition to jumbos, which were the only game in town initially, the market now has alternatives like interest-only options, fix-and-flip and foreign national programs, as well as products for borrowers who’ve had a "recent housing event,” such as a short sale, foreclosure, or deed in lieu. There are also products for borrowers requiring alternative forms of income documentation, such as 12/24 month personal or business bank statement and asset depletion documents.
Overcoming the Challenges of Non-Agency
There are many challenges associated with originating non-agency loans. Typically, these loans are manually priced and underwritten, which means originators need to understand multiple investors’ guidelines, which are frequently being updated to keep up with market needs. For first-time or infrequent originators in this space, this is not only time-consuming but also puts them at risk for promising the borrower a product or rate they can’t deliver on.
Using an automated underwriting system (AUS) for non-agency loans at the point of sale helps solve these challenges. An AUS helps wholesale lenders and investors keep up with the rapid growth and change happening in the market, by delivering timely product alternatives to originators, increasing credit availability to the millions of borrowers sidelined by the narrow agency lending that has dominated the industry post-crisis.
It also gives non-agency RMBS investors greater confidence by providing an audit trail that ensures consistent, transparent application of credit policy. Simply put: With the right technology in place, originators, aggregators, and money managers can each take advantage of the growing non-agency/non-QM market.