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The Revival of Non-QM Lending

mortgage applicationWhen the COVID19 pandemic took root in this country in mid-March, the non-QM market was one of the first business sectors to feel the effects of the economic trauma that accompanied the health crisis. One of the leading companies in this sector, Angel Oak Mortgage Solutions, initially hoped the tumult would be temporary, optimistically announcing on March 19 that its lending activities would continue with adjusted rates and guidelines. Three days later, the Atlanta-headquartered company had an update announcing a very different business strategy. “The pandemic has continued to cause turmoil in the worldwide economy,” Angel Oak said in a note to its clients. “Due to the constant shifts and the inability to appropriately evaluate credit risk, we are pausing all loan activity for two weeks. This includes fundings and any new loan activity.”

Halting of Business
The company was a tad optimistic about a two-week pause—the company didn’t restart its issuance of non-QM mortgage-backed securities until May. Tom Hutchens, EVP of Production at Angel Oak, recalled the problems facing the non-QM scene in March had nothing to do with the quality of the loans originated and securitized at the time and much to do with a panic in the bond market that traditionally welcomed this product.

“When the pandemic was starting to take on epic proportions in March and beyond, it brought the bond market to its knees because everyone was rushing to cash,” he continued.

“Bondholders across the globe were liquidating their bonds immediately. And the engine that that supports non-QM production is the bond market.”

“Governments were shutting down businesses,” he said. “Non-QM loans are non-agency loans— they’re not guaranteed by the government. So, it’s imperative for us to be able to determine a borrower’s ability to repay, and we couldn’t do it when governments are shutting down a lot of small businesses.”

Complicating matters, Hutchens added, was how states and localities responded to the pandemic in relation to the private sector.

Fast-forward to today, and the pandemic is still with us—and so is non-QM lending, somewhat bruised around the edges but moving ahead.

“We have certainly recovered from the COVID pause that the non-QM industry went through,” said Hutchens. “We have a lot of momentum going into 2021. We’re not back to pre-COVID levels yet, but we’re in the range and expect to be back to pre-COVID levels hopefully in the first or second quarter of 2021.”

Envisioning a Bolder Non-QM Space

Angel Oak is hardly alone in welcoming a bigger and bolder non-QM environment in 2021. Over at Irvine, California-based Impac Mortgage Holding, Chief of Staff Tom Donatacci
noted that a revived gusto in this space has led industry professionals to refer to the current product profile as “non-QM 2.0.” Within his company, Donatacci reported the non-QM origination team has an eyes-on-the-prize focus on the coming year.

“The state of non-QM is strong from a liquidity perspective,” observed Donatacci. “I think we’ve identified at least 12 investors with programs looking to acquire non-QM production.

Almost all the buyers from pre-pandemic are back and there are some new entrants as well.”

... read the full story in the January 2021 issue of MReport, available in full, here

About Author: Phil Hall

Phil Hall is a former United Nations-based reporter for Fairchild Broadcast News, the author of nine books, the host of the award-winning SoundCloud podcast "The Online Movie Show," co-host of the award-winning WAPJ-FM talk show "Nutmeg Chatter" and a writer with credits in The New York Times, New York Daily News, Hartford Courant, Wired, The Hill's Congress Blog and Profit Confidential. His real estate finance writing has been published in the ABA Banking Journal, Secondary Marketing Executive, Servicing Management, MortgageOrb, Progress in Lending, National Mortgage Professional, Mortgage Professional America, Canadian Mortgage Professional, Mortgage Professional News, Mortgage Broker News and HousingWire.

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