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A Look Behind the Curtain

Editor's note: This story originally appeared in the December edition of MReport.


When the COVID-19 pandemic began, every industry was caught off guard and businesses had to play the cards they were dealt. The mortgage industry proved to be no exception.

Since then, the mortgage industry has made an impressive come-back as many enjoy a purchase boom and a refinance boom. The challenge is that the refinance boom is fleeting. Are you ready for the 2021 purchase world?

The Market Today

The mortgage market is performing quite well, and many originators are busier now than ever. The majority of volume is due to refinances, which is bound to end sooner rather than later. The purchase market, however, is set to continue to boom well into 2021. The MBA announced that purchase originations will increase 8.5% to a new record of $1.54 trillion in 2021. In the same report, refinancing volume will be cut by almost half.

Those who are not prepared for the post-refinancing market are at a disadvantage. If you aren’t focusing on protecting your referral network by helping with purchase deals right now, you might stand to lose that business in the future too. If you are only counting on Agency business to pull you through, you may want to take a look at just how much circumstances have changed for many borrowers.

Borrowers in Need

Non-QM products might have been temporarily unavailable back in the spring, but demand for these solutions never went away. These products can be the only option for borrowers who don’t meet prime lending standards and, more recently, those financially impacted by COVID-19. As a result, lenders knew the need for non-QM still existed, it was just a matter of understanding how they could make smart loans. Lenders prudently adjusted their lending procedures and tightened eligibility requirements, such as requiring higher FICO scores and lower LTVs in order to meet borrowers’ needs without blocking them entirely from the homebuying process. Credit scores, FICO scores, and LTVs aren’t obstacles so much today.

Most of the pre-COVID non-QM products are back in the market, and bank statement loans are the most popular. They were the first to come back as they are among the most highly utilized loan products and typically serve borrowers with higher credit scores. Bank statement products serve borrowers who are near-prime or can only qualify for a non-QM loan because of their income documentation. The performance of the loans are closely tracked and confidence continues to grow. Investors in the secondary market have returned, which is a crucial part of the market that is often overlooked. This continued vote of confidence allows originators to further adjust products to meet the changing economic landscape and help more creditworthy borrowers. The beauty of non-QM is its flexibility and options that borrowers need Lenders acted fast, and it paid off for many.

Brokers with Solutions

Historically low rates have been fueling an explosion in refinancing across the industry. However, like all refi booms, it won’t last forever. In fact, it is projected to slow down substantially in the near future. The time to focus on the purchase market is right now—even with refinance volume that is almost too much to handle. Brokers who actively market non-QM have a better chance to quickly replace refi revenue when the boom dries up. Non-QM was one of the few sectors of the mortgage market that was grow-ing prior to the pandemic. As the economic impact of COVID-19 continues to abate, non-QM is a product that every originator should have in their toolkit.

Brokers who utilize non-QM now are finding they can tap into a new pool of borrowers and deliver innovative solutions that can help them grow or replace business. They can also feel good about knowing that lenders are making even more prudent and smart credit decisions in the wake of COVID-19. Many brokers are realizing that non-QM borrowers are coming back in force, and those who have the capabilities to service them could be at an advantage now and in the future.

Investors Eyeing Yield

Since non-QM securitizations are backed by the secondary market, demand from this corner has also played a powerful role in the return of non-QM. Investors like hedge funds and institutions are critical to the growth of the non-QM sector. Their involvement provides necessary liquidity to lenders who can in turn make more loans and keep up with demand.

Over the past decade, more and more educated investors have turned to the mortgage credit sector to put money to work. These investors, just like brokers and lenders, have realized how non-QM loan products differ from pre-crisis, what the credit profile really looks like, and why performance is strong. Demand in the secondary market has continued to increase in 2020, which bodes well for the overall non-QM market.

The Federal Reserve continues to pump liquidity into the markets, making the search for yield an elusive goal for investors as well. More institutional investors are attracted to the yield offered by some non-QM securitizations that exhibit good risk-reward characteristics. As a result, securitizations collateralized by high-quality non-QM loans have been oversubscribed this year.

Non-QM Exhibits Strong Fundamentals

The housing market has remained resilient despite lingering concerns over the economy. Changing needs and desires on the part of potential homebuyers has brought an influx of demand as renters look to leave their city dwellings. This mass exodus should impact the non-QM market as well—given more borrowers will be seek-ing mortgages that suit their unique needs.

As many Americans are still unemployed or furloughed, an increase in self-employed individuals is expected with those enter-ing the gig workforce or starting their own businesses. Accordingly, 1099 forms and bank statement loans will become greater necessities. The market is making significant enhancements every week to ensure these loans are more accessible to borrowers with-out sacrificing quality and due diligence.

As brokers see the long-term need and understand the shifting landscape that pro-motes demand for non-QM, there’s significant growth opportunity. Ongoing education and the adoption of new technologies that make the process nearly seamless have allowed the non-QM market to recover in a way it never had to before.

Great Financial Crisis vs. Now ... It Bears Repeating

Unlike the 2008 Great Financial Crisis, this pause in lending was not due to credit issues regarding the loans specifically, nor was it caused by subprime-like loans. Non-QM has proven not to be the same as sub-prime loans from the past. It was a response to a global health crisis, created by extrinsic factors and the fallout that resulted in order to flatten the curve.

Non-QM originators have been working within strict guidelines and lending standards, while improv-ing underwriting quality to help ensure that these loans perform well. Lenders have more skin in the game than ever before.

Looking Forward

Nhas proven to be a resilient sector of the mortgage industry. Similar to its role in the pre-pandemic environment, it will play an important role to keep your pipeline full. Be sure to tell Realtors and other financial partners how you can help their clients by utilizing non-QM and saving deals for them will protect your referral base. Circumstances have changed for borrowers and many who once qualified for Agency loans do not any longer. Someone is helping them. Are you? Your business growth in 2021 depends on it.

About Author: Tom Hutchens

Tom Hutchens is the SVP of Sales and Marketing at Angel Oak Mortgage Solutions, an Atlanta-based wholesale and correspondent lender leading the non-QM space for four years and licensed in more than 35 states. Tom has been in the real estate lending business for nearly 20 years.

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