If you’re a regular reader of National Mortgage Professional magazine you may have seen our article in the June issue on the rapid rise of the non-QM market and what it means to the industry, the issues that may arise, and some solutions.
There are a number of drivers behind this trend, perhaps the most significant of which is the need to shore up volumes the mortgage originators are losing in the conforming purchase money and refinance markets.
Lenders have to look somewhere for growth and if investors are willing to provide liquidity for purchase transactions made to borrowers who don’t fit into the traditional credit box, it makes sense that lenders will step in to facilitate. And that’s exactly what we see happening.
Most of the companies that we’re seeing move into the non-QM space are wholesale lenders as they can attract both capital markets investors for their non-QM securities and brokers to originate the loans. Brokers will be key here as they have ties to the local communities and easy access to borrowers who have been denied conforming loans.
Brokers can work with non-QM lenders to provide an alternative to borrowers that they had been forced to turn away in the past. This will allow the brokers to build their businesses and grow with borrowers that they could not previously serve.
The wholesale lenders we expect to get more involved in this market will be those that are adept at tapping the secondary market for liquidity. A case in point is Angel Oak Companies, a firm that brought its third non-QM transaction to market last year. The senior tranche was oversubscribed and received AAA ratings from both Fitch and DBRS. In late March, the company announced that it had surpassed $1.1 billion in non-QM originations during 2017, the highest volume in its history.
The rating agencies seem, at this point, to be predisposed to treat these securities favorably and so I expect to see more of them in the near future, which will fuel more lenders and give rise to higher volumes of non-QM loans.
Wholesale lenders that can attract both capital markets investors for their non-QM securities and brokers to originate the loans will do well because they can serve borrowers without having to engage in mass marketing that could serve to damage their reputations should the market turn. With wholesale lenders already on the march to attract such borrower, it’s time for conventional lenders to start moving into this space over the course of the year. As they do, they will have to deal with the increased risks these deals carry with them.
So, what can a lender do to reduce the risk and, even more importantly to some, the perception that these loans are risky? In my article, I describe a number of steps we’re seeing lenders take. We’re actually helping them with some of these steps.
- Underwrite carefully – This is step one and should go without saying, but I say a fair amount about it in my recent article.
- Employ good technology – Technology that makes it easier to perform Quality Control and compliance checks on these deals are critical.
- Choose great partners – Risk is reduced when it is managed by great partners. This is one area where I am proud to say we are called upon by lenders often.
We are already engaging with more non-QM lenders because the additional work involved in underwriting and processing these deals can slow down their internal teams, leading them to outsource more of the work to trusted partners.
Our MMaaS (Mortgage Management as a Solution) offering, which is in use by 4 of the Top 25 U.S. banks for underwriting audits, pre-funding reviews and post-closing audits has offered welcome relief to players in this market. We expect more lenders to employ it, based on the benchmarks we have already set using it, including:
- 14% Improvement in Quality of Underwriting of Mortgage Loans
- 85% Reduction in Mortgage Post-Closing Errors
- 37% Reduction in Residential Mortgage Closing Deficiency
- Risk Analysis of Closed Mortgage Loans using DTI% and Other Loan factors
Anyone who lived through the financial crash will likely view non-QM loans as potentially dangerous, and there is certainly risk to contend with in these products. But good lending practices can keep everyone safe. To find out more read our article in the June issue of National Mortgage Professional. For more information about SLK Global and our mortgage solutions, reach us at firstname.lastname@example.org or visit www.slkgroup.com.