In a democracy on the scale of America’s, there will always be times where one-size-fits-all solutions fall short. There’s just too much diversity for even great ideas to succeed in all cases. The mortgage space is no different: At times certain rules or definitions make their way into the industry that fail to take into consideration the unique needs of certain borrowers. When borrowers are underserviced, a lot of money can be left behind.
In the case of extended prime borrowers, we’re talking billions.
According to John R. Lynch, CEO and founder of PCMA Private Client Lending, extended prime clientele, despite being some of the wealthiest and most credit-worthy borrowers in the country, have been pushed to the margins of the housing market by being lumped-in, in an instance of perfect irony, with sub-prime borrowers.
As Lynch explains it, when non-QM first materialized circa 2006, most of the loans being originated in the space were agency fallouts that were credit repair in nature, which skewed its perception across the industry.
“It had a little bit more of a hard money or sub-prime feel to it,” Lynch says. “Non-QM immediately, in the psychology of our industry, got labelled as sub-prime,” even though the category included wealthy expanded prime borrowers.
Prior to the invention of non-QM, expanded prime borrowers were able to use stated monthly income to help make their cases to lenders. But after the 2008 meltdown, when stated income loans received no small share of the blame for the country’s grisly housing crash, a new set of ATR requirements were imposed that Lynch blames for the current limbo in which expanded prime borrowers find themselves floating.
“When they created that [safe harbour] overlay into the market, it pushed a whole subset of borrowers out of it,” he says. “From 2008 to 2016, the penalty for not meeting the ATR requirements on a loan were so punitive that people just stopped originating loans for that borrower. Banks could no longer hold it on their portfolios.”
It’s a situation that has resulted in a colossal loss of business for the industry. Rather than originating and servicing loans for these powerfully wealthy individuals, mortgage professionals have had to stand by and watch as these lost clients are forced to pay cash for properties. The most anyone can do at this point is help extended prime clients with their refi’s.
“We’re refinancing those loans all day long,” says Lynch. The average loan PCMA refinances involves a 60-year old borrower with an LTV of 60 percent, a 740 FICO score and a loan that is 12.5 years old. It’s no coincidence that these loans are close to the same age as the rules that stopped expanded prime customers from borrowing: That’s how long these people have been trapped.
Lynch says PCMA’s analysts have determined that the non-QM space – the actual, fully considered non-QM space, not just the credit-repair side of the equation – is potentially a trillion-dollar market. Cracking it could open the industry to billions in additional revenue.
A policy change from Washington would provide the easiest fix, but that’s not something Lynch is prepared to wait for.
“The one thing I’ve learned about Washington is that once they get their teeth into you, they don’t get their teeth out of you,” he says. “So am I going to try to get the legislators to pull back legislation? Good luck with that.”
Instead, PCMA has created its own apparatus for originating loans for extended prime customers at scale, for what Lynch calls “a homogenized securitization of only this borrower type.” The next step is securing a buy-in from Wall Street and the country’s mortgage insurers, many of whom still cringe at the mention of “non-safe harbour” – even when the discussion is about lending to millionaires with impeccable credit histories.
For Lynch, part of the issue in raising awareness (and funding) is clearing the air around what non-QM even means any more.
“Now that LTVs have been pulled back and FICO scores have been pushed up, the non-QM business as everybody believes it to be is not even the non-QM business anymore.,” he says. “The non-QM business has evolved to an expanded prime category,” he says.
Until that awareness morphs into action, originators will continue to miss out on working with some of the richest, most loyal repeat customers in the country.
“If I was an independent mortgage advisor, I would focus one hundred percent on rich people, just like the Million Dollar Listing guys do,” says Lynch. “They have fewer clients and more volume because they become experts in their space.”