Non-QM re-entering the mortgage space is an underappreciated driver of recovery, as the economy looks to rebound from the damage that the COVID-19 pandemic has caused.
“A healthy, growing economy is going to benefit by having lending products like non-QM and the access to capital it provides,” said Will Fisher, divisional vice president at Arc Home. “One of the reasons we’ve seen growth in our economy is due to non-QM lending, especially to the self-employed borrower and the business purpose rental market through debt service coverage ratio (DSCR).”
At the start of the pandemic, the non-QM market completely froze due to liquidity issues, but it’s beginning to thaw and pick up again. Many lenders have started tiptoeing back into the space, after putting temporary moratoriums on much of their offerings back in mid-March. Arc Home, best known for their proprietary non-QM products and their full suite of agency products, are looking to restart their non-agency business again in the coming weeks.
“The first to re-enter the market were the smaller TPO lenders, who are ultimately selling their loans to small regional banks with very limited programs, and now we are starting to see larger non-QM lenders who offered proprietary products, are again underwriting their own products,” said Fisher.
This is because of added price clarity, performance, and the success of recent securitizations. This directly impacts the ability to bring a product back to market that simply makes sense and can fill a void for borrowers, like those who are self-employed.
Over the past few months, amidst successfully transitioning their entire workforce to a work-from-home-structure, hiring new team members and continuing to recruit, Arc Home was able to further develop and refine their agency business.
“We have been hiring underwriters, account managers, account executives, and support staff,” he said. “Over the last three months, we hit new company records in volume that’s put us ahead for the rest of the year, even with non-QM pausing for a few months.”
With new price clarity and a rational approach, Fisher says overlays have started to go away on agency loans and there’s been huge rate and price reductions across the board.
As for re-entering the non-QM space themselves, Arc is monitoring the market and working on products that will best benefit borrowers and balance risk for the end investors. When it does happen, it has to be right, Fisher said.
“For our self-employed borrowers, we are going to be looking to see how they’ve handled a reduction in revenue and how it’s affecting business. For guidelines, this go around reserves are playing a more important role in who’s financially fit and I think we are going to see debt-to-income ratios a little lower than normal to start. The pandemic is not over, anyone receiving non-QM funding in this vintage needs to show they can weather potential future distress.”
As for the DSCR market, he adds that borrowers won’t be allowed to over-leverage and there may be restrictions on cash-out with more onus placed on rental agreements to ensure cash flow and a borrower’s ability to repay.
“We are moving back to a more 2013/2014 style of non-QM underwriting style,” said Fisher.
For more news on Arc Home proprietary Non-QM products hitting the market, watch this space.