The four Cs are vital to growth
The rapid growth of the non-QM market share over the past couple of years has proven that there is an appetite for people who don’t have traditional income sources, who don’t fit into the traditional QM box, who do have the ability to repay.
But there’s another reason why non-QM has taken off, according to Jon Gerretsen, the president of Altisource-subsidiary Trelix.
“Every time you have a conversation about non-QM, everyone immediately goes to, ‘oh my god, it’s subprime, and the world’s going to fall apart again.’ What non-QM is about is bringing back compensating factors.”
Pre-2008, it was all about the stated, no-verification, alternate doc products, and those really weren’t the sub-prime market, Gerretsen said. That’s a big disconnect.
“The big change that came when we went into the QM world is, the compensating factors went away. Prior to that, if you had a loan with a 50% LTV and with a combined dti ratio was 49% or even 52%, we’d do that all day long. QM put that away," he said. "I think what we're seeing is the introduction of them back into lending via non-QM and as more people become comfortable with responsible underwriting and manual underwrites, we will continue to see it grow.”
Growth will also continue as more investors get into the space, Gerretsen said, similar to what happened in the jumbo market in 2009.
“Post-2008, when all these investors went away on the jumbo side, nobody knew what the takeout was going to look like, so nobody wanted to originate it because they didn’t know if they could sell it. So as the investor pool begins to grow and the lines became more defined, through the availability on the secondary market, you’re going to see a greater acceptance,” Gerretsen said.
Trelix is a fulfillment services company within Altisource origination services and does everything from processing to underwriting to closing to pre-fund review, to quality control—the sort of cradle to grave service that’s not commonplace anymore. That particular skill set is vital to responsible non-QM lending, and the evolution of underwriters away from that model has given rise for companies like Trelix to step in to fill that gap. In terms of the role underwriting will play in the continued growth of non-QM, Gerretsen said that the more people become comfortable with manual underwriting practices, the more originators will feel comfortable taking on these types of products.
With manual underwriting, of course, comes an even greater burden of responsibility. Gerretsen says that doing it right means having a dedicated group in underwriting to choose a few available investors, and building out guidelines based on their overlays.
“It’s character, collateral, capacity, and credit. . . . That’s the responsible piece.”
On the whole, borrowers aren’t aware at the rate non-QM lending is growing, and in spite of the research that most borrowers do before getting a loan, these products aren’t on their radar unless they are pointed that way by an originator. That may change, if non-QM becomes branded in a different way, or originators themselves begin by seeking out the non-QM business off the bat.
“It’s about acceptance in the marketplace, it’s about skill set, the originators’ comfort levels, investors, that’s going to drive the growth. I really think the key point is about bringing compensating factors back into the equation,” Gerretsen said.
Hear from leading experts who will provide insight on the non-prime space, including their top strategies for winning business with these growing loan programs, at the session "Get out of your comfort zone: do more loans with non-prime" at the free Power Originator Summit coming up in April. Register today!