The last year has made a huge difference
What a difference a year makes. Last year, the future of non-QM lending was very much in question: Liquidity had evaporated, many non-QM aggregators had gone dark and most originators had pivoted to agency products. The non-QM market, which had been gaining momentum, had suddenly come to a screeching halt.
However, after a few tense months, what looked like the “end” turned out to be more of a big pause. By Q3 of 2020, non-QM 2.0 was gaining traction, investors had returned and securitization restarted. Non-QM securitization eventually hit $18.9 billion for the year, down about a third from 2019 levels, but still the second-best year on record for this category.
These encouraging trends have accelerated over the past two quarters. There has been a steady uptick in non-QM activity and new security issuance. The tighter credit box and guidelines that characterized non-QM 2.0 have been expanding. There has also been some downward movement in non-QM interest rates.
More borrowers are becoming non-QM
This is good news for our industry and for the millions of borrowers who don’t fit the profile for conforming or government loans, such as small business owners, self-employed contractors and gig economy workers who make up nearly 48% of the private workforce.
While the mortgage market in general is continuing to boom with record low rates, the vast majority of the loans being done are conforming or government loans. These loans are relatively easy to qualify for, if you can produce a W-2, and show steady employment. Small business owners, self-employed contractors and gig economy workers, however, don’t easily fit into these programs. This was the case following the mortgage crisis in 2008, and the reason why non-QM lending came into being.
Before last year, non-QM bank statement programs had become the program of choice for self-employed borrowers. Until last spring, these programs accounted for 65% of the non-QM market. The next biggest product was debt service coverage ratio (DSCR) loans for investors and fix and flip borrowers.
The economic consequences of the pandemic have, in many cases, had a disproportionate impact on small business owners, particularly those in the travel, restaurant and retail sectors. As the economy reopens, borrowers will be looking to take advantage of the historically low mortgage rates to lower their costs. So will the millions of self-employed consumers and gig economy workers - everyone from dentists to Uber drivers - many of whom may have also experienced a decline in their incomes.
Expanded credit programs will be critical if our industry is hoping to help homeowners and future buyers who have experienced financial setbacks due to the pandemic. Here’s some data to consider:
- As many as 65 million US workers filed for unemployment at some point since COVID-19 began.
- Current estimates are that about half of those who lost their jobs have been rehired or found other work.
- New unemployment claims are still in the 700,000s weekly.
- More than two million homeowners are in forbearance.
- More than one million homeowners were in some stage of default before the pandemic hit.
- The “gig” economy now consists of more than 30 million self-employed individuals.
All this suggests that going forward potential borrowers may have credit issues, smaller savings and a higher chance of self-employment – all of which puts them into a non-QM bucket.
Non-QM circa 2021
As we’ve discussed, investor demand for non-QM assets is back. Filling that demand is the challenge that our industry is facing.
Non-QM loans by their very nature require more work on the part of originators. They also require originators to stay abreast of rapidly changing investor guidelines, and now originators must also learn some new rules as to what qualifies as non-QM (more about this to come).
More things can (and do) go wrong with non-QM, which is why the pull through rate on non-QM is around 50% versus 70% to 80% for agency products.
Technology is one of the primary ways that forward-looking wholesale and retail lenders are addressing the supply/demand gap. Specialty lenders like Oaktree Funding and Finance of America are using our technology at the front end of their non-QM processes to help brokers and LOs quickly determine borrower eligibility.
On the wholesale side, brokers can access eligibility engines through many of the leading LOs directly in the broker portals where brokers submit loans to the wholesale lender. They can come in, run a quick scenario, get product eligibility and rate information, and then click a button to run the AUS, upload the file, reissue credit and get a findings report.
Meanwhile investors are increasingly using our non-QM calibrated AUS to accelerate decision making and improve underwriter productivity. Their goal is to offer the originator and underwriter the same experience that they have with DU and LPA on the agency side, with a custom AUS on the non-QM side. Meaning, they should be able to click a button, choose a program, and get a findings report detailing eligibility by each element of the program and product guidelines.
Prior to the big pause, lenders and investors had been growing more comfortable with non-QM products and the performance of their borrowers. This translated into higher loan to value ratios, less documentation and larger loan limits. One lender, for example, was even offering bank statement loans, based on a one-month bank statement.
While the industry is not ready to roll back things back quite that far, non-QM guideline changes are occurring on an almost daily basis. For example, three-month bank statement programs are once again available; LTVs and loan limits are rising, credit score minimums are back under 700 and debt service coverage ratios (DSCRs) are approximately .75.
Also, lenders are rolling out new non-QM programs to capture near-prime jumbos and address the GSE’s pull back on second homes and investment properties.
A year ago, non-QM was in question. A year later, that question has been answered.