Non-QM – the comeback product of the year

How do you efficiently meet this surging level of demand?

Non-QM – the comeback product of the year

The following is a contributed article from LoanScorecard

During the first two months of 2020, it looked as if non-QM lending was finally hitting its stride. But suddenly everything stalled as private investors headed for the sidelines during the early days of COVID-19. For several months, non-QM was in a state of suspended animation: originators pulled programs or left the field entirely; and securitizations were reduced to a trickle. When it became apparent that non-QM paper was still performing in late summer, originations gradually came back on line, as did non-agency securitization. But the product now came with higher interest rates and tighter credit criteria and guidelines.

Find out more: Learn all about LoanScorecard and its mortgage origination process now.

Fast-forward to today: Investor confidence in non-QM products has returned, and securitizations are once again regularly coming to market. Early non-QM pioneers, like Deephaven and Sprout have all ramped up again and traditional wholesale and retail lenders are tentatively re-entering the non-QM space.

Hardly a day goes by without an announcement or an email from a non-QM aggregator offering pricing discounts, increased loan limits, higher LTVs and DTIs and more relaxed underwriting guidelines. Six months ago, no-one would have predicted that the return of one month bank statements loans, interest rates in the 4-5% range and investor loans with coverage ratios of 1.0%. But that’s what happening.

The demand for non-QM is back. The challenge now is how to efficiently meet that demand.

Non-QM tech answers

Automated underwriting systems—like Fannie Mae’s Desktop Underwriter (DU) and Freddie Mac’s Loan Product Advisor (LPA)— provide standardization and efficiency for wholesaler and retail lenders originating agency, QM loans. Increasingly LoanScoreCard, the industry’s first non-Agency AUS, is filling this role for non-QM originations: in effect, becoming the third leg of the AUS stool.

LoanScoreCard is designed to offer the originator the same experience with non-QM loans as they have with agency loans: meaning, they can click a button, choose a program, and get a findings report just like they do on the agency side like through DU.

On the retail side, a loan officer can run LoanScoreCard on the front-end to get an early indication as to whether the borrower fits the guidelines for that loan. Depending on the results of the findings report, the file can be adjusted and run again.

On the wholesale side, clients, like Finance of America and Oaktree Funding, have incorporated this technology into their portals as eligibility engines. So, the broker can come in, run a quick scenario and get the product eligibility and rate information. When they are ready to submit the loan, all they have do to is hit a button to run AUS, upload the file, reissue credit and get a decision. It’s an elegant and efficient process.

Recently a senior executive at one of the nation’s largest lenders explained why her company has integrated LoanScoreCard into its non-QM origination platform. She noted that pull through on their retail book of business for a standard 30-year mortgage is in the 70 80% range. With non-QM, however, it drops to 45-50%, because the borrowers are more unique and the LOs and brokers don’t always understand who will qualify.

“It comes down to the 80/20 rule: 20% of your loan officers are going to learn guidelines and understand it and then the other 80% are not and they’re just going to lob loans in,” she said. “The easiest way to solve that is to put a resource like an AUS at the beginning of that process to help people figure out whether their scenario works.”

LoanScoreCard technology is available in Point and Path, as well as several other leading Loan Origination Systems, and the list is growing.