Putting the subprime ghost to rest

Fundloans’ chief lending officer on the misconceptions surrounding non-QM and why the product has a great future

Putting the subprime ghost to rest

You can come out from under the covers - non-QM bears no resemblance to the subprime specter.

The ill-conceived mortgage product responsible for causing the biggest market crash in living memory more than a decade ago is really nothing like its modern-day relation.

Thanks partly to a shake-up in the industry, which resulted in the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as more stringent rules to determine the creditworthiness of borrowers, non-QM loans are increasingly becoming an attractive proposition for both lenders and borrowers.

Read more: Fundloans – the bespoke approach to non-QM lending

Dave Hidy, Fundloans’ chief lending officer, is adamant that’s the case, having actively promoted the product since 2017.

Speaking to MPA, he said: “Every week I sell about $15 million worth of non-QM loans, and over a five-year period, my average credit score has been 700, and my average LTV, 70%. A majority of them are self-employed borrowers.”

He was dismissive of suggestions that non-QM resembled subprime. “You have to prove Ability to Repay (ATR) through bank statements and tax returns,” he said, adding that the percentage of people who still made the comparison between the two was diminishing with each passing year.

Not surprisingly, Hidy was bullish about Fundloans’ prospects for the product, predicting that the company will be close to doubling this side of the business next year.

He also took the opportunity to reveal that Fundloans’ average loan amounts for the jumbo side of non-QM are $1 million. “We are laser focused and we want to be the premier jumbo non-QM lender in the United States,” he said.

Demand for non-QM loans looks set to increase generally, due to a combination of changing labor market trends and work practices, which have given rise to the gig economy and an increase in the number of self-employed workers.

According to recent data from the US Bureau of Statistics, there are about 16 million self-employed people in the country, that’s a rise of about one million compared to 2015.

Read more: Serving the jumbo non-QM space

The pandemic has unwittingly played its part, too, Hidy stressed. “During COVID a lot of people found that they liked working at home, so more people are focused on self-employment income.

“Predicted self-employment numbers are increasing, and that’s the impetus of non-QM loans for self-employed borrowers because, as we all know in the US, if you don’t have a W2 and a tax return, it’s historically been more difficult to get a mortgage loan,” he said.

“But we’re very well positioned going forward in this new economy and really support self-employed borrowers at Fundloans.”

To meet the challenge, brokers should resist the temptation of gravitating towards “the low hanging fruit” of a qualified mortgage.

Hidy said: “Historically non-QM has been a little bit more challenging for the broker, so if they have 10 Fannie Mae deals on their desk, they’re going to really focus on that and maybe push the non-QM deals to the side of the desk.”

Weaning them off the habit will prove easier once interest rates increase, as they are sure to do, he added. “We know how economies flow, and at some point conventional rates won’t stay as low as they’ve been these last few years - that will benefit the non-QM space,” he said.

“As we continue to market the product, greater numbers of both borrowers and brokers are becoming increasingly familiar with non-QM loans. A combination of all those factors will drive more business in 2022. We’re getting the message out there.”