Foundation Mortgage's CEO says margin compression and early payment defaults will sort out the newcomers fast
The combination of more non-traditional mortgage customers with more headwinds in the conventional lending space has combined to boost non-QM and non-agency lending significantly over the last few years.
With the boom in more non-QM loans comes a surge in new non-QM lenders. While many of them are built on strong foundations that will likely stand the test of time, some industry veterans are concerned that some may be here only to take advantage of this surge in non-QM loans.
One Miami-based lender said the non-QM boom is producing exactly the kind of overcrowding that precedes a shakeout, and some of the data he’s starting to see lines up with that.
Marc Halpern (pictured top), CEO of Foundation Mortgage in South Florida, said the wave of new wholesale lenders entering non-QM is not surprising. However, for some of those new companies, market education is coming faster than they expected.
"You're seeing a lot of people come to market in wholesale," Halpern told Mortgage Professional America. "I don't know who these people are. And it's not so easy. When you go to sell these loans to the takeout company, and you're making your own delegated decisions — we have the years of experience. But what you're going to see is that there's going to be people coming in and going out as quickly as possible, because they don't really know the rules of the road."
What separates top lenders
Halpern said the evidence is already showing up in buyback data. He said he heard of one company dealing with 60 buybacks, a number that reflects underwriting decisions made without the experience the product requires.
He said the numbers will not work for lenders running those buyback rates.
"There's not too many companies that can eat 60 loans, even if you're breaking even on them," he said. "The numbers aren't going to work. And even if they've got an investor behind them, if you're losing a couple million a month or a couple hundred thousand, it's going to add up quick."
Meanwhile, Foundation Mortgage has kept its early payment default (EPD) rate low by staying disciplined on credit, he said. The company keeps P&L loans to less than 5% of its business because the product has shown performance problems across the industry, and it is cautious on lower credit score borrowers where the data shows the most stress.
He said the EPD cases that have come back to Foundation have been concentrated in lower credit score loans, pointing to a buyback the company received on a loan from the prior September.
"They gave us a buyback because it was an EPD, but this was from last September on a loan, and that was a 646 credit score," he said. "It's a low LTV loan; we'll be fine with it. But it goes back to really making the right judgment call from the beginning in the underwrite."
Another factor in the space is margin compression, which he said is adding pressure from both sides of loan funding.
"On the investor side, the people that are securitizing, the private equity companies, they're trying to get closer to the loan," he said. "And we as wholesalers are trying to get closer to the money. So there's a squeeze going on and certainly margin compression."
Halpern said Foundation has leaned into service as the answer to price competition, emphasizing its ability to get difficult deals closed and its access to takeout partners for consultation on borderline loans.
"We get price matches all the time," he said. "But what we've really spoken to our account reps about is selling our service. Hey, listen, we get the tough deals done. But on the other side of that coin, there's risk associated with it. We've been lucky to really mitigate our EPDs."
‘Bullish’ on non-QM market
Halpern said the growth in non-QM is not just a rate environment story, but also a solution for investors whose traditional tax forms don’t represent their actual income reality. It is one reason why bank statement loans are becoming so popular, he said.
"You have someone making $600,000 to $700,000 a year who wants to buy a $2 million property, and that's not enough to qualify," he said. "So you get a bank statement loan. And the rates are priced pretty close to an agency product. So in today's market, it's an easy choice. They’re like, ‘Here’s my bank statements. Let’s go the bank statement route.’"
He said the overall product is performing well, but inexperienced companies that might not completely understand the space could be the first ones to falter if market conditions worsen.
"I'm still bullish on the non-QM space," he said. "But there's going to be a natural attrition within companies not able to make it."
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