A non-QM lending veteran says the wrong lender partner can cost brokers far more than just one deal
The non-QM lending market has never had more participants, and the volume growth of recent years has drawn in a wave of new entrants. Because there are so many lenders out there, brokers often feel like they have endless choices when it comes to a non-QM lender.
However, not every non-QM lender is the same, and some industry veterans worry there could be fly-by-night lenders who won’t be around when loans go bad.
It’s not enough for brokers to find the lowest rate for their clients. It is also important to make sure the non-QM product meets the borrower’s needs, and that the process of getting the loan is as smooth as possible.
One mortgage executive believes one other thing brokers need to know is who the end investor is in the non-QM loans they’re trying to close. It can make the difference between loan approval and denial.
Mike Pearson (pictured top), SVP of business development at AD Mortgage, said there is a big difference between a lender that is the end investor and one that shops the loans around.
"Find out where they're doing their loans," Pearson told Mortgage Professional America. "There are so many lenders out there that do non-QM, but a lot of them are not the end investor. They don't have flexibility to get exceptions. Non-QM is all about exceptions because you have guidelines, but all these borrowers have some little tweak to what's going on. Not everyone has access to that because they're selling to somebody else who's selling it to somebody else."
Why lender structure matters
Pearson said the exception issue is fundamental to how non-QM works, since unlike conventional lending, non-QM by its nature involves borrowers who fall outside the standard box and the lender's ability to accommodate them depends entirely on how close they sit to the capital.
If a non-QM loan goes smoothly, Pearson said it could set a broker up for repeat business with that borrower. That customer will decide who they will work with when they need to refinance, and if the loan process is rocky, that future relationship is not guaranteed.
"The life of the loan matters and your ability to go back to that borrower and refinance that borrower matters," he said. "So who you're doing that loan with matters. Not all non-QM is created equal. Just because we all offer DSCR loans doesn't mean that we all do them the same way, and it does not mean that we are all going to treat your borrower with the same respect as you would."
Pearson said he has spoken with brokers who found out too late that their lender had made assumptions about investor guidelines that turned out to be wrong, leaving them with nowhere to turn.
"I've literally talked to clients that are desperate and frustrated because they're almost out of contract," he said. "They went to a lender that, on paper, black and white, promised certain criteria and found out they didn't understand and comprehend their investor guidelines. They made assumptions, printed assumptions, collected originations based on assumptions and found out they couldn't do anything. They couldn't close the loans. They couldn't honor the locks."
The education gap
Pearson said the concentration of lenders who cannot fulfill their promises is partly a product of how quickly the market grew, with volume growth attracting new entrants who understood the product at a surface level but did not have the infrastructure to back it up.
He said part of that gap traces back to how new originators enter the business. Non-QM products are not covered in SAFE licensing courses, which means a broker's introduction to non-QM depends almost entirely on where they land and who they learn from.
"You don't get that in SAFE classes," he said. "So if you're new to the industry, you have to land with the right company, or you have to find the right account executive who's going to take the time to educate you. I think there needs to be more done there."
He said the same principle applies to choosing a lender. The broker who picks the right partner gets the education, the flexibility, and the relationship, while the one who picks wrong finds out when it is too late to change course.
"Education doesn't happen during licensing," he said. "You don't hear about these products there. So if you're new to the industry, you have to land with the right company."
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