Pearson says the factors pushing California borrowers toward non-QM are structural and are not going away
Non-QM lending has been growing rapidly nationwide for a variety of reasons, but one state seeing an explosion of non-agency lending is California.
The combination of borrower demographics, property values, and a growing insurance problem has created conditions that push a higher share of mortgage transactions outside the conventional lending box than almost any other state.
For brokers who have been building non-QM volume and are licensed in the state, California likely represents a large portion of that volume. One mortgage executive believes the reasons for California's non-QM growth are structural rather than cyclical, which is part of why the market has continued expanding through a challenging rate environment.
Mike Pearson (pictured top), SVP of business development at AD Mortgage, said the growth reflects a combination of borrower demographics, insurance conditions, and property economics that have made California unusually well-suited for alternative lending.
"California was already a great non-QM market," Pearson told Mortgage Professional America. "But then you throw in these additional factors, and it's just skyrocketing out there."
Reasons for California surge
The single biggest driver is the concentration of self-employed borrowers, Pearson said. According to US Census Bureau data, California had 1,892,176 self-employed households in 2024, the most of any state, and self-employed borrowers typically have verifiable income and strong credit, but tax returns often obscure some of that income.
"The quickest and easiest one is the number of self-employed borrowers they have,” he said. “Self-employed borrowers have specific tax implications that lend themselves to non-QM. So that's a big piece of it. The number of self-employed borrowers is not going down, especially in our modern economy.
“There's more and more self-employed borrowers, more 1099 borrowers. And then the rental market — with rising rates, the increased number of people that are renting is out there. Those are two big areas where, yes, a lot of activity is happening, but there's still a tremendous amount of upside.”
The tech industry adds its own layer, with restricted stock units and equity compensation creating income profiles that do not translate cleanly into conventional loan qualification. A large concentration of foreign nationals and real estate investors adds further to the pool of borrowers needing alternative income documentation.
The state's homeowners insurance crisis is accelerating the shift, with insurers pulling out of California for several years before the 2025 wildfires compressed that process further. Non-QM lending offers more flexibility on insurance requirements than conventional lending currently allows.
"We're seeing a lot of loans go non-QM for pretty simple reasons," Pearson said. "Insurance, for example, in California they have a huge insurance issue, and you often find there's some flexibilities in what kind of insurance and things like having higher deductibles that you can do in the non-QM space that you're not able to do in the conventional or government lending spaces."
Strong borrower profiles
One of the persistent misconceptions about non-QM lending is that the borrowers are marginal credit risks. There is still a sector of borrowers who think these loans are for lower-credit or lower-income borrowers. However, Pearson noted that couldn’t be further from the truth.
"If you really kind of think out the whole dynamic, it makes a lot of sense," he said. "The amount of money they have to have down, the requirement for reserves, the type of people we're talking about — we're talking about self-employed borrowers that have been doing it for multiple years. Or you're talking about real estate investors that have multiple properties that they're covering. That's not the general profile of a low-credit borrower."
The two product categories that dominate California non-QM volume reflect this borrower profile, Pearson said. Bank statement loans and profit-and-loss (P&L) lending serve the self-employed segment, while DSCR loans serve the real estate investor segment, and demand in both has expanded alongside California's rental market.
With mortgage rates elevated and likely to stay that way for a while, AD Mortgage has launched a California-specific pricing promotion through July 31. The company is offering a 50 basis point improvement on non-QM loans including prime, DSCR, and foreign national programs.
"California is very sensitive to rates in particular," Pearson said. "There's also additional struggles with DTI and DSCR numbers based on where their property values are. Any kind of break in pricing is going to open the door to more borrowers."
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