Non-qualified mortgages are one of the only areas for growth in the mortgage industry today. As the agency market remains fiercely competitive, originators have been adopting non-QM programs at a rapid pace, while direct investors and wholesalers have been quick to meet the resulting demand. I’ve had a front-row seat to the rise of non-QM over the past seven years, and to me, it seems that newcomers are popping up week after week to cash in on the sector’s growth.
At my firm, we believe that a robust non-QM market helps support the long-term health of the mortgage market. Despite the frequent comparisons to the subprime lending practices in the run-up to the housing crisis, the fact is that post-crisis regulations have made it challenging for even creditworthy borrowers to access the mortgage market. The disappearance of private capital was the catalyst to this industry shift, and the only loans available were agency loans. In present day, regulations have stopped the current market from looking like pre-crisis. Subprime lending was a greater than $1 trillion market prior to the crisis. In the years following, the subprime market effectively went to $0. Ten years later, the non-QM market has bounced back to an estimated $20 billion per year.
Most market observers believe that non-QM is still in its infancy, with some experts forecasting the market to reach anywhere from $100–$300 billion per year. While that’s a far cry from the $1 trillion-plus in the pre-crisis period, even conservative estimates are predicting exponential future growth. New players continue to join the non-QM market as a result. To truly capitalize on that growth, however, originators need the right partners and the right approach.
Offerings, experience and service vary widely across non-QM wholesalers and direct investors, so it’s critical that originators choose wisely. Choosing the wrong partner could lead to lost opportunities. Above all else, the best non-QM partner has commitment to and experience in non-QM lending. We’ve seen a flood of new entrants into our industry, and I can say certainly that some are better positioned than others. Much like any other activity, mastery of this work is only gained through thousands of hours of experience. You want a partner that has funded 10,000 loans, not 10.
Originators should evaluate the resources a non-QM wholesaler or direct investor has put into their program. Those resources might range anywhere from a one-person non-QM “team” to a fully staffed department; some firms only work in the non-QM space. You also need to make sure your non-QM partner is actually able to make their own credit decisions, as opposed to relying on underwriting from a third party. The bottom line is that originators should avoid non-QM providers just looking to cash in on a trend, and seek out wholesalers and direct lenders that have the resources and track record to help you grow your business.
While that advice may seem like common sense, there are plenty of wholesalers that oversell and make inflated promises, hurting the broker as much as the borrower. One example I see frequently is wholesalers rejecting a loan after having already approved the terms. For example, a wholesaler may tell a borrower they qualify for a loan at an 80% loan-to-value ratio (LTV), only to have the end investor refuse those terms and insist on 65% LTV, leaving the broker in a difficult position with an upset borrower. Bumps in the road like that are missed opportunities that waste everyone’s time. Know that these types of hiccups are commonplace for many non-QM wholesalers, and partner with providers that have eliminated them.
Once an originator has selected the right non-QM partner, the greatest predictor of success is the originator’s approach to non-QM. Many originators fail to realize that non-QM is more than just a backup plan for borrowers who don’t qualify for agency loans. They continue marketing to agency borrowers and simply push borrowers to non-QM if they don’t qualify for an agency loan. This approach misses a huge segment of potential borrowers: those who don’t even know they can qualify for a mortgage. Given that the rate of household formations is at a generational low and recent surveys have found that the majority of consumers are wildly wrong about what is required to qualify for a mortgage, there is a real opportunity for those who actively seek out non-QM borrowers.
An active approach is critical for originators because it takes time to build a robust non-QM pipeline, from the infrastructure to the knowledge base to marketing. While closing a non-QM loan is not materially different from closing an agency loan, it does take time to train loan originators on the programs, borrowers and necessary documentation. Be sure to ask your partner for help in marketing to this population of borrowers because many can provide strategies and support. To be successful in non-QM, it can’t be just a backup plan.
Non-QM may be the buzzword on the tip of the mortgage industry’s tongue, but originators are unlikely to capitalize on its growth unless they select the right partner and the right approach. I’ve had seven years to witness this firsthand. I can tell you that seven years from now, the winners in the mortgage market will be those who capitalized on non-QM today by picking the right partners and taking an active approach to seek out suitable borrowers.