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Non-prime mortgage origination volumes have been relatively minimal over the last few years, with less than $1 billion originated in 2015. However, recent events lend favorably to the outlook for 2016. It has taken a while for this segment of the mortgage market to ramp up again, as lenders work to adopt a non-QM lending process that fits with new regulations in the industry, but it appears that a major hurdle has been cleared: securitization.
The second half of 2015 saw the first non-prime securitizations since before the housing crisis, with a handful of deals hitting the market (including Angel Oak’s $150 million deal in mid-December). Though we are still nowhere close to volumes seen before the housing crisis, the securitization of non-prime loans is a sign that momentum is heading in the right direction. The reemergence of these deals demonstrates that Wall Street, private equity and the non-prime mortgage market are back at the table together again and paints a positive outlook for mortgage liquidity.
There is ample demand on both sides of the equation for these loans. About a third of all Americans have FICO scores lower than 650 and millions of potential borrowers are locked out of agency lending channels because of QM restrictions. The sub-prime borrowers of years past haven’t disappeared, they simply cannot secure lending through traditional agency channels. The success of 2015’s securitizations in the non-prime space speaks to just how strong investor demand is for higher-yielding mortgage bonds. Angel Oak’s deal and others in the market were oversubscribed by investors, painting a positive picture for demand of future securitizations.
Lenders now know that, if they choose to originate non-prime loans, they have an alternate option to simply holding the loans on their own books. This is big for increasing liquidity in the underserved non-prime market and should lead to more lenders adopting a non-QM program in order to get a piece of the pie.
We feel that the nascent non-prime market can only benefit as volume increases and more participants enter the space. A rising tide lifts all boats, and 2016 should see the non-prime tide swell significantly. In fact, Angel Oak projects originating close to $1 billion in non-prime originations next year and we expect other lenders will see big increases in volume, as well.
Tom Hutchens is senior vice president of sales and marketing at Angel Oak Mortgage Solutions, an Atlanta-based wholesale lender currently licensed in 24 states. Tom has been in the real estate lending business for nearly 20 years. He may be reached by phone at (855) 539-4910 or e-mail [email protected].
This article originally appeared in the January 2016 edition of National Mortgage Professional Magazine.