The results are in, and a massive shift in lending practices are coming to reshape your book of business.
Agency loan growth has become stagnant, and refinances are going away almost entirely due to the surge in interest rates following the election and the upcoming 2017 Federal Reserve rate hikes. Considering agency lending and refinancing are the primary growth channels for a massive portion of the mortgage origination industry, where can lenders turn to spur loan growth?
The answer is non-agency, or non-QM, products. In fact, this is the only growing segment of the retail mortgage origination industry. There are several reasons for this phenomenon, the first being the massive untapped pool of prospective borrowers squeezed out of the agency market.
Currently, there are millions of Americans with excellent credit scores who want to purchase a home, but do not meet the income documentation requirements imposed by the government-sponsored entities (GSEs). These borrowers are often more than qualified for a mortgage, but are unable to document their income in a manner accepted by the GSEs. These same underserved borrowers, however, do qualify for non-QM loans.
As market acceptance of non-QM continues to grow, the market for non-agency securitizations has also started to blossom. A significant hurdle to the reemergence of non-agency loans was the creation of a secondary market. After the financial crisis, investors were wary of owning securities backed by non-agency loans. But throughout the last few years, the implementation of more stringent lending guidelines and prudent underwriting has led to the issuance of very high performing loans that are fueling the demand for these securitizations.
With refinances disappearing and agency loan growth stalling, the door remains wide open for massive non-agency mortgage growth, and smart lenders are beginning to position their businesses to offer these products. Historically, non-QM loans have represented about 10 percent of the total mortgage origination market, which stands today at approximately $1.1 trillion. Total non-agency volume has crept up steadily, but is still a far cry from its roughly $100 billion potential peak, leaving an enormous opportunity for growth.
Smart lenders need to position themselves on the right side of this historic shift by preparing to offer non-agency loans today, or risk devastating effects to their business’ growth prospects. Make sure you partner with an expert so you can successfully maneuver in this space.
Tom Hutchens is senior vice president of sales and marketing at Angel Oak Mortgage Solutions, an Atlanta-based wholesale lender licensed in over 35 states and operating in the non-QM space for over three years. Tom has been in the real estate lending business for nearly 20 years. He may be reached at (855) 539-4910 or Info@AngelOakMS.com.
This article originally appeared in the February 2017 print edition of National Mortgage Professional Magazine.