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Non-QM Lenders Could Face Serious Headwinds

Doug Page
Jul 13, 2022
Flagstar Bank logo

Major warehouse lender placing restrictions on funding advances.

  • 16 Non-QM lenders placed under review by Flagstar
  • Non-QM investors may cut the amount they forward.
  • Many of the problems Non-QM lenders are having are due to increasing interest rates.


The recent abrupt closure of two Non-QM lenders – one that shuttered its doors and another that’s now under Chapter 11 Bankruptcy protection – may have prompted Flagstar Bank’s warehouse lending division to send out a text message, saying funding advances for Non-QM mortgages will require advance approval.

“Effective immediately – Funding advances for Non-QM loans targeted to the investors listed below will require approval in advance,” the text message said. “Haircuts may be adjusted.”

The list of investors included 16 Non-QM lenders, among them Angel Oak Mortgage and Angel Oak Home Loans, Deephaven Mortgage, Redwood Trust and Standard Mortgage Corp., to name a few.

The message comes on the heels of Sprout Mortgage, based in in East Meadow, N.Y., shuttering its operations last week and, a few weeks prior, First Guaranty Mortgage Corp., based in Plano, Texas, laying off 471 employees, about 80% of its staff, before filing for Chapter 11. Both lenders offered Non-QM mortgages.

The message was shared with National Mortgage Professional by an executive who works at a mortgage lender.

Flagstar Still Funding

While Flagstar Bank, based in Troy, Mich., wouldn’t confirm whether the message was sent in response to what happened to Sprout and First Guaranty, a spokesperson confirmed the message’s authenticity.

“We have always reviewed certain Non-QM loans before funding them, and we are simply adjusting this process,” Flagstar Bank spokesperson Susan Bergesen told National Mortgage Professional in an email. “We still fund Non-QM loans and have not declined to fund any clients’ loans. Non-QM remains an important part of our business.”

Flagstar’s announcement could put Non-QM lenders under financial pressure, says an executive who works at another warehouse lender and requested anonymity. 

“Normally, we advance 99% of the loan amount and the Non-QM mortgage originator advances 1% of the loan,” the executive said. “With the haircut, it means those investors may only advance between 80% to 95% of those loans, which means the mortgage originator has to cough up more cash and put more skin in the game.”

He added: “If the Non-QM lender isn’t well funded, that does put a hardship on them, not only for the Non-QM loans they’re funding but also due to the multiple loans they have to fund.”

The executive also cautioned that Non-QM mortgage lenders aren’t left high and dry after their loan is purchased.

“Normally it takes about 10 days before an investor buys a Non-QM loan and, during that time, the Non-QM mortgage originator is earning interest daily on the money they lent,” he said. “There’s an advantage for them to take a deeper haircut due to the interest they earn.”

In addition to the message from Flagstar, Non-QM mortgage lenders are facing compression on the loans they sell, said the executive, meaning profits are dropping.

“Compressions have dropped to 101 from 104 – or three points – and when you’ve got all this overhead you’re trying to support, like salespeople and occupancy costs, there’s not enough margin there to support the business model,” he said.

Wellness of Non-QM Market

Flagstar’s text message prompts questions about the viability of the Non-QM industry, and there are different views on its health.

“You don’t really know what’s going on in the Non-QM industry because most of the players aren’t public companies,” Argus Research Senior Analyst Kevin Heal said. “Look at Sprout. Two weeks ago, everything was OK. Last week, it’s not.”

Many of the problems Non-QM lenders are having, he says, are due to increasing interest rates, which isn’t doing the lenders or their borrowers any favors.

“The increase in interest rates has pushed out homebuyers from qualifying for conventional mortgages and now you’re looking at Non-QM mortgages at around 7%, maybe even higher,” he said. “If you’re a restaurant owner or beauty salon owner, where you have a lot of cash coming in, a 6% mortgage might have been OK, but now you’re looking at a substantially higher rate.”

The higher rates, Heal says, are causing a slowdown in Non-QM lending and making buyers of these loans demand higher interest rates, too.

“Investors are also demanding higher interest rates due to the fact that there are fears of a recession,” he said. “If we go into a recession, investors of these loans are saying, are the businesses of these Non-QM borrowers affected negatively?”

But Jack Kahan, the head of residential mortgage-backed securities at KBRA said he expects that there may still be "meaningful activity" in the Non-QM industry when it comes to securitization this year.

“$27 billion have been securitized so far this year,” Kahan said “We're expecting another $20 billion by the end of this year."

Kahan added that the securitization total last year was $30 billion.

Heal attributes much of the volatility in the Non-QM arena due to the Federal Open Market Committee’s (FOMC) decision last month to raise the Federal Funds rate, the interest rate banks charge one another for overnight loans so they’re fully capitalized, by 75 basis points – all part of its plan to push down inflation, currently running at 9.1%.

Many Non-QM lenders, Heal says, turn to a warehouse line to fund their loans.

“They don’t necessarily have the capital to fund the loans themselves,” he said. “So, the warehouse funding lines have gone up from 25 to 50 basis points, which means you’re talking about an interest rate between 1.5% and 2%.

FOMC Raises?

If the FOMC raises the Federal Funds rate again – as some expect they will during their July meeting – it could increase warehouse’s interest rates.

“They’re probably at 2.5% in another month, so that’s definitely taking a toll on those that can’t fund the loans themselves,” Heal said.

Another Non-QM insider offered this critique of the industry. “I think where a lot of our competitors got into trouble is that they waited too long to take interest rates up,” Acra Lending CEO Keith Lind said. “They’ve been playing the market share game, which you don’t do.”

He also thinks some of his Non-QM industry colleagues forgot the industry they’re in.

“What a lot of people failed to realize is that we’re not in the agency business, where we take our loan and sell it to Fannie or Freddie,” Lind said. “We’re in the private lending sector. You have to understand your capabilities as a company, which is to manage costs, know what your liquidity is and who your liquidity providers are and, three, you need to manage interest rates. If you don’t manage those three things – manage costs, liquidity, and interest rates – you’re going to get into trouble.”

NMP Staff Writer Steven Goode contributed reporting to this story.

Jul 13, 2022
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