Eyes Wide Open
What will Non-QM lending amount to this year? There are two sets of views and they’re based on where people sit.
The first one, from the analyst community, including Schneider and UBS’s Brock Vandervliet, says it doesn’t grow more than 5% of the overall mortgage market. The Mortgage Bankers Association predicts $2.59 trillion in mortgage originations in 2022.
“Non-QM lending will do what it’s done, 5% of the market. It’s not going to be 25% of the market,” Argus research analyst Kevin Heal asserts.
Those inside the Non-QM industry see it differently.
“The analysts are completely wrong,” countered ACC Mortgage CEO Robert Senko. “They aren’t on the street talking to real estate agents or with loan officers. They’re crunching numbers in a cubicle thinking that’s indicative of the market. If they say Non-QM lending is 5% of the market, I’d be more bullish. I think 10% is a reasonable goal.” That translates to about $259 billion.
“Analysts have never been a loan officer who must start looking for solutions when business dries up. That’s the driver of [the growth],” Senko adds. He expects his firm to make close to $1 billion in Non-QM loans this year, up around 40% from last year.
Sprout Mortgage President Shea Pallante also thinks Non-QM lending could come in at 10% of mortgage loan volume for three reasons: the number of gig workers, the surge in home prices and home foreclosures.
Another “driver in our view of increased demand for Non-QM comes from the recent increase in home foreclosures — the resolution of which may present an increase in investment real estate purchase,” he said in an email to National Mortgage Professional Magazine. “With the right continuation and combination of these factors, Sprout believes that 10% is a potential.”
Angel Oak’s Steve Winokur differs, saying, “Our long-term vision is that it can reach 10%, but 5% this year is accurate. If it weren’t for COVID-19, I think we would have hit $100 billion by now.” Even 5%, though, would be about $125 billion based on the MBA’s estimate of overall originations at $2.5 trillion.
Angel Oak’s expectation, prior to the pandemic, was that Non-QM lending would double in 2020 to $50 billion and would double again in 2021 to $100 billion, said Winokur.
“There’s borrower demand for Non-QM loans but originators are still learning about Non-QM,” Winokur said, explaining why his company sees Non-QM lending at between $80 billion to $100 billion this year, or closer to 3-4%.
Acra Lending Vice President Michael Kirk disagrees with Winokur, suggesting there are about 8 million self-employed workers who need Non-QM to buy their primary residence and another 20 million investors who own fix and flips, condotels, Airbnb, and apartments, which is why he believes Non-QM will be stronger than previously.
“Rates have gone up, sure, but since I’ve been in this industry rates go up and down, up and down, and up and down. But, again, investors can’t stop doing business because that’s how they feed their families,” Kirk said. “So where exactly is it [Non-QM lending] going? I don’t know. I leave it up to the good Lord. But I can tell you there is a market of borrowers that need Non-QM financing and I do believe it’s more than 5%,” of the total mortgage market.
Countering Conventional Wisdom
The traditional mortgage market looks like a picked-over buffet this year. The table, once graced with a feast, is left with crumbs.
Instead of loan volume coming in at or above $4 trillion, like it did the last two years, the expectation this year is that it contracts about 40%, to around $2.5 trillion. Refis are expected to take the biggest hit, shrinking more than 60% to $860 billion from last year’s $2.3 trillion, says the Mortgage Bankers Association.
The previous forecast — now in the trash — was for a gradual increase in interest rates this year. But inflation’s spike plus the Federal Open Market Committee’s rapid increase in the Federal Funds rate, with more likely on the way, pushed up 30-year fixed mortgage rates, causing the real estate market to shrink, says UBS analyst Brock Vandervliet.
To originators holding onto the idea that conventional mortgages, backed by the GSEs, are the only ones to offer, it will likely be a challenging year. To those holding an alternative view, there’s a cornucopia of opportunity. But it involves selling and writing different kinds of mortgages. And that’s why so many wholesalers are suddenly becoming disciples of the unconventional.
Non-QM mortgages are unlike the ones purchased by Fannie Mae or Freddie Mac because applicants’ incomes are vetted differently. Unlike someone applying for and receiving a conventional mortgage, whose income is proven with an employer-provided W-2 tax form, borrowers under the Non-Qualified Mortgage umbrella are often self-employed, meaning their incomes can be more challenging to verify. Lenders and mortgage originators usually use bank statements to determine the income of a prospective Non-QM borrower. And it’s private investors buying these notes, not GSEs.
“Interest rates have gone up,” Greenbox Loans CEO Raymond Eshaghian said succinctly. Originators’ “pipelines have disappeared,” he said. “Non-QM isn’t [interest] rate sensitive and so the originator market is focusing more and more on Non-QM and, as a result, we’re seeing a spike in production.”
The typical Non-QM borrower, has an interest rate that’s anywhere between 75 basis points to one full percentage point higher than a conventional 30-year fixed mortgage, sometimes more, Eshaghian noted. They apply for these types of mortgages because their income cannot be verified in a manner that’s acceptable for a conventional mortgage.
“Purchases and refis, they’re all cookie-cutter loans. Non-QM loans involve manual underwriting — but given that the refi business is down, originators are more willing to look at them,” Eshaghian said. So much so that at his company he’s expecting up to a 50% increase in Non-QM loan production in 2022.
Acra Lending increased its sales force from 65 to 100 people, and they’re attending every conference of mortgage brokers to pitch Non-QM, said Lind, the company’s executive chairman and president, giving him confidence that the company’s Non-QM lending will increase more than 50% this year.
Arc Home Loans CEO Richard Bradfield said awareness is critical.
“People weren’t aware of this product,” he said. “It wasn’t mainstream, maybe because loan officers and companies weren’t comfortable with the product and then moved on to other [mortgage] applications.”
“It doesn’t mean there are more borrowers out there. It just means they haven’t been introduced to it yet,” Bradfield added.