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The Non-QM Pig Pile
When United Wholesale Mortgage, the Big Kahuna of originations, decided early this year that it was pushing forward into the Non-QM lending market, it was the biggest single indicator yet that lenders and LOs are looking to non-traditional mortgages to make up for a huge decline in traditional volume.
Where Non-QM — the product for the self-employed, the independently wealthy, the 1099 and K1 borrower — was largely a niche product over the past decade, UWM’s entry helped move its reputation mainstream. But the Pontiac, Mich.-based lender isn’t the only mortgage company with unconventional eyesight. Dozens of lenders have put Non-QM at the forefront of their business plan. Yet what no one knows is whether the market will be able to support all the companies piling on.
How Big Is The Non-QM Market?
The conventional mortgage industry tracks volume through the Mortgage Bankers Association. But since there isn’t a Non-QM mortgage association, it’s hard to say what the trend lines for this kind of lending are. S&P Global said Non-QM loan volume in 2021 was $28.6 billion or .7% of the mortgage market.
“Non-QM will likely see growth in 2022 as originators become more bullish on this subsector, especially with agency-eligible refinancing taking a backseat with interest rates on the rise,” said an S&P Global Ratings report in January. The same report says Non-QM lending will come in at $40 billion this year.
But two predictions, one from S&P Global analyst Jeremy Schneider and another from a Non-QM insider — Angel Oak Mortgage Solutions’ Executive Vice President Thomas Hutchens — see Non-QM loan volume surging in the coming months. Schneider contradicted his company’s report and estimated that Non-QM lending will be $80 billion this year while Hutchens predicted as much as $100 billion — or about 4% of the overall mortgage loan volume predicted for 2022.
Many of the top lenders in the Non-QM space see their loan volume growing this year, with A&D Mortgage CEO Max Slyusarchuk saying his company will do at least $4 billion in Non-QM lending, up from $2 billion last year. Acra Lending CEO Keith Lind says his firm’s on track to write $3.5 billion in Non-QM loans, up from $2 billion in 2021. Angel Oak sees its Non-QM loan volume coming in at $7.5 billion this year, up from $3.9 billion, says Steven Winokur, its marketing director.
Another newcomer to Non-QM lending, Champions Funding LLC, which opened its doors in early March, did $20 million in loans during its first month, said chief operations officer Natalie Verrette. “$1 billion, that’s the objective this year,” she replied, when asked about the company’s goals this year.
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.
“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
Other prospective Non-QM borrowers include high net worth individuals who don’t always show an annual income the way those who collect a W-2 tax form do. These loans can also be for foreign buyers as well as property investors.
“It’s fair to say Non-QM borrowers qualify for the loan given their cash flow but for one reason or another may not qualify on paper for a conforming loan,” Greg Austin, Carrington Mortgage’s executive vice president, said.
Serving The Self Employed
Much of the optimism for Non-QM’s potential stems from the number of self-employed workers. But like this year’s estimates for Non-QM lending, it’s difficult to pin down how many people are their own boss.
For example, according to the U.S. Bureau of Labor Statistics, people calling themselves self-employed increased to 9.2 million in 2021 from 8.8 million in 2019. That same report, however, showed that self-employed numbers dropped by 200,000 in February, to just over 9 million.
Barron’s, meantime, reported in March that “The Great Resignation” — a term coined as people left their jobs in droves in 2021 — was reversing itself, with people returning to the office.
“There are over 500,000 new, unincorporated, self-employed workers,” said Deephaven Mortgage’s Senior Vice President Shelly Griffin, citing a Wall Street Journal article from November as the reason her company sees growth in Non-QM loans.
The Pew Research Center estimated there are 16 million self-employed workers, a number not seen since 2019. But the study showing the greatest number of self-employed workers — and which gives Angel Oak Mortgage Solutions’ Winokur confidence about Non-QM’s potential this year — is from Upwork, a marketplace for freelancers. It reported in December that 59 million Americans performed freelance work last year.
“Freelancers contributed $1.3 trillion to the U.S. economy in annual earnings, up $100 million from 2020,” Upwork reported. “The higher skilled nature of freelancing is clear as 51% of post-grad workers chose freelancing, up 6% since 2020, while the share of freelancing individuals with high school diplomas or less education has declined 37% from 2020 to 31% in 2021.”
The advantage of the Non-QM loan, Natalie Verrette, president & CEO, Champions Funding says, is its flexibility in determining a prospective borrower’s annual income and how much they can afford to borrow. Her company cross references a borrower’s current pay with what they were making prior to COVID-19.
“The mitigation of risk is balanced across income analysis, a review of their credit and FICO score,” she said.
Lind agreed. “The average borrower is making a down payment of 34% and has an average credit score of 730. They’re good borrowers,” he pointed out. “They just don’t have access to credit like the standard W-2 employee.”
Eshaghian’s weighted average loan amount is $600,000 and his borrowers have a credit score of 730, he said. At Interline, CEO Gene Thompson, III, said his average borrower is a high net worth individual with a high credit score who’s making a down payment of at least 20% and taking out a mortgage north of $700,000.
PUSH, PUSH, PUSH
Education and sales calls have been instrumental in gaining originator buy-in, say executives in the Non-QM field.
“There was a lack of knowledge and awareness, that was the problem,” Greenbox Loans CEO Raymond Eshaghian said. “The Realtors didn’t even know this product existed, so I got involved with a couple of Realtor groups to talk about non-QM lending, and that helped.”
The boots-on-the-ground approach is similar to what Angel Oak Mortgage Solutions is doing. Its chief marketing officer, Steven Winokur, says the company’s 90 account executives make between 50 to 100 presentations a month to real estate agents about Non-QM loans because they view them as the gatekeeper to the prospective borrower.
“We offer an unbranded presentation that can be used to present non-QM to real estate agents,” he said. The brokers and loan officers can brand it with their own logo and contact information.”
The advantage of this presentation is that it allows loan officers to give something other than the same old, tired sales pitch about great rates and fast closes, Winokur says.
It allows them to say, “‘I’m going to talk with you about how you can put more money into your pocket and how you can serve borrowers who are underserved,’” he said.
“The next thing we bring up is who do self-employed borrowers hang out with? Other self-employed business owners. [Non-QM] is a good niche, and they [the real estate agents] can become known as the expert on self-employed borrowing,” Winokur added.