“They were well-qualified borrowers, typically because they were selling a house that had appreciated in significant value. So, a conventional loan was pretty much the best option. But I think right now you have a real opportunity to explore some Non-QM loans as well,” Kellen Vaughan, branch manager for Trademark Mortgage, says. “That’s certainly a conversation that we’re having with a lot of folks, especially those wanting bank statement loans.”
But adding product lines and partnering with new lenders takes time and research. Slyusarchuk says loan originators and brokers need to be well educated on the products and able to recognize a Non-QM borrower right away.
“It’s good, but we have to teach them how to spot the proper customer,” Slyusarchuk said. “It’s not that easy when somebody is narrow minded and has only been doing conforming loans for the past 10 years. You know, it’s a little bit of a challenge.”
Slyusarchuk said borrowers and brokers are willing to embrace non-traditional options, but for smaller lenders it’s still a challenge. Many were spooked due to the liquidity crisis that happened during the onset of the COVID-19 pandemic.
“Some of the lenders originated loans before the pandemic and then pandemic came, and they had to sell at a big discount. It was a huge disappointment,” Slyusarchuk said. “Warehouse lines got scared; everybody got scared.”
Eventually, fears began to taper off and more lenders went back to doing Non-QM loans, but in 2022 there was another liquidity squeeze due to rapidly rising rates, and lenders had to sell their loans at a discount once again. So, even though these non-traditional loans are becoming more widely accepted in the broker community, lenders remain hesitant.
“It’s easier for brokers where you lock the loan with a lender and you’re done,” Slyusarchuk said. “But for guys who close on their name and have to be part of the market, it’s a little more challenging.”
But if investor appetite for these loans are increasing, why shouldn’t lenders, brokers, and originators return or begin working in Non-QM? Well, depending on the severity of this upcoming recession in the second half of 2023, it could have an impact on Non-QM.
Per the last Federal Market Open Committee meeting, Federal Reserve Chairman Jerome Powell expects the U.S. economy to soften in 2023, and achieve its 2% inflation target without a big downturn in jobs and the economy. However, he warned no one should assume that the Fed can protect the economy if default occurs.
Both Angel Oak and A&D Mortgage are predicting the Fed will make a soft landing and the upcoming recession will be mild, but more importantly, that’s what analysts are predicting as well.
Overall, Howlett believes the remaining Non-QM lenders in the marketplace are prepared for this upcoming recession, which is likely to be mild.
“Right now, housing looks like it’s in good shape to handle a rising unemployment rate and it looks like it’ll be a soft landing, at least for the housing market at this point in time,” Howlett said. “But you’re right, I mean, the difference between a soft landing and hard landing could really make or break the model.”