Non-QM Turns A Corner, But Is It A Resurgence?

Latest securitizations signal recovery for the market

Katie Jensen
Katie Jensen
Non-QM Turns A Corner

“It’s been very tough with a lot of players that have completely left the market,” B. Riley analyst Matt Howlett says. “The liquidity crisis caught people by surprise and some of the weaker players have exited. But those people that have survived are in a very good position right now.”

Non-QM Squeeze

Toward the end of 2022, the mortgage rate topped 6% — its highest level since the 2008 global crisis — up from just 3% at the start of the year. This caused a liquidity squeeze in the secondary market, in which Non-QM loans are particularly vulnerable.

Because the GSEs don’t buy Non-QM loans and lenders don’t hold these loans on the balance sheet, the only natural buyer is the wholesale market, Howlett explains. All Non-QM loans need to be securitized and sold to secondary market investors, who are most attracted to loans with higher interest rates (or coupons).



So when rates suddenly shot up, lenders holding older loans with lower interest rates (lower coupons) couldn’t sell or exit them, causing pipelines to freeze. This is what caused shutdowns, bankruptcies, and layoffs across the Non-QM space.


The first sign came when Angel Oak account executives announced on social media the lender would revert all programs and guidelines back to where they were before the pricing and liquidity crisis. Since Angel Oak Capital buys the production, moving guidelines back is a big indication of a comfort level with loan securitization.

–Tom Hutchens, Angel Oak

“They’re completely correlated,” Tom Hutchens, executive vice president at Angel Oak Mortgage Solutions, says. “We’re increasing the guidelines because there’s been an increase in liquidity in the market. Anytime liquidity starts to shrink, guidelines follow suit. So when liquidity starts to grow, guidelines grow.”

Non-QM Resurgence

Angel Oak’s first securitization of 2023, the senior tranche of the AOMT 2023-1, received a AAA rating from Fitch Ratings. Namit Sinha, chief investment officer of private strategies at Angel Oak Capital Advisors, said the company is pleased with the execution of these loans and believes Non-QM will have a resurgence this year.

In February, Fitch Ratings gave A&D Mortgage quite the endorsement providing AAA, AA- and A- ratings to the biggest, best pieces of the securitization — especially considering more than 43% of the loan pool are Non-QM loans.

“I can tell you that securitizations on Non-QM are pretty close to securitizations on other classes,” A&D Mortgage CEO Max Slyusarchuk says. “January spreads have tightened a lot due to the fact that the Federal Reserve has been more optimistic and not in hiking mode. So that’s why Non-QM is doing so much better than before.”

Although Non-QM is susceptible to issues when there’s a liquidity squeeze in the market, both lenders maintain that the loans perform well — nearly as well as agency loans.

“Non-QM loans are still viewed by the end investors as really good loans,” Hutchen says. “If we had just started Non-QM last year, that’d be a different story. But, we have a 10-year track record of Non-QM originations and securitizations, and the performance of them kind of speaks for themselves.”

Do Your Research

Non-QM’s comeback arrives just in time for loan originators and brokers to add it to their portfolio. Throughout most of the pandemic housing boom, move-up buyers were the center of attention — clean, pristine borrowers with excellent credit looking for a simple conventional loan. They could go to any lender and get what they’re looking for, but now some loan officers are seeing more complex customers knocking on their door, wondering if they could get loans.

“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.”   

Katie Jensen
Katie Jensen,
Staff Writer
This article was originally published in the Mortgage Banker Magazine April 2023 issue.
Published on
Mar 30, 2023
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