PennyMac Financial Services is officially stepping into the Non-QM market, with its Correspondent Group set to launch products September 22 and wholesale to follow in the fourth quarter. For brokers and correspondents, the move signals that Non-QM lending has not only matured, but now has the backing of one of the industry’s largest players.
The initial product set includes Debt Service Coverage Ratio (DSCR) loans for real estate investors and a program for creditworthy borrowers with non-traditional income streams, such as self-employed professionals and entrepreneurs. Flexible documentation options include bank statements, asset depletion, 1099s, and verbal verification of employment (VOE), making the offerings especially attractive for borrowers underserved by the GSEs.
Why The Timing Makes Sense
Nick Pabarcus, managing director and Non-QM sales leader at Pennymac, told National Mortgage Professional that the decision is both strategic and timed very intentionally.
“We think it's a space that's going to continue to grow... the demographics in the U.S. are leaning more toward self-employed and gig income borrowers,” Pabarcus said. “The GSEs don’t have a great solution for this product line, and with that growing borrower demographic, there’s a real opportunity that the space is going to continue to grow,” he said.
Beyond demographics, Pabarcus pointed to the strength of the capital markets. “You only have half the story there, which is that, you know, probably 60% of the market is still issuing into the insurance bid,” he said. “So you have a record year from a securitization standpoint already, but over half the transactions in the marketplace are going into insurance takeouts that are extremely frothy for this A-paper.”
“There’s more demand than there is supply at this point,” he emphasized.
That dynamic, he added, makes Pennymac’s timing deliberate. “The excess liquidity, along with the comfortability of the credit quality after we have some good, vintage performances that we're able to take a look at, in addition to the growing market of the demographic, is really the reason that we intend to be a significant player in the space.”
"There are certainly IMBs and correspondent sellers that have pumped the brakes on [Non-QM], waiting for larger investors with more scale to come in and be an option to sell into. We’re going to fill that gap.” —Nick Pabarcus, Managing Director and Non-QM Sales Leader, Pennymac
Pabarcus also noted that Pennymac’s REIT, PennyMac Mortgage Investment Trust, adds another layer of strength. “It absolutely does,” he contended. “We would probably be getting ahead of ourselves since we're just launching the platform, but having that as an option is certainly a value proposition that we intend to take a look at. However, we do have several partners that we're working with that have great execution in the marketplace. And we certainly intend to be looking at the best execution across the board.”
Pennymac’s Take On Non-QM
Pennymac’s entry is designed to align with both market demand and investor expectations. “The credit quality on this stuff is top notch... weighted average credit scores in the 745–750 range, LTVs weighted average at 68. Good, solid, safe transactions if done right,” Pabarcus explained.
“What you can expect from us is we're going to feed off the top end of the credit curve. Being disciplined and pricing well in that premier credit grade is our intent,” he noted.
For brokers and correspondents, that discipline comes with advantages. “Our main advantages are going to be with our scale... not only with how we manufacture the loan, but with the technology that we're using,” Pabarcus said. “In addition, our intention is to retain the servicing on this transaction, which we think will be a huge benefit.”
He added that Pennymac’s capital markets strength and existing non-agency experience already give it a head start.
“I would put our credit and capital markets people up against, really, anybody in the industry,” Pabarcus said. “Finding those cohorts of products that are performing, and then finding execution for those products, is something that we've certainly gone into a lot of painstaking development to do.”
What It Means For Brokers
For brokers still weighing whether Non-QM should be part of their business, Pennymac’s entry may be the nudge they’ve been waiting for. As Pabarcus put it: “PennyMac entering the space does legitimize the space a bit. There are certainly IMBs and correspondent sellers that have pumped the brakes on the product, waiting for larger investors with more scale to come in and be an option to sell into,” he said.
“We’re going to fill that gap.”
