As more lenders come to the conclusion that adding Non-QM mortgage loan products to their menus will be an essential tactic for remaining competitive in the coming purchase money market, we expect to see more lending executives stalking through the industry in search of a good partner. Actually, the best lenders will seek out a great Non-QM investor, as they know how important any competitive advantage will be in the days ahead.
We won’t waste any time in this article to talk about why lenders will come to this conclusion, as we have written about that at length elsewhere, except to point out that the wave of Non-QM borrowers is here.
An S&P Global report released earlier this year concluded that the final QM rule issued by the Consumer Financial Protection Bureau would open the floodgates for Non-QM lending. That surprised pretty much no one, at least no one who had been active in the Non-QM space.
In its report, the company said:
“The non-QM sector experienced the biggest shock in the spring of 2020 as originations and securitizations largely halted, and non-QM issuance fell relative to 2019,” S&P Global wrote in its report. “However, we feel that non-QM issuance volumes will return to 2019 levels this year, reaching an estimated $25 billion, due to a strong purchase loan market and slowing agency refinancing activity. We also think that older non-QM securitization clean-up calls could contribute to additional new securitization collateral in the low-interest-rate environment.”
We expect the Non-QM sector to do even better than that. But we’ll leave our reasons for believing this for another time. What’s more important now — and will become increasingly important in the days to come — is how to go about finding, vetting and partnering with a great Non-QM investor.
Being a competitor in this space, we have spent a great deal of time seeking out the best criteria for lenders to use and then working to ensure that we are competitive in those areas. As a consequence, we can now share with you four key qualities every lender will be looking for in an investor partner.
The right relationship is everything in business and no article can tell you everything you need to know to choose the best partner. Experienced executives know that there are many intangible factors that must be considered, many of which only come to light when the parties sit down for extended discussions.
But as starting points go, these four criteria will set any lender on course for Non-QM success.
1. Look for experience
“Are you experienced?” has never been a more important question to ask. The right partner will have a long history in the non-QM sector. That means more than just a few months or even a few years.
It’s important to seek out executives who have lived through a cycle or more, as they will have better insight into how the market moves and how to manage through change. And there are plenty of changes in the lending business.
Experience brings with it many benefits. Experienced Non-QM investors will offer the right suite of programs, tools, training, and, most importantly, funding to contribute to the lender’s success and growth. The right partner will offer flexible programs to help underserved mortgage customers, including the self-employed and foreign nationals. But also JUMBO and other products for more experienced borrowers.
The right lender partner will anticipate the lender’s needs and the needs of their borrowers.
2. Look for product mix
If the Non-QM investor your choose doesn’t offer all of the products required to serve its borrowers, other investors will have to be found. That just complicates the issue, increases the number of people on the lender’s side required to manage those relationships and adds friction to the lender’s business.
Far better to find an investor who understands that Non-QM is an entire universe of opportunity that requires many different product types to meet consumer demand. Lenders must seek out a partner that knows how to offer the products their borrowers are seeking. All of their borrowers.
Don’t settle for a borrower who only thinks Non-QM loans are meant to serve borrowers who can’t qualify for a Fannie Mae or Freddie Mac mortgage because they fall outside of the credit box. The lender’s investor should be able to serve those borrowers, but also the many other kinds of borrowers who are seeking out these loans.
More and more borrowers are requesting Jumbo and bank statement loans, for instance. The self-employed are also increasingly seeking viable loan options. To meet this jump in demand, you should look for a partner that knows how to originate and fund these types of loans.
Some investors or wholesale non-QM lenders exclusively purchase certain kinds of Jumbo products. Others will buy both QM and non-QM Jumbo loans. A partner with experience understands this and can accommodate multiple programs.
The right partner will have documentation and verification policies that make it practical to serve credit-worthy borrowers without standard documentation. The right partner should provide bank statement mortgage loans and other income and credit verification documentation such as 1099 forms and other options.
3. Look for a good support team
The Non-QM world differs in many ways from what we used to call conventional mortgage lending.
Underwriters and loan processors must have access to experienced support staff who can guide them so that every loan moves through the pre-funding and post-closing processes smoothly.
A good helpdesk is an investment that not every company will make, but it’s critically important. In addition, an experienced sales staff will add value to every transaction and will guard the growing relationship. Over time, these internal champions become invaluable to mortgage lenders and help them grow their businesses.
Lenders must find out exactly what each prospective partner provides in terms of support and avoid settling for less than they need. Avoid the temptation to just get started on the promise of better support as the relationship develops. That’s not a safe bet.
Find out exactly what the support team looks like, who will answer the phone when someone on the lender’s team has a problem and who among your peers recommends this support team.
4. Look for an innovator
Innovation has a bad name in some lender shops. It can be risky to make changes in an industry subject to such high regulator oversight. The truth is that an innovative company is the only competitive advantage anyone in our space has today.
This is true because Fintech players from outside of our industry are moving in aggressively. Major banks have already learned that failing to keep pace with these innovative competitors will put their businesses at risk.
In any business, what we have today may not be sufficient to meet our needs tomorrow, or the needs of our customers. When a lender chooses a partner, they must make certain that they are working with people who have committed to the non-QM space and invested the resources required to be innovative.
Given what we saw happening in this market over the last year, we see great promise in this space, in terms of the loan products available, new loan products in development, and the market’s appetite for securitizations.
If your business is considering adding these products to your menu, we hope these four elements of a good partner will point you in the right direction.
Jeff Schaefer is Executive Vice President of Correspondent Sales at Verus Mortgage Capital, Washington, D.C., a full-service correspondent investor offering residential non-Qualified Mortgage and Investor lending solutions. To learn more about Verus, go to www.verusmc.com or email [email protected].