4 Reasons To Reconsider Non-QM

With refinances slowing and rates climbing, a growing number of lenders are realizing now is the time to look for new business wherever they can find it. And many are finding it in the non-QM marketplace. The resurgence in popularity of these products is due, in part, to the endurance of the mortgage industry.  In the summer of 2020, a lot of lenders were prepared to walk away and give up on this profitable business.

No one knew how COVID-19 would affect the economy. Investors, rating agencies and lenders had no data that could help them determine how loans would perform with the sudden changes that occurred throughout the workforce. In an instant, the ratings agencies stopped rating non-QM securitizations while they amended their models for the new economic environment. This resulted in capital markets abruptly closing. With heightened risk in the near future, warehouse lenders closed their lines for non-QM products, which made it impossible for originators to fund them. The business halted on both sides. However, this situation did not last very long.

Today non-QM lending is making a comeback and growing quickly. We’ve identified four reasons why lenders who want to pursue continued growth during the second half of 2021 should get into or back into non-QM lending.

1.) Consumer Demand is High

Before the pandemic, there was a considerable amount of demand that went unfulfilled in the mortgage marketplace. Since that time, the demand for mortgages has grown even more but lenders have not met that demand at the same fast pace.

By meeting the needs of borrowers who don’t fit neatly into conventional loans, such as the self-employed, foreign nationals, credit challenged and those who need higher-balanced loan amounts, lenders can continue to expand their businesses.

The fact is a significant number of borrowers are not good candidates for conventional loans for a variety of reasons. But this does not mean they are a greater risk. It simply means they need an alternative solution.

2.) Self-Employed Borrower Segment is Underserved & Growing

According to the US Bureau of Labor Statistics¹, as of April 2021, the number of self-employed people in the U.S. is 9.651 million. April 2021’s figures are down a slight 2.28 percent from the previous month, during which the number of self-employed in the U.S. grew 4.38 percent annually to 9.876 million. This was the highest number of self-employed in the U.S. in any given month in nearly three years.

Given the increasing number of people becoming self-employed, and the documentation burden that they must shoulder when trying to get approved for a conventional mortgage loan, lenders can more effectively answer their home financing needs with non-QM loans which may feature:

• Income verification via bank statements
• Longer payment terms
• No private mortgage insurance requirement
• Higher debt-to-income ratios

By incorporating non-QM options into your loan programs, you automatically open your lending operation up to a whole new borrower segment, paving the way for more growth.

3.) Market Conditions are Ripe for Non-QM

Over half of mortgage lenders anticipate profit margins to decrease throughout the remainder of 2020 and this belief is backup up by data. According to the Mortgage Bankers Association², mortgage margins have steadily declined, while at the same time, 30-year fixed mortgage rates are expected to increase to 4.4% come next year.

The changing market conditions in combination with an influx of well-funded investors are making it easier for lenders to enter the non-QM space and answer the needs of borrowers who cannot access conventional loans. 

4.) Luxury Home Market and Second Home Sales are Soaring

Since the onset of COVID and the move to a remote workforce, American real estate markets have experienced a noticeable transformation. Many people discovered their existing homes don’t satisfy their new needs and are in search of additional space away from the cities they no longer must commute to and from. Having the flexibility to work from anywhere is at the heart of this noticeable shift.

According to national property broker Redfin³, purchases of high-end homes in the U.S. jumped 26% year over year during the three months ending April 30, 2021. That’s compared to the 17.8% gain in purchases of affordable homes and the 14.8% increase in purchases of mid-priced homes. In addition, Prices of high-end homes in the U.S. rose a record 14.3% year over year during the three months ending April 30. By comparison, prices of mid-priced homes climbed a record 12.4% and prices of affordable homes increased 10.2%. This phenomenon is a clear indication that wealthy Americans have benefited the most from working remotely and a strong stock market.

The high number of luxury homes that have become available over the last year have facilitated purchases in this segment, causing that market to thrive. Listings of high-end homes rose 19.3% year over year during the three months ending April 30–outpacing a 13.9% gain in affordable listings and a 9.1% increase in mid-priced listings.

The enthusiasm for high-end and secondary homes is expected to continue throughout the remainder of the year, which points to a growing need for Jumbo loans and non-QM financing options.

How to Get Started

Most everything in business depends on relationships.  If you’re interested in taking advantage of the non-QM opportunity, select a partner that has demonstrated success in the sector by having: a long history in non-QM; an array of products that will answer your borrowers’ needs; an experienced support staff who can guide you so every loan moves through the process smoothly; a commitment and vested financial interest in the space to ensure innovative non-QM product offerings.

Lenders who understand non-QM products and the borrowers who want and need them ─ and have a reliable investor partner ─ will emerge as leaders in the sector as their businesses expand. As agency production and refinance business begin to wane in a rising rate environment, non-QM will be the road that leads mortgage lenders to higher growth.

¹ https://www.oberlo.in/statistics/how-many-americans-are-self-employed

² http://www.mortgagenewsdaily.com/channels/pipelinepress/06222021-economy-and-traffic.aspx

³ https://www.worldpropertyjournal.com/real-estate-news/united-states/austin/real-estate-news-luxury-home-sales-data-for-2021-redfin-housing-reports-fastest-growing-luxury-housing-markets-in-2021-12563.php