Non-QM: Moving from story-telling underwriting to mainstream loan program

Non-QM: Moving from story-telling underwriting to mainstream loan program

From Housingwire

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For the past couple of years, non-QM lending has been largely a private or hard money loan program for mortgage production. As we move into 2017, we’re seeing a lot of economic forces coming together to create an expanded environment where non-QM lending can once again become a viable option for loan originators.

With interest rates ticking up, refinance volumes shrinking and total originations projected to drop nearly 30%, originators and investors are looking for ways to keep volume flowing. Non-QM may not be the full answer, but there are several factors that indicate there is both interest and opportunity — if it’s done right.

Among these factors are “boomerang borrowers” who were impacted in the 2008-2010 period and went through foreclosure and/or bankruptcy. Many of these consumers have repaired their damaged FICOs, re-establishing their credit worthiness, and are now looking to re-enter the homeownership market.

In addition, by most estimates, Millennials will comprise one in three homebuyers in 2017. While both groups were negatively impacted by the tight credit guidelines established in the wake of the housing recession, many now have good cash flow and/or savings and can qualify for lower LTV programs.

Another factor creating opportunity in non-QM is increasing rates, which is predicted to spur an approximately 47% decrease in the refinance market in 2017. This will also cause originators to look at developing new lending policies, which will be shaped by the need to look at the credit window from both a traditional and evolutionary viewpoint for boomerang borrowers and Millennials.

The opportunity to grow non-QM safely in a tighter regulatory environment will not only take credit, collateral, and capital, but also intent and integrity.

Products are being revisited in today’s market for Alt-A and non-prime with a look to the future — tempered by the lessons learned from the past.

Portfolio managers and investors also have a vested interest in the expansion of the non-QM market. They have an appetite for non-QM assets as they represent an attractive yield opportunity. That’s why we’re seeing more “hold” strategies at work with current non-QM production.

So how can the industry move toward growth in non-QM and at the same time promote an environment where non-agency securitization can expand?

First, originators, warehouse lenders, servicers, rating agencies and investors need to be on the same page about creating a standardized method of determining if a non-QM asset is investment quality.

This standardization to create a set of protocols in a consistent and systematic manner entails a fresh look at ATR (Ability to Repay), collateral review, underwriting, and closing/post-closing.

With some of the ambiguity created by overlapping regulation, every one of these market participants needs confidence that by using standardized and recognized policies it will be able to grow the non-QM channel in a fully compliant manner while adhering to TRID. These “best practices” can assure market participants at each step in the mortgage cycle.
Second, originators and their LOs need to create awareness of non-QM lending that targets both the boomerang and Millennial borrower. Educating the consumer and what options they have open to them besides traditional QM products and how to qualify will become a competitive edge.

Our company has been in a unique position of facilitating the discussion around non-QM by conducting assessments of originators and loan-level review for investors and deal agents. We’ve also been very active in the discussion of how best to grow non-QM lending — and turn it into a featured or mainstream loan program.