In the non-qualified mortgage (non-QM) space, there has been lots of hype and growth with some bank and nonbank entrants acting as investors on the origination side.

Warehouse banks have been less eager to participate. Their biggest hurdle to date has been liquidity as it relates to some of their clients only having one investor alternative to sell these non-QM loans. As soon as there are more buyers offering these programs, warehouse lines should become more readily available.

Surprisingly, litigation risk was a secondary source of concern by the warehouse banks. Some of the medium and larger size mortgage bankers nationally have not agreed to take on the additional exposure as a correspondent, but have chosen only to broker these loans.
Recently, a few of the panelists at the ABS East Conference in Miami, Florida mentioned the Deutsche Bank report, which stated that the market size is approximately $50 billion (5% of current originations). They all agreed that supply for production in general will remain a challenge for 2014, but all were optimistic going into 2015.

The rating agencies announced that they were all prepared for the significant volume they expect in 2015 for non-QM issuance. They have established criteria to assess risk and will look at legacy books for performance metrics on prime/super prime jumbo non-QM loans. They are definitely not interested for another two years to rate nonprime non-QM without having a better understanding of how litigation risk works and what the legal history will be.

Some of the challenges associated with the lower end of the credit spectrum include justifying these loans to regulators. They currently peg legal costs exposure at about $30,000 per loan. They claim the Consumer Financial Protection Bureau (CFPB) provided them with this information. As a side note, I could not locate this info on the CFPB website so perhaps they “backed into” this number.

The typical non-QM files that some of the due diligence firms see:

• expanded ratios beyond 43%
• Interest Only loans
• Alternative documentation 12-month bank statement loans with ATR (ability-to-repay).

All loans are exhibiting higher credit scores but are non-QM for a variety of reasons. A special note is that QM eligibility is NOT driven by FICO scores.
Issuers and investors were keenly interested in the development and product supply in this market. They are certainly attracted to the higher yields and the higher credit quality borrowers, even though there is potential for litigation risk on some of these loans that will eventually go into default.

At the most recent ABS East Conference, the mortgage industry, as it relates to the securitization market, was not viewed upon favorably but non-QM certainly peeked everyone’s interest. Potential issuers, investors, and industry participants were keenly interested in what industry experts had to say about the newest asset class, non-QM. As you can imagine, those sessions were full and was standing room only for the last session of the last day!

There are some new entrants in the non-QM space worth noting

One nonbank recent addition just publicly announced that they are selling these loans to a foreign bank. This is an exclusive arrangement that allows them to offer a full non-QM menu (Jumbo, Agency, Income, Investor).

Other participants include private equity fund buyers where one was recently merged and were provided an additional $300 million in capital to grow!
There are also quite a few banks that offer their versions of non-QM programs but also offer warehouse lines to create liquidity for their portfolio programs. There are some that exclusively grow their entire origination efforts in their respective correspondent channels.

There are other nonbanks that see tremendous opportunity in this space and are making it happen through their wholesale/correspondent channels. The whole loan market for loan sales is extremely liquid; as they have told me they are receiving 102+ bids on loans with over a 5% yield. These participants have shared with me they have no desire to access the securitization market and don’t see that happening for another couple of years!

Talking about the non-QM Private Label Securitization (PLS) market, prime jumbo REITs are dabbling in this currently with high credit quality jumbos that just happen to exceed 43% DTI.

As for others looking to participate, some nonbank wholesalers are planning a non-QM product rollout to its brokers in late 4th quarter. They will also participate in the higher credit quality non-QM loans. They see a non-QM PLS market along with other industry experts to represent $1-$2 billion in 2015 of new security issuance.

The markets are certainly prepared for this!

What are your thoughts on non-QM lending? Please share in the comments.

Lloyd San

Lloyd San - Retired MGIC Mortgage Market Manager

A 30-year mortgage industry veteran, retired in 2021, Lloyd San served as Mortgage Market Manager for Mortgage Guaranty Insurance Corporation (MGIC). Overseeing a national effort, he was responsible for managing all client-related capital market activities in the areas of bulk and correspondent loan referrals, investor introductions, structured products, whole loan sales, as well as product and personnel introductions.

In addition, he is chairman of the California Mortgage Bankers Association, Secondary Marketing Executive Committee and also serves on the Western Secondary Conference Committee.

A graduate of San Diego State University in California, Lloyd received his MBA in Financial Management from National University. He also holds a California Real Estate Broker’s License.

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