Move over Fannie, the non-QM loan is on the fast lane

In the world of mortgage financing, there is a product line defined by what it is not: an unqualified mortgage (non-QM), a non-senior, agency-less loan, or a loan with alternative documentation.

According to Dane Smith, president of Compared to mortgage capital.

“We are waiting for the total [private-label] the issuance for 2021 will be around $ 25 billion, ”Smith said, referring to the non-QM private label securitization market. “By 2022, we expect emissions to exceed $ 40 billion.”

Until November of this year, Versus sponsored 10 non-QM private label securitizations valued at over $ 5 billion, according to a review of bond rating reports,

Even if the non-QM private label market reaches $ 40 billion next year, this is still only a fraction of the market’s lending potential. Manish Valecha, head of client solutions at Angel Oak Capital, which is part of the Angel Oak Companies, says the non-QM market “as a percentage of the overall market is around 10% to 12% in a standardized environment” – adding that was the size of the non-QM market in the early 2000s, before the global financial crisis.

“This implies a market size [today] somewhere between $ 175 billion and maybe $ 200 billion, ”he said. “We just see a great opportunity. “

Angel Oak, through its affiliates, originates and securitizes non-QM loans. So far this year, the company has brought to market seven non-QM private label deals valued at nearly $ 2.5 billion, according to bond rating reports.

A technical sheet prepared by Kroll Bond Rating Agency which includes most, but not all, of private label transactions through mid-November of this year shows a total of 68 non-QM securitization transactions involving loan pools valued in total at over $ 21 billion. dollars. This represents an increase from 54 transactions valued at nearly $ 18 billion for all of 2020 – a year disrupted by the emergence of the pandemic.

The universe of non-QM single-family mortgage products is large and difficult to define in a few words, but the definition is important because a large portion of borrowers in this non-QM category represent the heart of the US economy. Within its scope are self-employed people as well as entrepreneurs who buy single-family investment property – and who cannot qualify for a mortgage using traditional documents, such as salary income. As a result, they must rely on alternative documents, including bank statements, assets or, in the case of rental properties, debt service coverage ratios.

“If you look over the past 15 to 20 years, the self-employed portion of the country has increased every year,” said Keith Lind, executive chairman and chairman of Acra loan (formerly known as Maintenance of the citadel). “The pandemic has only accelerated this, with more and more workers self-employed or eager to become entrepreneurs. It’s a huge tail wind [for the non-QM market.]

This sweet spot includes the odd-job economy, which accounts for between 11% and one-third of the U.S. workforce, according to the source of analysis.

Lind says Acra and other non-QM lenders are well positioned to tap this demand and the aftermarket created in its wake. He said Acra did a small securitization of non-QM loans this year, worth around $ 51 million, but next year he said the company was ready to make more deals and “was exploring [its] options in the securitization market.

Non-QM mortgages also go to a tranche of borrowers with credit problems, such as recent bankruptcy or slightly out of range credit scores. Loans can include interest only, 40-year terms, or other creative financing features often designed to lower monthly payments at the start of the mortgage – often with a view to refinancing or selling the property in the short term.

It’s important to note, however, that non-QM (or non-prime) mortgages are not the same as subprime loans, which were high-risk, poorly underwritten loans – often involving little or no documentation – mortgage loans that helped trigger the housing stock market crash some fifteen years ago. Today’s non-QM / non-prime loans are underwritten at much higher credit, income and asset standards and involve a range of buyers beyond people with poor credit – and even these loans must adhere to federal repayment capacity rules. The group of non-privileged borrowers also includes real estate investors, real estate investors, foreign nationals and business owners.

Non-QM mortgages, Lind said, include anything that cannot be guaranteed by a government or an “agency” through Fannie mae, Freddie mac or through another government-backed loan program offered by agencies such as the Federal Housing Administration Where Department of Veterans Affairs. This is a large and growing segment of the mortgage finance market that is expected to grow as rising house prices, changing employment dynamics and rising interest rates push further home. borrowers to get out of the agency’s envelope.

However, some mortgages fall in a gray area outside of the agency space, but also don’t fit perfectly into the non-QM category, such as senior jumbo loans – which otherwise meet to agency lending guidelines, except for their size. Also in this gray area are some mortgages for investment property and second homes to individuals (as opposed to partnerships or legal persons) who qualify for agency guarantees – but have been excluded from a stamp Fannie Mae and Freddie Mac for much of this year due to volume caps since suspended.

In fact, jumbo loan securitizations were the spearhead of the private label market in 2021, with private label transaction volume of $ 44 billion through October of this year, according to one. loan aggregator report. MAXEX. The pace of jumbo loan securitizations in 2021, however, has been driven, to a large extent, by loan refinancing, and rising rates are expected to cool the market in 2022.

“As rates start to rise, the supply of [jumbo] loans will decrease and we will probably see less securitization volume, ”says the MADEX report.

The opposite is the case for the non-QM market, however, given a rising rate environment, in the absence of sharp peaks and volatility, creates opportunities for this market, both in terms of loan origination. and securitizations.

“Think of all mortgage brokers [this year] who didn’t care about non-QMs and are focusing on agency and jumbo products because that’s the fruit at hand, ”Lind said. “Guess what? If the prices go up a bit, they’ll have to find new products to focus on.

Lind added that a “50 or 75 basis point move” upward in rates is starting to push the market away from refinancing jumbo loans and agency loans and towards a greater range of home loan products. purchase, such as non-QM products.

“I think that’s one of the biggest tailwinds, the fact that you will have more brokers focusing on the [non-QM] product, ”Lind said.

However, not all is a tailwind in the market. Smith of Verus Mortgage said, although he believes the outlook for the non-QM market is quite strong for the year ahead, “we see the potential for volatility in the face of the Federal Reservetapers [reduction of bond purchases] and changes in interest rate policy.

“Despite the potential for increased volatility on the horizon,” he added, “we believe the market is mature enough to effectively digest higher emissions and continue to grow.”


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