5 Key Insights for Lenders on Non-Agency Lending

While there is some positivity in today’s housing market, pressure continues to be felt among mortgage lenders. According to the most recent economic forecast from the Mortgage Bankers Association (MBA), total single family mortgage originations are expected to grow to $1.8T in 2024 — up from $1.6T in 2023. The growth continues to come from a rebound in purchase demand which MBA forecasts to increase nearly 6% year-over-year in 2024, as well as equity take-out products such as second liens. Refinance lending will likely remain anemic, as over 95% of borrowers have rates well below levels that could emerge with any reasonable probability.

But despite this partial reversal of fortune, it is not necessarily going to positively impact every area of the market evenly. According to forecasts from Goldman Sachs, agency mortgage production could actually decline roughly 1%, while the smaller non-agency market could see year-on-year increase of roughly 16%.

Given this imbalanced landscape, we believe there is no better time to enter or expand one’s footprint in non-agency mortgage lending and capitalize on the opportunity. Verus Mortgage Capital offers innovative programs to correspondent lenders providing them with responsible solutions for non-agency lending. In addition, we’re committed to educating lenders about the market, since offering non-agency mortgages may help them reach more borrowers.

To that end, here’s a list of five things lenders need to know about non-agency mortgage lending today.

1. Non-Agency is A Key Growth Sector

As mentioned above, non-agency lending is one of the few areas where organic growth is attainable in a non-zero sum manner — meaning it is a chance to grow by addressing new forms of demand rather than competing on price/costs. This is because the growth is not the product of macroeconomic trends, but rather an evolution in underwriting and credit evaluation to better address high-quality, underserved borrower segments. Chief among these is the $2.7T self-employed market, which constitutes 10% of the labor force and is comparatively insulated by the affordability headwinds affecting the conventional market. Self-employed individuals also have incomes 32% higher than salaried borrowers on average and 3x higher net worths. Despite the overwhelming amount of creditworthiness and sustained purchase demand that exists in this demographic, the need to undertake a detailed review of bank statements and/or P&L reports continues to leave it underserved in the mortgage market. Similarly, the $10.2T investment property market, backed by the 22 million single-family rentals currently in existence, has been the largest growth segment since the financial crisis. However, it remains underserved as the borrower profiles fall in between residential and commercial lending.

2. Flexible Underwriting Allows Lenders to Serve More Borrowers

It’s called the conventional credit box for a reason. Agency loan programs are fairly prescriptive in nature and designed to evaluate typical borrowers. Because of the scale of the agency market, these standards have to remain fairly rigid, regardless of whether they are aptly capturing borrower credit quality. The non-agency market, in contrast, offers the flexibility of common-sense underwriting to service a broader array of borrower types and situations.

What’s more, the Verus platform allows for an execution channel for the standards lenders have developed while serving their customers. For sellers who historically operate in the bulk/mandatory market, Verus’ Hybrid Flow channel offers  the option to get their own guidelines approved by Verus and lock best effort loans using said guidelines. A win for lenders and borrowers alike.

3. Non-Agency Allows Larger Loan Balances

In addition to being more resilient to weakening demand from affordability, non-agency loans offer greater production efficiency as a consequence of higher loan balances. According to Fannie Mae, the average mortgage origination balance for its conventional originations was $340K in 2023. In comparison, the Verus platform acquired loans with an original UPB closer to $490K for the year. The larger loan balances enable more efficient, profitable loan manufacturing during this period of broader retrenchment, enabling many correspondents an avenue to target growth with a smaller operational footprint.

4. Countercyclical Benefits of DSCR/Investor Loans

Although supply-side constraints on housing and growth in real wages continue to strengthen the housing market, there are some countercyclical features of the non-agency market that could smooth out demand in the event of a housing downturn. As noted above, the 22 million single-family rental properties in the United States were largely acquired in the wake of the previous housing crisis and constituted the largest segment of ownership growth in the post-crisis period. Because these periods can be characterized by weak borrower demand for purchase loans, higher distressed sale inventory, and greater rental demand as some households shift from homeowners to renters , they can offer attractive entry points for rental operators. By participating in programs like Verus’ DSCR loan product, a lender is able to tap into that countercyclical demand.

5. Non-Agency Loans Accommodate Demographic Trends

With 10,000 baby boomers — who represent nearly half of America’s housing wealth — reaching retirement age every day, and a broader trend of transitioning many downtown areas from commercial to mixed use, we expect the demand for loan programs catering to asset heavy/income light borrowers and non-warrantable collateral to steadily grow over time. Lenders with programs in place that cater to these forms of unique demand, like the ones offered by Verus, will be well positioned to capitalize on the growth.

The Bottom Line on Non-Agency Mortgages

Non-agency mortgages may be excellent options for lenders — and with the right partner, they can be well equipped to get the most value out of them. Verus Mortgage Capital is an experienced counterparty dedicated to expanding alternative financing solutions. To date, we have established more than 100 partnerships with correspondent lenders, purchased almost $30 billion in non-agency loans, and completed 60 rated securitizations.

We understand how to responsibly reduce risk, ensuring our lender partners can confidently close loans. Our team is determined to help lenders meet the needs of underserved borrowers who fall outside traditional guidelines.

To learn more, contact us today.

Source Documentation

The number of self-employed is taken from the BLS Consumer Expenditure Survey (here). Using the self-employed and overall counts multiplied by their homeownership rate, we can estimate the share of homeowner households that are self-employed. The share of the labor force and 32% higher income are also derived from the BLS report. The self employed share of homeowner households is then multiplied by the count of single family homeowner households according to the Census American Housing Survey (here) to get the 5.7m homes estimate. The total value of residential real estate is calculated by taking the homeowner’s equity in resi real estate and total residential mortgage levels from the Fed Z1 (here). Dividing the value of the housing market from the Z1 by the number of housing units from the Census gets an average home value. Average home value can be multiplied by the estimate of the number of self-employed owner occupant households to derive the $2.7T figure. The 22m SFR properties estimate is derived directly from the Census report and the value of those homes is similarly derived by multiplying by our estimate of average home value. Finally, the higher net worth for self employed borrowers comes from the Federal Reserve Survey of Consumer Finances (here).

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