Conference season is upon us and it is expected that non-QM will be one of the hottest topics at shows. The non-QM market is likely to grow by as much as 400% during 2019, a year in which overall originations were predicted to be flat, highlighting their necessity in the current market environment. When scores of credit-worthy borrowers are challenged to meet the tight qualified mortgage (QM) requirements, non-QM loans and lenders are there to meet their needs. For lenders looking to expand their offerings and diversify their portfolio, non-QM can be a worthwhile option to explore. One of the most important steps in constructing your non-QM platform is to find and secure the right investor partner.
But what is a non-QM loan? What’s the difference between today’s non-QM product and the sub-prime or Alt-A loans of the past? In short, a non-QM loan is a mortgage that does not meet one of the Consumer Financial Protection Bureau’s (CFPB) requirements for a “qualified mortgage,” which include a debt-to-income (DTI) ratio of at least 43%; eligibility for purchase by one of the GSEs; and originated by a federally-insured institution and held in portfolio for at least three years. Non-QM loans can be a great fit for first-time homebuyers, those with extensive assets but less income, self-employed borrowers, and others that have non-standard income sources or needs. Not meeting these requirements (non-QM) does not make the loan inherently more risky; in fact, non-QM loans must still meet the same Ability-to-Repay (ATR) rule that QM loans meet, helping to ensure the safety and soundness of the product.
So what should you look for in an investor partner? Here are just a few items to keep in mind when considering your options:
- Flexibility – this is one of the most valuable characteristics an investor can bring to the table. It is important that your partner has expansive solutions and options to fit unconventional borrowers.
- Leadership – while non-QM is an exceedingly safe product (CoreLogic found the serious delinquency rate for non-QM was actually lower than conventional loans in 2018), you’ll want an experienced partner who can provide guidance and leadership to your team. As a top non-QM securitizer, VMC recently finalized our 13th securitization – $609.2 million in RMBS.
- Training – again, it is helpful for your team (origination through compliance) to have a trusted resource to turn to with any questions or best practices. Particularly if you are setting up a brand-new non-QM platform, don’t try to re-invent the wheel! Find an experienced partner to properly guide you.
- Non-Competitor – make sure you’ve done your research and know who your prospective investor’s client base is. Who are their borrowers and applicants? Your top priority should be working with an investor who is solely dedicated to buying closed loans.
The outlook for non-QM is extremely positive. Just make sure you team up with the right investor partner, who can help make your platform profitable and sound.