MReport August 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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14 | TH E M R EP O RT C0VER STORY Reaching Underserved Borrowers As they look to complete a stellar first half of 2019, non-QM loans have the potential to grow further. So what's holding them back? By Radhika Ojha N on-Qualified Mortgages (non-QM) are still a small part of the overall mortgage origi- nation market. They represented only about 4% of the total origina- tions market in 2018, according to CoreLogic, yet, in the current lend- ing environment, this segment has seen much more traction, expand- ing a full percentage point between 2017 and 2018. And their popularity continues to grow. A recent Standard & Poor's (S&P) report indicated that the segment has gained significantly from the time that non-QM was introduced in the market. In fact, it was the fastest growing market in non-agency residential mortgage- backed securities in September 2018 and was on track to double or even triple in size this year. "We're seeing a lot more non-QM products and similar types of loans coming to the market," Jeff Taylor, Founder and Managing Director of Digital Risk, told MReport earlier in 2019. "People are looking to expand their credit box and see what types of different loans they can put in the marketplace and what the appetite might be from the investor base." He added that, "the higher the interest rate, the higher the payment, the more risk toler- ance people will be willing to take from a non-QM type loan, and the expansion of these mortgage products into different areas." However, the path hasn't been an easy one for non-QM products, which are often compared to the subprime loans of the 2000s. The Origins of Non-QM N on-QM loans were first introduced as B&C lending in the late 1990s. "The way it was taught to me, you had your A Lenders like Fannie and Freddie, and mortgage rates were at around 6-7%," said Robert Senko, President of ACC Mortgage, while explain- ing the foundations of non-QM loans during a webinar. "This was a boom time in the industry. There was a refi wave and if you couldn't get a loan through one of the Fannie Mae lenders, there were a number of institutions such as Ford Financial, Option One, GE Capital, and Advana who were willing to step in." Eventually, B&C lending gave way to newer terms for the same product, such as subprime or nonprime lending, which were at the core of equity-based products. "These were products where people were putting down 20-30% to buy or refinance a home. They had equity and they were using that money to put down and that's how you judged it," Senko said. "Looking at the big picture, these were the wild wild west days. Things were different and money was flying all around." Soon these products evolved and borrowers were presented with state income loans where they had to have a five-year self- employment, stellar credit, an 80% max LTV, and had to get letters from CPAs and extensive other documentation in order to qualify for a mortgage. In 1998-99, however, a Wall Street crisis related to long-term capital management saw a number of banks and mortgage companies closing down. As a result, lend- ers pulled back and there wasn't much innovation. However, when things started looking up again in 1999-2000 with new lenders such as Lehmann Brothers coming into the market, This was the time when lenders were also offering loan products with 100% stated income, as well as Alt-A loans for people with excellent credit scores and light documentation to prove income. As competition for these products increased, lenders began offering them to people with lower credit scores. By the early 2000s, these had transformed into the subprime loan products that are still often confused with being non-QM, according to Rick Allen, VP, Business Transformation at Optimal Blue. "The origins of non-QM started with what the industry called subprime loans or Alt-A loans in the 2000s, but the reality is that they are very different. By defini- tion, non-QM did not form until we had QM, which was in 2014, as part of the regulations imple- mented through the Dodd-Frank Act," Allen said. "Back in 2004 and 2005, the subprime market reached about 40% of the total market." That all changed with the market crash. "The market really dried up until folks started to realize that non-QM could come with reason- able risk and higher profits." Like most mortgage programs, once the need was identified, the mortgage market began developing loan programs to serve that need. "That's what has happened with the non-QM loans," said Fobby Naghmi, SVP and Eastern Division Manager for Planet Home Lending. "More and more real estate and mortgage professionals began to see non-QM, not as a fallback for customers who wouldn't otherwise qualify, but a product for credit- worthy customers who have been excluded from the mortgage market by Dodd-Frank." The biggest development that has helped non-QM loans

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