MReport August 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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16 | TH E M R EP O RT COVER STORY to evolve, according to Tom Hutchens, EVP, Angel Oak Solutions, has been the ability to securitize these loans. Giving insights into what it was like before securitizations, Hutchens said, "At least the first two years that we were originat- ing them, they were balance sheet loans. There was no permanent capital. And because of that, frankly, the interest rates had to be higher because people were having to carry them on their books." With securitizations, Hutchens said that pricing has improved because of the influx of investors. "We've seen more products because of that, and because of the perfor- mance of the loans, the number of products have also expanded." Yet, the growth of these loan products has been slow this time around. Non-QM Is Not Subprime A ddressing a misconception that has plagued non-QM since the time these loans were first introduced, Aaron Samples, CEO of First Guaranty Mortgage, said, "Simply put, the term 'sub- prime loan' still resonates from the financial crises. Not only for people that were negatively af- fected in the downturn but also their kids who are now millenni- als and watched their parents or others struggle." Borrowers frequently—and er- roneously—equate non-QM loans with the pre-crisis subprime loans that were of lower credit quality, and which are cited as one of the causes behind the 2008 financial crisis. "There is an argument to be made that virtually everybody could purchase a home with the pre-crisis loan products. However, non-QM affords financing options only for credit-qualified bor- rowers," said Denis Kelly, SVP, Correspondent/National Wholesale for Sprout Mortgage. "The risk is mitigated in non-QM through a variety of measures, including demonstrating the ability-to-repay, increased down payment require- ments, appraisals, and collateral valuations through independent third parties, and more sophisti- cated and better fraud controls, to name a few." "For a decade, private securiti- zation has been a non-factor, and most people understand mortgage lending as a loan that only fits into agency guidelines as defined by automated underwriting," Samples added. Further diving into the differ- ence between QM and non-QM loans, Allen said, "The Non-QM group is, by definition, anything that is not QM as defined under the Dodd-Frank regulations." However, this doesn't necessar- ily equate to higher levels of risk. "It just means it's outside of the definition of QM." Additionally, there's more "skin in the game," for non-QM prod- ucts now, according to Hutchens. "Pre-crisis, almost every loan originated was through 100% financing, where the borrowers made zero down payments. Today, our average loan-to-value is around 77%," he said. As such, these bor- rowers are making larger down payments. "That has a big factor on performance," Hutchens added. The fact that many loan of- ficers are still unable to make this distinction between subprime and non-QM loans is another cause of concern for most lenders. According to Michael Brenning, Chief Production Officer for Deephaven Mortgage, loan officers have dis- played "some concern and lack of understanding on these products." Additionally, Naghmi said that much of the resistance to the acceptance of non-QM lending early on was based on the fact that many didn't understand that non-QM programs have their own guidelines. "It's important that loan officers and lenders understand those guidelines versus viewing the products as products of last resort," he said. Education is, therefore, an im- portant aspect of clearing up these misunderstandings both for loan officers and consumers. Train, Train, Train E ducation is the key to the expansion of this product and the expansion of homeownership," Samples . "Consumers need to understand that there are other options based on sound lending practices and credit decisioning which still ensure that TRID and ATR requirements are followed." Kelly observed that while lenders today have many meth- ods to educate borrowers about these products, they are primarily focused on "training the train- ers"—in other words, training the loan originators. Kelly told MReport that Sprout Mortgage has to date trained more than 10,000 mortgage loan officers on non-QM products. "Since non-QM loans have dif- ferent guidelines from one investor to another, all mortgage profession- als have to be trained accordingly," Naghmi explained. "Offering non-QM programs without proper training can be disastrous for the mortgage lender for a variety of reasons, the biggest being a loan that cannot be sold to a secondary market investor after it is closed." To ensure that loan officers thoroughly understand the underwriting guidelines for the non-QM products, Naghmi said that Planet Home Lending has ap- pointed a national non-QM sales director "for the sole purpose "Offering non-QM programs without proper training can be disastrous for the mortgage lender for a variety of reasons, the biggest being a loan that cannot be sold to a secondary market investor after it is closed." —Fobby Naghmi, SVP and Eastern Division Manager for Planet Home Lending

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