MReport August 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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18 | TH E M R EP O RT COVER STORY of training our mortgage loan originators and branch managers as well as doing presentations for real estate professionals." Apart from loan officers, lend- ers are also looking at educating borrowers, many of whom still believe that non-QM products are the return of the no-income, no- asset (NINA) documentation loans of the 2000s that eventually led to the housing crisis a decade ago. "The biggest challenges lenders face today are around the stigma of the product being misunderstood as a sub-prime product," Samples said, adding that many loan officers have mostly processed agency loans over the past decade and are largely uneducated on non-QM loans themselves. As a result, they often shy away from educating customers about these products. However, according to Deephaven's Brenning, borrow- ers don't think the way mortgage professionals do. "They don't think FNMA, FHA, non-QM. They think in terms of, 'I want to buy a home, cash out, and consolidate debt.' I don't feel that consumers have any real misunderstandings about these types of loans. Sure, they may have a few hesitations on an ARM loan or the slightly higher rates, but, in general, consumers don't really think about mortgage programs the way we do." Hutchens agreed, suggesting that borrowers don't really know what non-QM means, or what they need to know about the topic. "They just need to know that there are loans that are outside of agency guidelines that are avail- able," Hutchens noted. "We've been on an education mission since we began. We just educate people, primarily originators, but also real- tors and everyone in the real estate space about non-QM loans. We just want to make people aware that these loans are available and they perform well." Technology to the Rescue A nother challenge that most loan officers face with non-QM products is the under- writing process. So far, because of the nature and the documentation needed for non-QM loans, the underwriting process has largely been manual. "Today's non-QM loan is more transactional in nature," Samples explained. "There is no automated system to run these loans through. They take more hand holding, so if loan officers can do a conventional loan with little friction versus an alternate product, they will. Unfortunately, that conventional loan is likely a third of the ALB and margin of a non-QM solution." As such, many borrowers "never find a solution and are left out." That is changing as technology impacts the non-QM space. Samples says that his organization is focusing on these products through a proprietary technology that can create a low- friction, low-stress lending process for non-QM borrowers. Additionally, as a technology services provider, Allen views non-QM as a growth market. "There is increased activity in the market with new entrants and expanded programs from lenders that are already in the market," he said. "Lenders are looking for ways to do all loans more efficiently, including non-QM, which means it's important for technology ven- dors like Optimal Blue to improve the related technology and how non-QM loans are handled." Opportunities Abound T oday, these products are help- ing lenders reach a wider set of borrowers, many of who may be creditworthy and well-qualified but are still not eligible for tradi- tional mortgage products. In fact, "non-QM loans fulfill more borrower scenarios than most people realize," Raymond Eshaghian, President and Founder of Greenbox Loans, Inc. recently wrote in a piece for the MReport. com. These borrowers could include self-employed borrow- ers, those with Individual Tax Identification Numbers (ITIN) who don't have a Social Security number, foreign nationals, and real estate investors, according to Eshagian. "The bottom line is that there are millions of deserving borrowers out there who need someone to help them overcome their homeownership barriers," he wrote. Samples agreed. "Products have evolved to fit consumer needs, growing numbers of self-employed borrowers, and changing lifestyles. Additionally, broader secondary market opportunities including pri- vate securitization have made this product more accessible," he said. The advance of non-QM loans has led to a wider set of borrowers and translated into increasing demand from self- employed borrowers and others who might not have the qualifying characteristics required under the QM rules, according to Allen. Thus, there's ample opportunity for growth in this space. "We be- lieve, looking at just historical data from the late '90s and right around 2000 when non-agency was kind of the right guidelines and the right percent, it was about 10-12% of the business," Hutchens said. "If you look at today's originations and say 10% of the business is non-QM, we're looking at $200 to $300 billion a year in originations. And last year, this number was less than $20 billion." "As the market has evolved, and rates have come down in non-QM, just-miss prime types of programs have become more prevalent and account for more volume in today's market," Brenning said. "Additionally, bank statement loans have become the most popular non-QM product segment catering to the self-employed." And these aren't the only borrowers that today's non-QM products cater to. Naghmi listed some examples where non-QM is making it possible for homebuyers to achieve their American Dream: • Non-warrantable condominium loans for condominiums that don't meet the agency requirements for owner- occupied units to nonowner- occupied units in that condominium project. • Foreign national loan programs for consumers that don't have legal status in the United States but wish to purchase a second home or even an investment property in the United States. • No-ratio investor loans, utilizing the rental income only to qualify for the purchase of an investment property. The consumer creditworthiness for non-QM is apparent in Morningstar's delinquency ratings for various mortgage products, which indicated that, in early 2019, the 60-day delinquency for non-QM loans was around 4%, which is in line with the conventional loan 60-day delinquencies. "Compared against the FHA loan program which has a 60-day delinquency closer to around 9%, the non-QM loan looks even more attractive to secondary market investors," Naghmi pointed out. "Some in the industry see the non-QM market increasing as much as 400% in annual produc- tion in the foreseeable future." Responsible lending will be the bottom line for lenders looking for long-term gains from non-QM products too. "Provided that the lenders and the products that they offer continue to practice follow responsible lending principles, non-QM loans are expected to perform well in both the near-and- long-term," Kelly said. RADHIK A OJHA is a professional writer and editor specializing in the mortgage banking sector. She is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master's degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd covering the retail market and at Honeywell as an executive in corporate communications.

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