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12 | M R EP O RT FEATURE W hen the COVID- 19 pandemic took root in this coun- try in mid-March, the non-QM market was one of the first business sectors to feel the effects of the economic trauma that accompanied the health crisis. One of the leading companies in this sector, Angel Oak Mortgage Solutions, initially hoped the tumult would be temporary, op- timistically announcing on March 19 that its lending activities would continue with adjusted rates and guidelines. Three days later, the Atlanta-headquartered company had an update announcing a very different business strategy. "The pandemic has continued to cause turmoil in the worldwide economy," Angel Oak said in a note to its clients. "Due to the constant shifts and the inability to appropriately evaluate credit risk, we are pausing all loan activ- ity for two weeks. This includes fundings and any new loan activity." Halting of Business T he company was a tad optimistic about a two-week pause—the company didn't restart its issuance of non-QM mortgage- backed securities until May. Tom Hutchens, EVP of Production at Angel Oak, recalled the prob- lems facing the non-QM scene in March had nothing to do with the quality of the loans originated and securitized at the time and much to do with a panic in the bond market that traditionally welcomed this product. "When the pandemic was starting to take on epic propor- tions in March and beyond, it brought the bond market to its knees because everyone was rushing to cash," he continued. "Bondholders across the globe were liquidating their bonds im- mediately. And the engine that that supports non-QM produc- tion is the bond market." "Governments were shut- ting down businesses," he said. "Non-QM loans are non-agency loans— they're not guaranteed by the government. So, it's impera- tive for us to be able to determine a borrower's ability to repay, and we couldn't do it when govern- ments are shutting down a lot of small businesses." Complicating matters, Hutchens added, was how states and locali- ties responded to the pandemic in relation to the private sector. Fast-forward to today, and the pandemic is still with us—and so is non-QM lending, somewhat bruised around the edges but moving ahead. "We have certainly recovered from the COVID pause that the non-QM industry went through," said Hutchens. "We have a lot of momentum going into 2021. We're not back to pre-COVID levels yet, but we're in the range and expect to be back to pre-COVID levels hopefully in the first or second quarter of 2021." Envisioning a Bolder Non-QM Space A ngel Oak is hardly alone in welcoming a bigger and bolder non-QM environment in 2021. Over at Irvine, California- based Impac Mortgage Holding, Chief of Staff Tom Donatacci noted that a revived gusto in this space has led industry profession- als to refer to the current product profile as "non-QM 2.0." Within his company, Donatacci reported the non-QM origination team has an eyes-on-the-prize focus on the coming year. "The state of non-QM is strong from a liquidity perspective," ob- served Donatacci. "I think we've identified at least 12 investors with programs looking to acquire non-QM production. Almost all the buyers from pre- pandemic are back and there are some new entrants as well." William Aubrey, President of Pacific Mortgage Capital in The Revival of Non-QM This sector was hit hard in 2020—now, Non-QM leaders discuss how to not only bring it back but see it thrive in 2021. By Phil Hall