MReport June 2022

TheMReport — News and strategies for the evolving mortgage marketplace.

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20 | M R EP O RT COVER STORY T he date of March 11, 2020, will forever be etched into the minds of all. Not quite a momentous holiday, but that date will always resonate as the date the World Health Organization (WHO) declared the COVID-19 outbreak a pandemic, thus forever changing the way of life for many worldwide. And with this declaration by the WHO, society was introduced to some new terms. "Remote work," "stay-in-place," and "social distancing" were just a few of the phrases that became synonymous with the era of the pandemic, while also putting a halt to forms of income for many. Mass closures of places such as food establish- ments and shopping malls put a strain on the income of many, as the emerging gig economy was stifled for a period of time. As odd as it seems, the very same factors that put many out of work, also gave birth to a new generation of gig economy work- ers. Those displaced by office closures and forced career changes sought refuge in this burgeoning economy and found a new home. Harvard Business Review character- ized workers in the gig economy and freelancers as independent by choice, and although the unpredictability of schedules and finances are a factor, they are outweighed by the fact that many were earning more than their nine- to-five corporate counterparts. As the new gig economy population grew, they were flour- ishing at a time when mortgage rates were hitting all-time lows and renters were fleeing the urban jungle and taking their new trade to the suburbs. The time to upgrade from renter to homeowner came during a period of great economic uncertainty, as lenders scrambled to qualify this new type of borrower that had different income to report than their traditional conforming counterparts. By definition, a "non-QM" mortgage is a home loan that is not required to meet agency-stan- dard documentation requirements as outlined by the Consumer Financial Protection Bureau (CFPB). Breaking the mold of tradition and convention, non-QM loans were often equated to sub- prine loans, geared toward bor- rowers with low credit scores and high debt. However, a non-QM loan is not necessarily deemed a "high-risk loan," but the inclusion of terms such as "interest-only" or "limited/alternative documen- tation" can increase the risk of repayment for lenders. CoreLogic reported that the non-QM share of total mortgage counts declined during the time of the COVID-19 pandemic, reaching its lowest level in 2020 at 2% of market share. As the vaccinations rolled out and the nation began to get the pandemic under control, the non-QM share nearly doubled in 2022, represent- ing approximately 4% of the first mortgage market. Over the years, lenders have steered away from non-QM offer- ings, but the emergence of mar- kets such as the aforementioned gig economy has forced some to reconsider including non-QM on their list of offerings. Non-QM loans are not backed by the government and do not provide the same regulatory pro- tections that a qualified mortgage may offer. Interest rates on-QM mortgages are relatively higher than that of conventional loans due to the fact they are sold and packaged into private mortgage- backed securities (MBS) that don't carry the payment guarantees of bonds issued by the government- sponsored enterprises (GSEs). I addition to freelancers and gig economy workers, other candidates for non-QM loans include retir- ees, real estate investors, business owners, foreign nationals, and those with less-than-perfect credit scores. Solving the Puzzle of Homeownership Shifting workforce patterns and the continuing prelevance of the gig economy have some lenders revisiting non-QM. Here's what they told MReport about its place in the modern lending landscape. By Eric C. Peck

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