MReport June 2022

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M R EP O RT | 23 COVER STORY The market is growing because non-QM loans offer responsible fi- nancing options and products that make sense for borrowers who would otherwise struggle to buy a new home. There is a plethora of well-capitalized lenders offering similar non-QM products, making it easier for certain borrowers to purchase a primary residence, investment property, or second home. Neil Merritt: The non-QM market is definitely growing; it's expected to nearly double its market share in 2022. We are seeing a larger number of lenders who are new to the non-QM space issue their own non-QM offerings. Non-QM loans are harder than other loan products, so lenders must invest the time, resources, and education into their sales teams and brokers to learn the intricacies of these products. That's why it's so important for mortgage professionals to work for a company that has strong non-QM underwriting exper- tise, and one that provides the educational resources necessary to navigate the challenges common to the non-QM market. In fact, nearly 80% of our LOs have un- dergone non-QM-specific training to ensure they're primed to help meet the growing demand of this type of borrower. It's also why non-traditional borrowers should choose a lender that has experi- ence in this field and the ability to deliver with customer satisfaction. What best describes your typical non-QM borrower? Michael Isaacs: I find the typical non-QM borrower is a high-FICO borrower with consid- erable assets but has income that is hard to document. However, if you take a closer look, non-QM borrowers fall into many different buckets. The most common are self-employed borrowers, inves- tors, and borrowers looking at high loan amounts. Take, for example, self-em- ployed borrowers. These borrow- ers often write off too much of their income and may not qualify for the conventional mortgage be- cause their adjusted gross Income keeps them from qualifying. Bank statement loans are perfect for this type of borrower. Depending on the situation, we either average 12 or 24 months of gross income from their personal or business bank statements, apply an expense ratio based on the type of busi- ness they have, and then use the balance as income to qualify. Then, there are borrowers who are buying a one- to four-unit family home as an investment property. They may be either a W-2 employee or self-employed, but they do not qualify for conven- tional financing because of their debt ratio. The liability that comes with owning rental property often puts the borrower above agency guidelines for debt-to-income ratios. For this type of loan, the borrower qualifies solely based on the new property cash flow supporting the new liability. With a non-QM loan, there is no consideration for the borrower's income or debts aside from the new property. That's why I coin them "investor cash flow or DSCR (Debt Service Coverage Ratio)" borrowers. Finally, there is the "non-con- forming jumbo" borrower. Banks and investors that buy jumbo loans from an independent mort- gage banker (IMB) have very strict guidelines due to the higher loan limits. Non-QM loans fill the gap for a borrower purchasing a prop- erty in which the loan amount is above the conforming limit, and the borrower or the property does not meet standard guidelines. Today, borrowers typically use non-conforming jumbo loans for situations involving non-warrant- able condos, high DTI ratios, low FICO, late mortgage payments in the last 12 months, credit events in the last seven years, low reserves, and non-standard income. Neil Merritt: Our Newrez Smart Series non-QM program has three loan types, each designed for a different kind of borrower—self- employed borrowers, real estate investors, and borrowers who fall just outside of traditional qualify- ing limits. This product, designed for self-employed borrowers, consistently makes up around 55% to 60% of our current non-QM production, so self-employed bor- rowers are the most common for our offering. How did the pan- demic impact the non-QM market? Tom Davis: After an initial pandemic-related pause in the overall mortgage market, including private label and non-QM, this segment has been extremely resil- ient. Investor appetite came back faster than many had anticipated, and demand is strong and grow- ing. Industry experts expect the market to reach $300 billion over the next three to five years. We just returned from a major industry conference, where our sales team had 90 meetings with mortgage brokers and corre- spondent sellers interested in increasing their non-QM market penetration. The pandemic and the related closures of office and school buildings left borrowers scram- bling for more space to work or learn from home, and this defi- nitely contributed to the growing market demand. Having more square footage makes it easier for people to leave their jobs and start their own home-based businesses or try freelancing. There are currently approximately 16 mil- lion self-employed people in the United States, according to Pew Research Center. Many respon- sible, creditworthy, self-employed individuals may have a difficult time qualifying for a government- backed mortgage; however, they could be perfect candidates for a non-QM loan. Jeff Leinan: Initially, the market froze, as investors headed for the sidelines waiting to see how these assets would perform. Without a secondary market takeout, nonbank lenders, like Plaza "The pillars for our non-QM are training, technology, support, and flexibility. We've formed new technology partnerships and refined our processes and tools to simplify every non-QM transaction." —Tom Davis, Chief Sales Officer, Deephaven Mortgage

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