non-QM: What It Is and Isn’t
In early 2020, non-QM (non-agency) loans were one of the fastest growing sectors in the mortgage industry. Then came the pandemic, which caused many non-QM lenders to temporarily put the brakes on these programs because the secondary market for these loans quickly froze up in response to economic uncertainties.
Now, there is a new normal and the non-QM sector has regained its pre-pandemic momentum. While some lenders have not yet re-entered the non-QM space and others didn’t weather the storm, leading non-QM lenders, including Sprout Mortgage, continue to meet the increasingly robust demand for non-QM programs.
Fortunately, the housing market has remained strong, driven by incredibly low mortgage interest rates and homeowners refinancing to get lower monthly payments. There’s also a new focus on home life and the need for home offices, home learning areas and perhaps more recreation areas by families in search of more functional living space.
If your business is predominantly comprised of conforming loan originations, now is the time to take a serious look at the volume potential of non-QM loans. non-QM offers innovative lending solutions for a variety of loan scenarios not possible with conforming loans. Forward-thinking originators should be looking at the growing non-QM market as a way to increase their business, by expanding their customer base beyond traditional ‘agency’ mortgage origination.
Eventually, there will be a dip in conventional loan volume and savvy originators should be preparing now for the inevitable economic shift. Why rely on one type of product as the mainstay of your business? This is an ideal opportunity to add non-QM to your pipeline.
What non-QM Is
In January 2013, The Consumer Financial Protection Bureau (CFPB) issued the Ability to Repay and Qualified Mortgage (QM) Rule to implement provisions of the Dodd-Frank Act that requires lenders, before making a residential mortgage loan, to make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan. This rule took effect in January 2014. In addition, on October 30, 2020, the CFPB issued a final rule (Debt Collection Rule) implementing the Fair Debt Collection Practices Act (FDCPA).
· Is quickly becoming the go-to choice for brokers to assist qualified clients with loan needs that fall outside of the QM realm.
· Are high quality loans and don’t necessarily mean high risk.
· Offers innovative lending solutions for a variety of loan scenarios not possible with conforming loans.
· Caters to borrowers who have high credit scores, although their income stream may be seasonal or gig-based - as with the self-employed and as with contract workers who receive one or more 1099s instead of a W-2.
· Caters to consumers with more assets than income.
· Caters to Real Estate Investors, both domestic and foreign in need of financing for second homes, vacation properties and rental properties including mixed-use.
Millions of credit-worthy borrowers exist outside the conventional mortgage realm,including first-time homebuyers, borrowers with substantial assets but limited income, jumbo and super-jumbo borrowers, everyone who’s part of the“gig economy” (self-employed individuals), real estate investors, and fixed-income retirees.
What non-QM Isn’t
According to Corelogic, a non-QM loan is not necessarily a high-risk loan. It’s merely a loan that doesn’t meet the Qualified Mortgage (QM) standards. A non-QM loan still needs to satisfy the Ability to Repay (ATR) requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
· In 2018, the average credit score of homebuyers with non-QMs was 760, compared to a score of 754 for homebuyers with Qualified mortgages.
· The delinquency rate for non-QM loans is slightly lower than the rate for conventional Qualified Mortgage loans and government-insured loans in 2018.
· Lenders are using high credit score and low LTV to help offset the added risk from higher DTI, limited documentation and interest-only non-QM loans.
Unlike traditional conforming agency loans, non-QM loans aren’t guaranteed by the federal government and can’t be sold as mortgage-backed securities (MBS) to Fannie Mae or Freddie Mac.
While non-QM loans do not meet qualified mortgage (QM) requirements, they must still meet strict underwriting standards for credit quality.
The most important distinction to make is that non-QM loans are high quality, and these loan candidates are typically easy to qualify when the broader criteria are applied. The guidelines are straightforward and savvy lenders that are experienced in these programs can be relied on to close transactions quickly and easily.
Adding non-QM to an existing pipeline is the key to business growth.
non-QM loans provide a solid lending solution for variety loan scenarios not possible with conforming agency loans. Originators should be taking notice and getting educated today on non-QM. Don’t wait until prime volume begins to recede and everyone is scrambling for non-QM business.