Residential Magazine

Carve Out a Successful Niche in Non-QM

Originators should review their business model and treat these loans differently

By Andy Steben

Nonqualified mortgage (non-QM) programs are no longer a backup plan for lenders and mortgage originators who are looking to expand their business. If you don’t offer non-QM loans for unconventional borrowers, you’re losing market share to competitors. Originators who rely on the refinancing waves that come and go will see their business growth stagnate, but those who adopt non-QM programs are likely to see undeniable growth.

A variety of clients can benefit from these programs, including self-employed borrowers without pay stubs or tax returns; prime borrowers with strong credit who may want interest-only payments; and nonprime borrowers with a recent credit blemish. The non-QM market is much smaller than it was prior to the housing crisis but it is poised to grow from about $20 billion per year in originations to $100 billion or more.

Why should you enter the non-QM financing world? Originators who dedicate time to properly educate themselves and allocate resources toward non-QM operations have an opportunity to capitalize on one of the fastest-growing sectors of the mortgage industry. As more originators position their business to capitalize on the growth of non-QM lending, however, many fail to realize what it takes to build a sustainable sales model.

Establish a game plan

Before mortgage companies make the commitment to offer non-QM loans in their product lineup, they should ask themselves how non-QM fits into their current business model. Merely offering these products and doing one or two a week won’t make an impact on the bottom line.

It’s vital to approach this process with an honest evaluation of your company’s available resources and limitations. Without a game plan and dedicated resources, originators will struggle to close enough non-QM loans to truly make a difference for their company’s revenues.

Thankfully, non-QM loans are not a one-size-fits-all product and originators can utilize them in various ways, depending on the amount of expendable resources, capital and time available. Once you establish your company’s limitations, you can become a non-QM correspondent lender by finding a larger lender that will work as an extension of your business.

An experienced correspondent lending partner understands how to properly utilize these products. They also can decipher which areas of your business model must undergo some adjustments in order for a non-QM program to achieve long-term sustainability.

Receive proper training

Non-QM lenders tailor their support and approach to match the needs of their correspondents. More often than not, this process starts with education. When an originator learns every aspect of the non-QM financing process, they can clearly identify how their current business model should adapt to offer these loans.

Educational approaches may vary depending on a mortgage company’s specific situation. Training sessions may cover a broad introduction to the non-QM lending industry or a deep dive into topics such as how to target non-QM borrowers. Correspondent lenders can hold training sessions on a branch-by-branch basis or by hosting a companywide seminar.

Following these sessions, correspondents should have a solid understanding of what these programs look like, who the borrowers are, how to target them and how to efficiently originate these loans. This provides originators with a solid foundation to start rolling out non-QM financing options.

Regardless of the amount of support a correspondent lender needs, it should isolate its non-QM program and develop a team of product experts who focus on cultivating a non-QM channel. These originators should be familiar with investor guides, loan programs and the non-QM market in general, since they’ll be responsible for day-to-day operations. Mortgage companies that don’t have the bandwidth to effectively execute this process can outsource underwriting responsibilities to their correspondent partners until they feel comfortable taking the process in-house.

A correspondent lending relationship should focus on the ways in which originators can reach a level of operational efficiency and receive the necessary education to take on the challenge themselves.

Bank-statement desks are a popular option for originators who would rather outsource the verification of borrower bank statements than train an in-house underwriter to do it.

If correspondent lenders are working with the right non-QM partner, this process should take 24 to 48 hours. As the growth of the non-QM market continues to accelerate, however, the flood of new entrants makes the landscape increasingly fragmented. Originators have recognized that some correspondent lending partners are better positioned than others. If it takes a lender more than 30 days to close a non-QM loan, originators should look elsewhere.

Set your strategy

The reality is, some mortgage professionals offer non-QM loans but don’t do them well. These originators make the mistake of treating non-QM products like any other loans, rather than realizing they are unique products that require extra effort from loan officers. Lenders must manually underwrite these loans, and this process varies greatly from the agency and government loan underwriting processes that have become increasingly digital in nature. These conventional lenders are told what to do and when to do it.

On the contrary, non-QM loans — such as bank-statement programs — elicit more communication and due diligence from loan officers to ensure a borrower’s ability to repay. This means the originator must properly utilize a borrower’s past 12 to 24 months of bank statements while clearly understanding what the borrower’s business is, how it works and what their cash flow looks like, as well as potentially evaluating the business’s profit-and-loss statement if a bank-statement desk is not available.

It’s key to position your non-QM business around a purchase-driven model, which expands your lending options and allows you to say “yes” to more potential borrowers. If your business has an 80% purchase-loan share, for example, that leaves you in a strategic position. Non-QM lending isn’t going away and the purchase market is more consistent since people are always going to buy homes. Correspondent lenders that actively target loan officers at banks could establish a solid referral pipeline for their company. And originators who specialize in non-QM loans can present alternative options to Realtors.

Similar to loan officers at banks, Realtors can lose business when a client doesn’t qualify for an agency or government loan. To a Realtor, an originator’s ability to say “yes” and be a solid referral source makes your business different than everyone else on the block. Lenders can help their correspondents on a granular level by organizing non-QM financing presentations for real estate agents. Additionally, lenders can provide personalized marketing materials for correspondents that are looking to cast a wider net.

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The reputation and power of non-QM lending is growing, and people are realizing how the best alternative mortgage financing options can provide a relatively safe and profitable channel of opportunities that are mutually beneficial for everyone involved in the origination process. Don’t let your business miss out.


  • Andy Steben

    Andy Steben is senior vice president of correspondent lending at Angel Oak Mortgage Solutions. Steben has been in the mortgage business since 2002 and has been involved in the non-QM industry since 2015. His breadth of knowledge spans all avenues of investments in the mortgage industry, including portfolio lending, direct sellers and servicers, and securitization. Prior to his career in the mortgage industry, Steben worked in commercial banking and played a major role in the success of three startups.

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