Residential Magazine

More Than a Backup Plan

Non-QM loans present a strong business opportunity for proactive correspondent lenders

By Andy Steben

The nonqualified mortgage, or non-QM loan, is the latest catch phrase in the mortgage industry. This should come as no surprise to observers who have watched over the past few years as stagnating demand has made the agency lending market fiercely competitive.

Although non-QM originations represent only a small fraction of the overall mortgage market, the non-QM loan has had nearly uninterrupted growth since 2012, according to the Securities Industry and Financial Markets Association. That consistent growth is why more lenders continue to invest in non-QM programs to attract new borrowers and loan officers. As non-QM loans continue to perform, correspondent lending channels offer the next big opportunity for both originators and lenders.

Untapped potential

Independent mortgage brokers have been steadily adopting non-QM programs, whereas correspondent lenders — those that originate loans with their own money before selling them to investors on the secondary market — have been slower to embrace non-QM, a trend that could impact long-term growth for lenders. Those following the growth of non-QM lending have seen brokers expand their business and establish solid referral pipelines by actively targeting non-QM borrowers.

Many industry experts believe that the non-QM market — as measured by the issuance of residential mortgage-backed securities — will grow from effectively zero post-recession to $300 billion within the next several years. That $300 billion forecast, however, represents only a fraction of the nonprime loan volume prior to the housing crash, when nonprime loans comprised roughly 50% of the overall market. The future of non-QM lending is likely to account for 10% to 20% of the mortgage’s market’s overall volume, which would be similar to the nonprime loan share from 2001 to 2003. 

For correspondent lenders looking to grow their business, non-QM is the clear answer. Many lenders have failed to realize that non-QM loans are more than just a backup plan for borrowers who don’t qualify for agency loans. Lenders who proactively seek out and market to non-QM borrowers can carve out a niche in an underserved and growing market. That distinction is paramount for correspondent lenders seeking to grow their non-QM business, since building a robust non-QM pipeline takes time. This market sector is ripe for the taking if originators partner with a non-QM lender that guides them along the way.

Going mainstream

The low interest rate environment has spurred a refinancing boom that has, at least temporarily, rejuvenated the agency mortgage market through Fannie Mae and Freddie Mac. Interest rate-driven periods of demand, however, are fleeting.

Typically, during a borrower’s rush to refinance, non-QM volume would decline at the mercy of lower agency rates. But this hasn’t happened in today’s market, a testament to what’s going on in the mortgage industry as a whole. Non-QM has become mainstream and it will continue to be a growing segment of the market regardless of interest rate fluctuations. Lenders and originators with non-QM products in their toolbox have valuable options to offer when the refinance market inevitably dries up, and those who understand the value of non-QM will have an advantage over other lenders when rates rise.

The first step for correspondent lenders is to choose the right partner with the experience and understanding of the non-QM marketplace to support their proactive approach. In the non-QM market, integrity is a must. The right non-QM partner works diligently behind the scenes to ensure that the lending program is managed correctly. This entails everything from helping originators identify these borrowers to aiding the correspondent lender in targeting, underwriting and funding these loans. It’s imperative for correspondent lenders to choose an experienced non-QM partner who is just as dedicated to your company’s success.

Although closing a non-QM loan is not materially different from closing an agency loan, it does take time to understand the programs, borrowers and necessary documentation.

Selecting a partner

Given the growth of non-QM lending, there has been a flood of recent entrants into the space, but not all newcomers have taken the time to understand the non-QM borrower and dedicate the resources to streamline the closing process. Be sure to choose a non-QM partner that focuses on this market, not one that started a non-QM program because it’s the latest buzzword.

When selecting the right non-QM partner, size and experience are key differentiators. Some are better positioned than others and, much like any other activity, mastery of the task is only gained through thousands of hours of work. You want a partner that has funded 10,000 loans, not 100. The best non-QM partners will have years of experience and full control over their origination platform, from sourcing all the way to securitization and funding. They should have an extensive net-work to fund your loans, as well as the bandwidth to dedicate time and capital to train your loan officers.

Correspondent lenders need to evaluate the resources a direct investor has put into their non-QM program. These resources might range from one person to a fully staffed department, while some companies work exclusively in the non-QM space. You also need to make sure your non-QM partner is able to make their own credit decisions, as opposed to relying on underwriting from a third party. Ultimately, your non-QM partner should be an extension of your business and work directly with your team. The ideal non-QM partner will work with originators to ensure they are comfortable and confident utilizing these products.

Although closing a non-QM loan is not materially different from closing an agency loan, it does take time to understand the programs, borrowers and necessary documentation. There’s not a one-size-fits-all approach and it can be tricky to determine a borrower’s ability to repay.

That’s why the right non-QM partner makes education a priority and dedicates time to teach originators via webinars or in-person meetings. In addition to internal non-QM development strategies, a good non-QM partner helps correspondent lenders target these potential clients with customizable marketing materials, including social media graphics, flyers, videos and presentations. Correspondent lenders should recognize that marketing to non-QM borrowers requires a different approach and messaging.

• • •

Mortgage originators typically enter this business with the same goal: to help more borrowers realize the American dream of homeownership. You have likely experienced the disappointment of turning down a borrower who didn’t meet the tight standards of agency lending. Today, however, correspondent lenders have a new way to reach an audience of creditworthy borrowers who are hoping to realize their dreams. 


  • 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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