The word is out: non-qualified mortgages are taking off, signalling a new era for the industry.
Proof is in the numbers. Angel Oak Companies, one of the biggest players in non-QM, hit a record $1.1 billion in volume during 2017 and expects to double its business in 2018. During the coming years, the non-QM market could reach $100 billion.
“We haven’t even scratched the surface – we are still in the infancy of the cycle, so to speak,” said Tom Hutchens, senior vice president of Angel Oak Mortgage Solutions. “I think 2018 is the year that production is going to continue to grow rapidly, and everyone is going to position themselves to begin the process of offering the programs and products. 2019 is when we’ll really start to see more exponential growth.”
Hutchens’ advice to originators: Get into non-QM right away if you haven’t yet.
“You’re already not an early adopter; you’re a later adopter,” he said. “If you look at the macro level, rates have gone up and the refinancing boom is over. To succeed in a purchase market, you have to have all the tools in your belt of available products, and that’s what we bring – more tools.”
Non-QM isn’t just a boon for originators. Hutchens stressed that the new products also benefit the many borrowers who can manage a mortgage, but don’t tick all the conventional boxes to qualify.
The market for these unconventional mortgages is broad, ranging from wealthy retirees seeking interest-only loans to single parents with poor credit. Buyers like self-employed business owners who lack fully documented income also fall into non-QM territory, even if they have hefty bank accounts.
More and more Wall Street investors are seeing possibilities for non-QM, though the secondary market is still fairly minimal. Non-QM deals also lack the liability protections afforded to mortgages that meet QM criteria.
“It’s healthy for the entire real estate industry for non-QM to continue to succeed,” Hutchens said. “There are deserving borrowers who have been forced to be on the sidelines. They deserve a loan, that’s the bottom line. We keep hearing about the lack of supply of housing in the market. I think there is a perception that mortgage availability is very limited.”
While non-QM allows many more people to become homeowners, it is far from the free-for-all of the mid-2000s.
Today’s non-QM products require substantially more documentation, including proof of ability to repay the loan. In the purchase market, the highest loan to value that most lenders offer is 90%. Buyers must put down a minimum of 10% from their savings.
“The majority of the loans in 2005 were 0% down,” Hutchens said. “They were 100% loans, and as soon as the market had a little bit of a hiccup, it was really easy for people to walk away from their mortgages because they hadn’t put anything into the transaction. Now they are coming to the closing table with their money. That’s skin in the game.”