Gary Eakin – Senior Vice President, Mortgage Solutions at Peoples Processing
The ongoing COVID-19 pandemic has led to several changes for the mortgage industry. Borrower profiles and market norms have also radically changed.
However, even with the current mortgage environment, the opportunity exists for lenders who are open to exploring underserved borrower profiles. Specifically in the Non-Qualified Mortgage (“Non-QM”) segment.
Here’s what has changed in the industry & what makes a Non-QM product offering a good strategy to pursue.
The Changing Face of the Mortgage Market
Evolving Borrower Profile
The impact of the pandemic on national unemployment is a topic that needs little introduction. Statistically speaking, unemployment rates spiked to an all-time high of 14.7 percent in mid-March 2021, overtaking the highest rate seen in the US since the Great Depression.
Here’s the good news, however – there’s also been a 24 percent increase in start-up businesses across the US between 2019 and 2020, indicating a shift in the professional goals and priorities of people along with a continuation in economic momentum.
This change in the employment structure should be of importance to lenders as it makes up for an upcoming salient borrower profile. With this structural change, a large proportion of loan seekers have now turned into natural candidates for Non-QM products instead of the more popular agency products that were meant for the salaried borrowers.
Upward Trend in Home Prices
While there has recently been a noticeable slowdown in refinance activity, we all know housing prices have increased. This has resulted in immediate demand for larger-sized Non-QM loans, in a backdrop of the refinance activity that has slowed down. In the last quarter of 2020, the decline in refinancing was projected to be around 50 percent.
Stricter Regulations by Fannie Mae & Freddie Mac
On the regulatory front, both Fannie Mae and Freddie Mac have announced stricter restrictions, limiting the percentage of loans based on their risk criteria. The result is a GSE approval box that has become smaller and has therefore disqualified a sizable amount of borrowers who do not align with GSE products.
When looking at the numbers, this phenomenon becomes very apparent. There’s only been a marginal decline in the Non-QM space as compared to the sharp decline in the QM space. Statistically speaking, in 2020, the Non-Qualified Mortgages sector closed $18.9 billion.
Identifying Opportunities in the Non-Qualified Mortgage Market – Early Mover Advantage
With the majority of lenders preferring Qualified Mortgages, early attention towards the Non-QM loans can be significantly rewarding as it helps gain an edge in a fairly low competition environment.
In the current environment, this segment holds promise to fulfill volume expectations, ensuring that overall loan origination volumes are less susceptible to any adverse impacts of the overall economic conditions.
Greater Bargaining Power
Naturally, with fewer lenders to compete with, the opportunity for greater volume and market share is appreciated by lenders who cater to non-qualified borrowers.
Non-QM loans typically require fewer conditions and documentation from borrowers, therefore the typical cycle time of underwriting and processing these loans can be lower and thereby raising efficiency, ROI, and profitability for the lenders.
Embracing Success in the Evolved Environment
As a lender, if you see value in the Non-QM space then it is imperative that you focus on enhancing the borrower experience and allowing for a smooth process. On the regulatory front, preparedness must include building capacity for meeting ever-changing compliance requirements.
Finally, as a business, it is also necessary to gear up to scale both effectively and efficiently, allowing you to cater to newer volume requirements without putting pressure on the existing cost infrastructure.
One of the most effective strategies to achieve all of the above is by partnering with an experienced mortgage solutions provider for Non-QM fulfillment. They can help smoothen the transition, generate demand, and then effectively fulfill it efficiently and at a lower cost of origination.
About Gary Eakin
Gary has spent over two decades delivering strategic mortgage solutions to lenders and servicers. He has extensive experience in business development and operational efficiency in outsourced mortgage origination, servicing, digital solutions, and quality assurance both in the US and offshore. Gary can be reached at Gary.Eakin@peoplesprocessing.com