The majority of mortgage originators avoided nonqualified mortgages after the 2008 housing crash because these unconventional loans were too risky and required far too much work to get approval. Sure, wholesale lenders offered these products, commonly referred to as non-QM, but why would an originator go through the hassle of putting together a loan package only to see it denied?
Today, thanks to technological advancements and innovative new products, originator and wholesale lender relationships are flourishing in the non-QM space. This also benefits borrowers who might not otherwise have qualified for a home loan.
The non-QM market has grown significantly over the past few years and is expected to grow even further in 2019. About $10 billion of these loans, which don’t meet the criteria to be backed by Fannie Mae or Freddie Mac, were securitized in 2018, according to S&P Global Ratings. Another $10 billion of these loans were securitized in the first half of this year.
What’s driving the market? Primarily, it is the flourishing gig economy and the expanding definition of QM, which have led to the development of non-QM products to help responsible yet underserved borrowers achieve homeownership or refinance their current home. These products include alternative documentation (e.g., bank-statement loans), as well as asset-depletion, fix-and-flip, foreign-national and interest-only loans.
Unfortunately, for a couple reasons, many mortgage professionals remain cautious about originating non-QM loans. The first is the misconception that these loans are similar to the Alt-A and subprime loans originated prior to the housing crisis, which had extremely loose guidelines — 100% or higher loan-to-value ratios (LTVs), for instance — and were too often given to people who couldn’t repay them, such as borrowers with no income and no assets, or NINA loans.
The truth is, many non-QM loans originated today have LTVs in the 70% to 80% range, along with reserves to weather the next downturn. Many of these borrowers have average FICO credit scores of 699 or higher and have average debt-to-income ratios below the 43% QM threshold, although outliers are allowed through risk-based pricing.
Mortgage brokers and loan officers also hesitate to originate non-QM loans because they believe these loans need to be manually priced and underwritten. They also believe they require a deep understanding of multiple wholesalers’ guidelines, which are frequently updated to keep up with changing market needs.
If an originator puts together a loan package and submits an application that gets denied, then the originator and the borrower have wasted their time gathering documentation. Too many false starts increase operating costs, trigger Home Mortgage Disclosure Act filings and foster bad will with wholesale lenders. Originators who submit a lot of files that never pull through often receive lower ratings and are penalized on pricing. To avoid this, some choose to play it safe and turn away borrowers who could qualify for non-QM loans.
Although technological solutions — such as product and pricing engines and automated underwriting systems — have been available for a while, they have typically been reserved to originate agency loans (e.g., using Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Product Advisor). That has begun to change.
Many forward-thinking wholesale lenders have started deploying decision-making technology at the point of sale.
Many forward-thinking lenders and investors have started deploying decisionmaking technology at the point of sale. This allows mortgage originators to not only see a variety of program and product offerings, but also receive an immediate indication of whether a loan would qualify — so they can feel as confident originating non-QM loans as they do originating agency-backed mortgages.
Forward-thinking lenders and investors are not only making this technology available so approved originators will have access, but today they are providing these tools to approved and not-yet-approved originators at no cost. These technologies benefit investors, lenders and the originators. A product and pricing engine eliminates the need for rate sheets, which are also available digitally to originators.
Originators can search for pricing based on borrower profile, product type, rate, margin and more, to provide real-time loan information. In addition, these systems track and preserve every rate quote and lock request.
Some lenders and investors also are providing access to an automatic underwriting system that is customized to their non-QM loan products. A nonagency automatic underwriting system allows originators to stay abreast of extensive and ever-changing guidelines, input limited data and run upfront prequalification scenarios at the point of sale. This gives originators an early indication whether a mortgage will be approved, reducing the likelihood of providing inaccurate quotes to borrowers, while ensuring the borrower eligibility for a particular loan program.
Sophisticated automatic underwriting systems can also support alternative-documentation products, such as bank-statement loans. Bank-statement loans are designed for borrowers who are either self-employed or participate in the gig economy and therefore lack traditional forms of income documentation, including tax returns, W-2s and pay stubs.
With a bank-statement analysis solution, an originator can digitally source 12 to 24 months of personal or business bank-statement data directly from a borrower’s financial institution, instead of gathering hundreds of pages of past bank statements. Once the data has been collected, a bank-statement analysis tool creates a report that details allowable deposits for each month, transactions that were excluded and the reasons why, as well as an average monthly income calculation. This helps originators increase efficiency and productivity while also reducing human error.
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Don’t leave money on the table. In today’s competitive market, it’s in the originator’s best interest to partner with investors and lenders that have creative and expansive suites of non-QM products. These lenders offer technology that makes it easier to understand product guidelines, put together a proper loan package and, ultimately, close more loans.