4 Steps to Take Advantage of Non-QM Lending Opportunities
High interest rates, a shrinking housing supply, and economic uncertainty have made 2023 another erratic year for mortgage originators.
While the continued downturn has disrupted the industry, it has also presented originators with an opportunity to approach their portfolios with more creativity and flexibility.
Queue non-QM – or non-qualified mortgage – lending.
Non-QM loans, which are originated for borrowers who fall short of typical qualified mortgage requirements, have recently risen in popularity. And while they can be a great way for originators to diversify their portfolios and excel in a down market, they don’t come without risks and challenges. This blog post will help you navigate these risks and challenges, so you can take advantage of non-QM lending opportunities effectively.
Monitor the Evolution of the Non-QM Lending Space
The demand for non-QM loans, which do not meet the Consumer Financial Protection Bureau’s Ability-to-Repay / Qualified Mortgage Rule (ATR/QM Rule), has surged in recent years. Industry experts believe this trend will likely continue, or even increase, through the end of 2023.
Originators scarred by the 2008 housing crisis may view this development with a wary eye. In reality, non-QM loans – while not without their risks – are unlike subprime loans and must still meet the ATR rule under the Dodd-Frank Act. This fact (and the changed nature of the mortgage market itself) means a repeat of 2008 is highly unlikely.
While the demand for non-QM loans is currently elevated, there is no guarantee it will remain that way. Lenders should monitor ebbs and flows in demand closely.
Understand What Non-QM Borrowers Need
In order to take advantage of non-QM lending opportunities, originators must understand who typical non-QM borrowers are and what they are looking for.
Let’s start with the who. Most non-QM borrowers maintain a nontraditional income structure. Many are self-employed, contractors, or retired and cannot produce the required documentation to prove they can repay the loans.
Non-qualified mortgage lenders allow borrowers to provide alternative income documentation, including bank statements and tax returns, to prove their ability to repay. This is a feature that has significantly contributed to the rise in non-QM lending.
McKinsey’s 2022 American Opportunity Survey found a whopping 36% of employed respondents “identify as independent workers.” These workers may have excellent credit and a steady income but lack W-2s to easily prove their “ability to repay.” For this reason, they turn to non-QM loans.
Beyond independent workers, those who commonly seek non-QMs include foreign workers, borrowers with high debt-to-income ratios, first-time homebuyers, and investors.
While these borrowers have unique requirements, they all have one thing in common: the need for a lender who will work with them and practice flexibility.
In practice, that flexibility often takes the form of manual underwriting. A manual underwriter can delve into a borrower’s income and credit history to make exceptions in a way automatic underwriting cannot.
Know the Risks Associated with Non-QM Loans
While the flexibility exhibited during the non-QM underwriting process can help borrowers secure mortgages, it can also expose lenders to increased risk. Originators looking to explore non-QM lending opportunities must be aware of these risks and take the necessary steps for ensuring mortgage compliance.
Originators must be certain that prospective borrowers will be able to repay their loans and that the loans they’re manufacturing meet investor guidelines. Strong mortgage quality control processes can be an effective way for lenders to identify defects and avoid repurchase demands.
Unfortunately, the risk factors don’t end there. According to a Mortgage Professional America article, liquidity is one of the most prominent issues non-QM lenders are facing. As the article explains, investors stop buying notes if the money isn’t moving, and with non-QM loans, there’s a risk of loans not getting paid off.
To add to the list of risks to be aware of… Non-QM loans cannot be purchased by GSEs and must be sold to investors, particularly those who favor high interest loans. There’s always a risk that, due to fluctuations in interest rates and demand, investors may decide to stop buying non-QM loans. So, by their nature, non-QM loans are more vulnerable to shifts in the market than qualified loans.
Partner with a Mortgage QC Expert to Mitigate Risk
Conducting mortgage quality control audits is key to ensuring regulatory compliance – especially when dealing with riskier loan types. Partnering with an outsourced vendor with experience auditing non-QM loans can provide you with the peace of mind you need in today’s uncertain market.
MetaSource Mortgage offers a full suite of mortgage QC and compliance offerings that help mitigate the risks associated with non-QM loans. Our mortgage compliance services, which include both pre-fund and post-close audits, give originators confidence, save them money, and free up their time, so they can focus on maximizing business opportunities.
Speak with one of our mortgage QC experts to learn how to minimize risks while taking advantage of the rise in non-QM lending.