One of the topics that was on the minds of the participants in last week’s MBA’s Secondary Marketing Conference was non-QM lending. More specifically, what is going on with it? The lending industry has been dealing with the “QM versus non-QM” discussion and decision for quite some time, and non-QM lending has not gained industry-wide acceptance. Qualified Mortgages have become part of the vernacular, and every day companies are weighing the risks of offering the product through retail, wholesale, and correspondent channels. QM, of course, refers to the federal Qualified Mortgage rules that are designed to foster “safe” lending. They ban certain loan features such as negative amortization and interest-only payments; set a 43% ceiling for debt-to-income ratios; and impose a 3% limit on total loan fees, among other requirements.
Of course, doing a QM loan does not shield Optimal Blue’s clients, or any lender, from a lawsuit in the future. It is important to remember, however, that non-QM loans do not equate to subprime loans. Lenders jumping into the non-QM space emphasize that they have no interest in funding subprime applicants who lack the ability to repay their mortgages. Many lenders, for example, offer products that allow debt ratios of 50% and depart from other QM standards for applicants who have strong compensating factors such as substantial down payment and reserves.
As OB’s clients know, several companies are known as the place to go for non-QM: Citadel Servicing, Angel Oak, Luther Burbank, BofI, and a handful of others, to name a few. Some call them “Alternative QM” mortgages for several categories of creditworthy borrowers with special needs. They are targeting near-miss borrowers who almost qualify under standard rules, but not quite. Say they have solid credit scores and good jobs, but have a debt-to-income ratio of 49%. They’re likely to have difficulty making it through Fannie Mae’s or Freddie Mac’s underwriting systems, but worthy of being given credit after taking a hard look at their bank reserves and assets.
Lenders are also addressing self-employed borrowers who have been left behind by QM rules and large lender underwriting guidelines. Business owners, for example, generally can’t show IRS W-2 forms and may have irregular income flows, complex tax situations and periodically high debt levels. Some residential lenders allow them to document their income using 12 months of recent bank statements and to have debt-to-income ratios as high as 50%. Also included in the product lineups are programs helping investors with multiple properties. They face significant hurdles when they apply for mortgages. Investors who own 10 or more rental homes or commercial properties and seek to refinance and pull money out are frequently turned down by conventional lenders. So some lenders evaluate borrowers’ incomes based on the properties’ cash flows and has no limit on total properties owned.
There is still concern about future liabilities, investor options if a closed loan isn’t purchased, reputational risk for offering non-QM product, and the sales job that LOs must give borrowers for the higher rate. Although this may change, non-QM lenders are looking for borrowers with high FICO scores and ample money to put down on the home, earning a low loan-to-value ratio. Ability to Repay, or ATR, is critical, and non-QM loans can be a good credit risk if the borrower demonstrates an ability to repay.
Investors are showing interest in the product. The government, indirectly, wants the industry to increase “private lending” and therefore do non-QM although the agencies have a waiver until they come out of conservatorship to go above the DTI limit. Despite their issuing a tough QM rule, financial regulators really want lenders to do more non-QM to decrease Freddie’s and Fannie’s share of the total mortgage market.