The buzz continues to build. Non-QM loans are no longer the future of mortgage products—they’re the present.
The forecasts of the booming non-QM market are finally coming to fruition. According to Inside Conforming Markets, “$11.38 billion of expanding-credit MBS, including non-QM loans, was issued in 2018.” The same report said that analysts are expecting a 60 percent increase in these products in 2019. This news aligns with other predictions that the non-QM market will explode in the immediate future.
Lenders may feel some apprehension about non-QM loans, fearing increased risk after the mortgage market finally settles down. However, these products represent opportunity backed by due diligence and smart strategy.
What Is a Non-QM Loan?
In 2014, the Consumer Financial Protection Bureau (CFPB) instituted its qualified mortgage guidelines, aimed at protecting the industry from the housing crash of the previous decade. QM rules prevent borrowers from taking out mortgages they can’t afford, restrict riskier terms, and limit fees and points. Borrowers avoid mortgages they might struggle to repay, and lenders avoid handing out loans that might default.
The problem with the CFPB’s QM rules is that they sideline many qualified borrowers who fall just outside of the guidelines—for example, self-employed consumers, foreign nationals, real estate investors, and borrowers with significant assets but not necessarily a job.
A non-QM loan does not conflict with the CFPB’s directive and approaches the mortgage in a unique way. Interest rates may be higher or for longer terms, and the origination process is geared toward these borrowers differently, but a non-QM is anything but subprime, ATR-noncompliant, or predatory.
The Sudden Surge
Non-QM loans aren’t necessarily new, so why are they bursting in popularity now? Many reasons jump out for this surge, including:
- More successful self-employed workers in the economy
- A tighter mortgage market that makes lenders more willing to offer less traditional products
- Higher interest rates that price some consumers out of traditional FHA loans
- Less risk for loans that differ from non-traditional products
- Increased year-over-year earnings for American workers that can be applied to a non-QM loan application
- More renters potentially ready for their own homes
- Prospering millennial and Generation Z borrowers exploring options in the residential market
- Aging baby boomers, possibly retired or not fully employed, looking to downsize but still own
Mike Brenning, chief production officer at Deephaven Mortgage, estimates that half of American consumers are well-positioned for a non-QM loan—cementing that this strategy isn’t just for a small, risky segment of the population, but rather, a demographic that is underserved and untapped.
The Challenges of Non-QM Loans
Unfortunately, non-QM loans are often equated with subprime products, which scares off lenders and even borrowers who think anything outside of a traditional mortgage is dangerous. Your business will face this initial challenge to overcome this negative perception if you plan to expand into non-QM lending, but other challenges also exist.
As Ben Wu, executive director of technology at Calyx, explains, the scrutiny and documentation behind a non-QM loan can be burdensome, as can underwriting. No lender wants to take the borrower through the origination process only to encounter unexpected obstacles unique to non-QM. Agency mortgages follow standards and processes that don’t always fit non-agency loans, and the differences can reduce efficiency.
Technology Can Help
Newer technology in the loan origination industry is beginning to catch up with the non-QM boom. In the past, loan professionals had to manually process and underwrite applications, thus slowing down the process and increasing the chance for errors. These more efficient technologies include:
- Pricing engines: The newest technology automatically determines borrowers’ non-QM loan options and runs pricing scenarios for the lending team. Tasks that might have taken hours or even days now take minutes or less.
- Automated underwriting systems (AUS): A non-QM or non-agency AUS handles the nuanced underwriting of non-QM loans as effectively as a traditional agency loan. Such a system continually updates so when new innovations hit the scene, lenders can immediately offer the mortgages to customers.
- Experienced technology partners: Mortgage software vendors with decades in the business have seen everything and are adept at staying current with the needs of their customers. Such partners understand the industry and work with you to help you successfully navigate the complexities of non-QM loans.
Proactive, ambitious lenders should seize the opportunity to take advantage of the surging non-QM market. With the right systems in place and the right attitude, mortgage teams can help borrowers who might have been shut out of a traditional loan find the home they’ve been dreaming of.