September 10, 2018 - Originally posted on MBA.org
Ben Wu is executive director of LoanScorecard, a leading provider of non-agency automated underwriting, CECL loan-loss reserve solutions and borrower point-of-sale solutions designed to meet today's regulatory challenges and capitalize on market opportunities. He can be reached at email@example.com.
MBA INSIGHTS: Non-QM originations and securitizations have seen significant levels of activity over the past 18 months. What's driving the market?
BEN WU, LOANSCORECARD: The non-QM market is showing no signs of slowing down, with both origination and securitizations expected to double this year. Several trends are driving this shift in production. On the origination side, the shift from a refi to a purchase market and the growing "gig" economy have led many lenders to develop products for responsible borrowers who don't necessarily fit in the traditional QM box. For example, we're seeing more lenders offer bank statement loans to help qualify self-employed borrowers who can demonstrate a reliable income stream through deposits into their bank account, rather than traditional W-2s, paystubs and tax returns.
On the issuance side, investors who have been in the market for the past few years are doing even more securitizations and are much more comfortable with them. These pools are composed of well-underwritten, fully-documented loans that comply with the Ability-to-Repay rule and have low delinquency rates that rival that of agency residential mortgage-backed securities. In addition, new entrants are looking to replicate the success of the non-QM pioneers because they find the risk/reward very appealing.
INSIGHTS: One of your products, Portfolio Underwriter, captures specific credit policy and underwriting criteria. How are your clients using this to explore the non-QM market?
WU: Our clients are using our automated underwriting system, Portfolio Underwriter, in a variety of ways. Wholesale lenders and investors who offer non-agency/non-QM products are using our technology to distribute their products and pricing, as well as determine borrower eligibility.
Brokers are using Portfolio Underwriter via their LOS or their wholesale lender's website to not only access guidelines for non-agency/non-QM loan programs, but also run "upfront pre-qualification scenarios." Portfolio Underwriter provides brokers with an in-depth Findings Report, which is a detailed breakdown of the underwriting criteria applied and any documentation required. This gives brokers an early indication if the loan will be approved, as well as reduces the likelihood that they will provide inaccurate quotes to borrowers. It also ensures consistent, transparent credit policy application to support Fair Lending requirements.
INSIGHTS: Are you seeing more clients comfortable with working with non-QM loans?
WU: Yes, and automated technology is a big reason why. It's enabling all stakeholders to stay abreast of changing guidelines. It's empowering brokers and lenders to "dip a toe in the water" and try originating non-agency/non-QM products. It's also giving investors greater confidence by delivering reports that vouch for loan quality.
INSIGHTS: How are lenders using automated technology in the non-agency/non-QM space?
WU: Lenders are using automated technology to not only keep up with the rapid growth and change happening in the market, but also to be more efficient and accurate in their day-to-day tasks. As I mentioned before, our custom-tailored AUS, Portfolio Underwriter, allows them to underwrite new non-agency/non-QM loan programs. In addition, product and pricing engines allow them to quickly deploy their programs into the marketplace, without relying on memos, and product announcements.
INSIGHTS: What do non-agency/non-QM loans look like today? And how are they different from the non-agency loans originated pre-crisis?
WU: Loans originated pre-crisis, such as Alt-A or subprime, had extremely loose guidelines (100% or higher LTV) and were poorly supported (remember: NINA). The non-agency/non-QM loans originated today are quite different. Generally, they have LTVs in the 70 to 80 range, plus sufficient reserves to help weather the next downturn. The average FICO is 699 and the average DTI is below the 43% QM threshold, though outliers are allowed through risk-based pricing. Every file is now well documented and thoroughly underwritten. Every borrower is vetted to ensure they meet ability-to-repay standards. In addition, due diligence is performed on 100% of the underlying pool.
INSIGHTS: The Bureau of Consumer Financial Protection (Consumer Financial Protection Bureau) is currently reviewing the QM rule and may broaden the definition of QM. If this happens, how could it impact the non-QM market?
WU: The definition of QM is already broadening. The recently signed 2018 Financial Reform Act states that QM status now applies to mortgages originated by and held in the portfolios of financial institutions with less than $10 billion in assets. We expect the expansion of QM will be a boon to non-agency/portfolio lending. It should be noted that many of our clients think about the market less as QM vs. non-QM and more as agency vs. non-agency or portfolio lending. With more loans falling under QM's protection, lenders would be able to develop new products to help underserved borrowers, including borrowers with past defaults, sole proprietors and individuals with assets looking for interest-only or asset-depletion options. In addition, more secondary market options would allow lenders to see if they could get a better price for their agency-eligible loans in the private-label market, which could lead to more profitability.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)