The Complications of Non-QM

When the pandemic hit, origination in the Non-QM space practically disappeared.

Newfi Lending’s Steve Abreu, whose wholesale lending operation based in Emeryville, CA, did much of its business in Non-QM, talked with Mortgage Media’s Suresh Ramakrishnan about the change in the market, and the current state of Non-QM.

Abreu describes the market as being in a state of disarray back in March, when investors had left, panicked to some extent. He said about 50 percent of the investors have returned, but not all the players – and only about 10-20 percent of originators have come back.

For most of the industry, the focus is now on the simpler loans, he said. “Yes, jumbo has been coming back, but not Non-QM in any size.”

With secondary margins being so strong on generic products, Jumbos and FHAs, lending has been focused on that business right now.

“You see the Non-QM participants also participating in that space, grabbing after the low-hanging fruit and wider margins on the easier products to originate,” Abreu said.

The cost to produce Non-QM loans is much higher, so the broker community is focusing on the easier products.

Abreu points to how Non-QM business often serve self-employed borrowers. “Coming out of March, April and May, with the employment situation, and particularly with self-employed borrowers having more stringent requirements around them, it’s hard to get those loans approved and packaged up correctly.”

Plus, the note rates a little higher compared to Jumbo loans, which makes underwriting a challenge when looking at 2020 mismatch with bank statements compared to 2019, especially if the borrower’s business had been impacted.

There are different layers of risk post-March versus pre-March, he noted.

Another issue with how to qualify self-employed borrowers was that most of their business had received the SBA’s Paycheck Protection Program loans.

For Non-QM going forward, Abreu said that “the guys now who are in, are in.”

“There’s a higher yielding asset here – so there’s people that want to do these loans. There’s just not a lot of loans to originate to the end buyers. And the yields are higher so not a lot of buyers are going to refinance into higher note rates. It’s really the purchase deals and cash-out deals for the self-employed. It’s a more difficult loan to originate.”

NewFi had to quickly change its approach to the market, putting more of its resources into Agency and Jumbos. “We have Non-QM on the rate sheet as product offering, along with Jumbos, Agencies, FHA and VA. We like to be able to have all products and be ready for any type of market moves. But most of the paper is getting done on the higher credit quality full docs.”