How lenders thrive in a new working environment

Narrator: [00:00:03] MPA Talk, the American Mortgage Professional Podcast. This episode is presented in partnership with the Next US Brian Hewitt, National Sales Manager. Next US joins us for the latest episode of MPA Talk to discuss the current climate of no income loans and how brokers can use non-Cuban to improve their business this year. 

Richard: [00:00:34] Hello everyone and welcome to a special edition of MPA Talk, the US Mortgage Industries Podcast. I'm your host, Richard Torne, the US news editor at Mortgage Professional America. And in today's episode we're going to be discussing non QM, those non-conforming loans designed specifically for self employed borrowers who fall outside traditional agency guidelines. The non QM market grew impressively last year when it generated around $30 billion in the US, and with that figure set to increase by another $10 Billion this year, specialist non QM lenders have in recent months been expanding their workforce. One such company is California based Next US lending. Joining me today is the company's national sales manager, Brian Hewitt. We'll be guiding us through the product and talking about the company's growth prospects in the space. He's ideally qualified to talk about the subject as he's overseen many sales and operations teams in the wholesale mortgage business over the last 24 years. Brian, welcome to MPA Talk. 

Brian: [00:01:35] Thank you for having me. I'm very glad to be able to be here and speak with everybody today. 

Richard: [00:01:41] Excellent. So how well did the company rebound from the COVID pandemic with non QM. 

Brian: [00:01:47] With non QM? The COVID pandemic actually was a benefit to non QM lenders. People's income structures changed the way they were paid, changed qualifying. Looking at a person's bank statements gave you a real picture of their economic state versus looking at a two year old tax return. So really, COVID was a was a plus for the non QM space because of the alternative documentation, people had to qualify by other means. That actually gave a much more accurate picture of their current financial state. 

Richard: [00:02:29] Right. And what are the most common misconceptions surrounding them? 

Brian: [00:02:34] I think the big misconception is that the borrowers aren't really qualifying kind of per the Fannie Mae guidelines or FHA guidelines. There are different ways to underwrite income and some people might think, well, that's not truly a full doc loan. So you're you're maybe you're putting somebody in a loan that they can't actually get or they can't afford, which is not the case in non QM loans, we probably take ATR our ability to repay more important than a regular Fannie Mae lender does. So when we're looking at the income, we're looking at income for the last 12 months or last 24 months where in a Fannie Mae loan you may look at two years tax returns, but if you're doing a loan in October, those two years tax returns are ten months old. So is it really an accurate picture of the current income stream where a bank statement program does show the current income? And then we also do expense factors. So you get you're gaining a true picture of what the borrower's ability to repay the loan in is in in the recent past. Not a delayed look at it. 

Richard: [00:03:55] Right? How can brokers use non QM to boost their business this year? Now that refi loan volume has dropped by almost 60%?

Brian: [00:04:04] There are several ways there. I mean, they would really have to look at who their clientele is, look at their community and see if there's more clientele than they've possibly looked at in the recent past. For example, if you were doing a lot of refinances for owner occupied and just dropping people's interest rates down and getting them into a lower payment, there may be a situation where refinancing now to do home improvements and maybe get $100,000 in cash out to pay for the home improvements would be beneficial. Or possibly you have a number of investors in your area that are looking to build their real estate portfolio. They may need to take cash out of other properties while that to a point where that property would still cash flow for them, but they can use the monies from those properties to to purchase another property that would cash flow. With the increase in interest rates lately, the cash flow of investment properties has shrunk, so investors are tending to put more money down. It used to be a year ago they try to put 20% down on an investment property and they could still cash flow because rents were increasing. But now their interest rates are increasing. In most cases, investors have to put 30%. Down for the property. That's still cash flow.

Richard: [00:05:37] Right. Looking ahead. The housing sector is facing important challenges, what with rising rates, soaring inflation and market uncertainty due to the war in Ukraine. Given the current economic headwinds, how confident are you that non-Cuban can thrive in such a volatile market? 

Brian: [00:05:55] Actually, I'm very confident. It's bringing a service to a consumer who may not have the ability to do financing on their property in the regular conventional means. The basically what has happened so so this is the 1st of April. What has happened over the last 90 days is unprecedented. In the past, we have not seen yields on bonds essentially double. Interest rates have gone from the three and 4% interest rate handle into the six sevens and in some cases on light commercial eights. Borrowers who are looking to do something. The longer they wait, the rates are rising. So the longer they wait, the more their payments going to be. And this is not a doomsday thing, but just in the last week, we've increased our interest rates a quarter and in actual rate, not a quarter in fee. We haven't really gone through that in the past. Prior to that, it would normally take nine months for what has happened in the last 90 days to occur. So it's the rise in rates have been very compressed. 

Richard: [00:07:21] Right. And beyond that, are brokers still reticent about including non QM in their pipelines because of the perception that it's more complex to calculate a borrower's credit score and their loan eligibility? 

Brian: [00:07:36] Some are, but a lot more are becoming more open to the idea. We've actually taken and put together a very detailed Excel spreadsheet that when a broker sends, say, bank statements or a PNL or even business tax returns. We actually have a staff on hand that goes through the information, puts it on a spreadsheet, and emails the final underwriting income figures out to the loan officer so that they can go back with confidence and say, okay, if I submit this file with this information, this is what the income figure is going to be. So really then all they're dealing with is what is the borrowers, other debts and how does that work into the debt to income ratios? 

Richard: [00:08:23] All right. Now, I understand that the company has been involved in a recruitment drive recently. What does that say about the positioning of non QM in the mortgage space? I mean, is that a reflection of the growing importance of the product for you? 

Brian: [00:08:39] It is. We are truly a non QM lender. We don't do any other type of loans. Our our market share is growing. We just finished a record quarter and we are hiring and all positions while we have some competitors that are having some struggles. I don't think I think that the last 90 days has caused some liquidity issues for certain people or certain lenders. But everybody will get through that. So this is this is a speed bump right now. What's happening with interest rates as that settles down and there's not the volatility in it. A lot of the other lenders will start to be able to come back. But right now, we're positioned very well. This is this is a prime time for us.

Richard: [00:09:33] Because, of course, mortgage rates are not such an issue for for self-employed borrowers. And I understand that's that's that's the case, isn't it? 

Brian: [00:09:45] A lot of times it's not. I mean, truly, what they're looking for is they're looking for financing that works for them. When a self-employed borrower like I'll give you example, sometimes I've done loans, I have a client who is a CPA who who does loans for a CPA, who does taxes for tattoo artist, tattoo artist work. They travel the United States and they actually work in other states. And their tax returns are very complicated because they make income in a number of different states, a regular Fannie Mae underwriter. That is a difficult file to underwrite.

Richard: [00:10:27] Exactly. 

Brian: [00:10:29] A non QM underwriter. We can just take a look at the bank statements and go, okay, your expense factor is 40%. We'll add it all up, divide it by 12 and here's what your income is. So they're a self employed borrower, depending on what they do. Really, non QM is a better transaction for them. A lot of times they actually come in with a much higher income than they do on their tax returns.

Richard: [00:10:57] So you're looking forward to this year then you think it's going to be a good year for Next US? 

Brian: [00:11:04] Oh, yes, 100%. I mean, we just ended a quarter. That was a record quarter for us. Our hiring is significant. I expect our second quarter to even double what we did in the first quarter. 

Richard: [00:11:17] Brian, I've heard concerns from other non QM companies that lenders are reportedly changing loan terms at short notice. I'm curious to know if you've experienced this at Next US. 

Brian: [00:11:30] No Next US lending. We have not experienced it. However, I am fully aware of that happening with other lenders. The cause of this is the compression of the rates in the last. 90 days. Created a lot of volatility. So if a if a company had closed an interest rate in the threes or 4% in a non QM alternative type income structure, they're actually losing money on those loans, sometimes as much as $0.20 on the dollar. So when they have to liquidate those loans to refresh cash, to do more loans, sometimes they need to close. They need to sell these loans at basically 100 to maybe 102 and a half. So anything less than that is actually a money loser for them. Initially, loans were being sold at 101. They were still losing money, but then it became $0.90 on a dollar and even dropped as low as $0.80 on the dollar. So the math on that is if you try to sell $10 Million in loans, it could cost you $2 Million where you used to sell $10 Million in loans and you made $12. So it's kind of flipped on its head. So there are a lot of lenders that have kind of changed their lock policies in the last probably 14 to 3 weeks, 14 days to three weeks. Next US stopped writing loans at the three and 4% interest rate in November. So we don't have any of that legacy loans sitting there that's causing us financial harm. Other lenders probably were writing three and four and even low five interest rate handles all the way up to 2 to 3 weeks ago. And they're finding it very difficult to sell those loans and replenish their cash. It's not a great position to be in. Interest rates for non QM loans are realistically at 5.5% today, up to six and one half, maybe even 7%. And in the near future, with the volatility, they may actually be a little bit higher. But a lot of companies are shorten their lock period because they're they can't take another financial hit like they're taking at this current time. Next US lending, we don't have any of those legacy loans. So for us, this is actually really been a time for us to thrive because everybody has raised their rates to where we did it in November. So while we suffered for a couple of months, we we didn't have the losses that they're having now. 

Richard: [00:14:22] Right. That's that's very interesting and very insightful. Well, Brian, thank you for being on the show today and giving us those useful insights. 

Brian: [00:14:31] Richard, I appreciate you having me on the show today and I look forward to doing this in the near future. 

Richard: [00:14:36] Excellent. And thanks also to everyone for listening. I've been your host, Richard Torne. Please join us again next week for another edition of MPA Talk. Goodbye. 

Narrator: [00:14:49] Thank you for listening to this episode of MPA Talk. For more from Brian and the team at Next US, visit them at nextuslending.com.