Non-QM: the challenges, opportunities, and future

Narrator: [00:00:03] MPA Talk, the American Mortgage Professional Podcast. This episode is presented in partnership with First Guaranty Mortgage Corporation. Non-core loans continue to become increasingly attractive, but success in this space goes beyond the product offerings. What are the challenges and opportunities within the non-QM space and what does the future hold? To discuss this and more, we are joined by Paul Jones, senior Vice President at FGMC.

Richard: [00:00:48] Hello everyone and welcome to a very 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, a much talked about mortgage product that's designed specifically for borrowers who fall outside traditional agency guidelines. Now we've refinance originations expected to drop by 62% this year. Brokers are understandably looking for alternative forms of lending. With that in mind, the non-QM market has grown substantially since experiencing a blip during the COVID pandemic, enjoying its most successful year in 2021 when it generated just under $30 Billion, according to a study by S&P Global this month. That figure is set to increase to $40 Billion this year and double that if you include jumbo loans. However, despite the evidence earlier, there are still many originators who have yet to take full advantage of non-QM. Today we're shining the spotlight on First Guaranty Mortgage Corporation, which re-entered the non-QM market back in 2020 and has been working hard to re-establish itself as an industry leader in the space. Joining me today is Paul Jones, the company's senior vice president, who is going to guide us through the product and talk about the challenges, opportunities and the future of non-QM in the US housing sector. Paul, welcome to MPA Talk. 

Paul: [00:02:15] Thank you very much, Richard. Very happy to be here today. Thank you for having us. 

Richard: [00:02:19] Excellent. Now, first question, what are the most common misconceptions surrounding non-QM and how do you address them? 

Paul: [00:02:27] Well, one of the most interesting things I still find with introducing non-QM to many people around the U.S. market is the term subprime. So people kind of try to correlate non-QM as a subprime offering, which we all know got a lot of people into a lot of trouble. Many years ago, that concept is probably the most resonating idea around non-QM today. And for us you know that that misconception is really easy to help overcome because we try to point out within our matrices, our grids and our guidelines and even with some low level price adjustments, how we mitigate the risk that may be perceived as subprime. Most of the loan products that we offer today, and I would actually say all of them have some demonstrated ability to repay for the borrower. So if we take a customer and we're calculating bank statement income or we're looking at assets as income, we're still evaluating some type of form of income to give that customer, you know, the certainty and us the comfort with any risk for that type of borrower. Another thing that we do, as I mentioned, is we look at those guardrails. How do we take a customer with maybe a lower credit score and still give them the right opportunity? We might reduce a loan loan to value allowance.

Paul: [00:03:53] We might require additional reserves. With that being said, you know, there's there's no chance of returning to a subprime offering because we're looking for customers who have skin in the game. Across the market itself, we see a lot of borrowers who have 30% to put down well established finances. Beyond that, many of these borrowers who are taking advantage of non-QM are entrepreneurial. So whether they're self-employed borrowers leveraging bank statements for income or an investor in real estate who wants to just leverage the cash flow because that's how the investor looks at their monthly earnings. When they have a tenant in the property, they just want to ensure they're covering the monthly mortgage payment with the rent they're receiving. So all these different small factors add up to overall removing some of that. That misconception that people have and and other misconceptions are sometimes surrounded by compliance. People assume that these loans don't follow compliance. We always look for a compliant loan. So you're still getting an L.E. And a C.D. If we do allow business purpose usage for a cash flow investor loan, then that's handled differently. But we're assessing and evaluating and assuring that these customers are not subprime customers, even when we do give further forgiveness around credit or other documentation. 

Richard: [00:05:19] Right now, look at the practicalities of it. How can brokers use non-QM to boost their business, particularly now that refi loan volume is plummeting? 

Paul: [00:05:30] Sure. Well, boosting the business is going to be at the forefront of everyone's mind. I think with the change in the volume and refinances diminishing, one of the biggest things that any broker can do to boost their business with non-QM is to. Find the proper partner who has more than just product. Every day we're seeing new entrants into the non-QM space. I just saw an article earlier today that talked about this product is easy to develop today. It's more normalized, but what do your partners with non m offer as far as resources do? They have a robust training platform that gives them ongoing support to get that loan officer turn them into a master and an expert in non-QM. We see a lot of that with FGMC and how we train our customers. We conduct customer webinars for product training 300 a month sometimes and that's repeat customers. Coming back to our events like Flight School, which we perform four or five times a month, which are centered around different features. And I think that's another piece of the training aspect. Richard, you want to look for customers who break these products down into smaller, digestible chunks that might resonate in certain markets or with certain types of loan officers, or have a customer base already established that can benefit from these these offerings. So I think it starts with training. I think it goes further with other resources leveraging technology partners that are now developing in the industry. And also one of the things that we try to do at FGMC is we provide a lot of market intel to help them understand how to navigate some of these headwinds and things I know we're going to talk about today, and that's really all about being consultative, being an expert. We give customized marketing materials, white label ability to those marketing materials so someone can literally take one element like debt service coverage ratio, DSCR cash flow, as it's also known as. And they can take one flyer to a group of real estate investors with their business card and they can walk out with multiple referrals and potentially even applications right there on the spot. So we give them kind of the coaching and tools to success and not just a matrix or a grid and some guidelines and hope that they can figure it out for themselves. And that's really a big part of boosting their business. To go further with that, another big part it's going to be important to have non-QM products is the recruiting of talented loan officers who are looking for more that they can sell. And furthermore, how do you retain your talent if you have loan officers in your shop that need to continue thriving and surviving? So just by offering that with the additional benefit, it's going to keep the producing loan officers in their homes today that they're working out of instead of looking for a new place that can offer these products to them. So I think everyone needs to have some some format of non-QM out there. And then when you talk about the refinance volume decreasing, another thing that's really interesting is while refinances decreased on the agency side, we're seeing an uptick in cash out refinances using non-QM products where all this equity growth that people have had in the last swell of two years of of increased values in their homes. People are leveraging the non-QM products to take more cash out, especially in light of inflation and other things going on in the US economy right now. 

Richard: [00:09:06] That's a very comprehensive answer. I wanted to ask you that in your experience, having said what you've said, are brokers still reticent about including non-QM in their pipelines because of the potential hurdles that they face, such as when calculating a borrower's credit score or loan eligibility? 

Paul: [00:09:27] Yeah, that's a great question, Richard. I think you see a lot of brokers who once they understand that the right partner has resources to help evaluate a credit score and a profile for a borrower, calculate a bank statement income on their behalf. I always say, you know, if we can find a way to just take the non-QM out of the loan upfront, the rest of that loan remains exactly what people are used to. If we at FGMC calculate your income for you on a for a bank statement customer, the rest of that loan remains what most people are very comfortable and familiar with. Right. You think? Thankfully no one's invented a non-QM credit report, right? There's just 60 days of seasoned assets like you're always going to gather and you're getting the same appraisal that you always would with your disclosure. So I think when you find the broker who who understands that and has comfort with that, then you can get them to kind of not see it as a hurdle for for them. And that's what we really do. And it goes back to what I'll probably beat the drum maybe too much on, but I don't think you can ever over train when it comes to non-QM and giving the loan officers and their other processing teams and underwriters and. House and anyone else that's touching these loans, the exposure and the ongoing involvement and training really does help to get them over those hurdles, as you mentioned. 

Richard: [00:10:57] Right. I'm curious to know also, how well did the company rebound from the COVID pandemic with with this particular product? 

Paul: [00:11:04] You know, it was an interesting time to relaunch, but I think we did a successful job leveraging where the market was at the time of our relaunch during COVID. And that was because, you know, we still had record volume around refinances. We still had just overall increase in the purchase market, a kind of the upswing was occurring and that gave us time to really plan our flag in the ground and look at the market in the landscape to strategize, look at our product offering to figure out where it should be for today and get ahead of certain trends in the marketplace, which I think we did a great job of. And it gave us the right amount of runway to get to where we are today. And as a company today, you know, month over month we've seen an elevated and exceeded our numbers pre-COVID in non-QM submissions, locks and funding. So we were able to just kind of plant those seeds, give them time to germinate, maybe work with the partners who had already worked with us in the past, work out the kinks. We had to restart a car that had been sitting for a little while. So once we cleared off the cobwebs and got that ready, when the market kind of turned the other way away from the agency opportunities, we had a lot of people that were already kind of storming the gates and ready for the the non-QM offering that had been already trained, had studied our guidelines, who had participated in all the various webinars we'd offered. We started doing town hall events, bringing in large numbers of customers at one time to kind of get them kind of primed, if you will, for the non-QM resurgence. And that really got us to where we are today. So it was it was it was a challenging recovery. And if you look at our current guidelines, I don't think you'll see the word COVID once. And if I'm lying, it might be one time you see that word in there. And there's a reason, you know, we kind of looked at the market and we kind of saw where things were going. And we build our guidelines to address those things that people are now still struggling with sometimes or still working through, if you will. And we just re redesign the guidelines to capture those borrowers without spelling out and putting in everyone's faces. This is a COVID guideline. For example, forbearances we were very generous on. We give less time than the agencies for seasoning coming out of a modification or forbearance, and a lot of those forbearances and modifications we all saw were as a result of the pandemic and in some cases, a knee jerk reaction to to the servicers and then what was going on early on in spring of 2020. So we just kind of said we got to help these borrowers coming out of a mod or some type of forbearance and give them a little bit more leeway and forgiveness, forgiveness coming off of those types of events by using non-QM. So that was that was again the time we had to take and we could take to level set and be ready. 

Richard: [00:13:56] Now looking ahead, I think everybody in the industry recognizes that the housing sector is facing important challenges with rising rates, soaring inflation and market uncertainty due to external economic factors. There is also a lot of volatility lately, with lenders reportedly changing loan terms at short notice. Given the current economic headwinds, how confident are you that non-QM can thrive in the current climate? 

Paul: [00:14:25] Well, I think just by the numbers we've seen as an organization as well as the new entrants into the marketplace, I think it I think it's coming back with a vengeance to to so many corners of the market in the US that didn't participate previously. You know, the flyover states, right. Certain areas were really untapped. We look at our heat maps on a regular basis for production and we're seeing markets that were very cool now starting to heat up. So I think that shows the normalization of the product. For one, the ability, as we've seen from the securitization sector, changing over the last several months, the ability for everyone to adapt. And I don't ever want to say, because I learned the hard way previous to COVID that it's economic proof. Okay. But I think it does have ways to remain flexible universally through all the providers to adapt to the market conditions and always still add and give that benefit to the borrower who is out there. You know, you're not going to see as many rate sensitive self-employed borrowers because the opportunities are limited in a agency landscape. When you tell someone they can use 12 months of bank statements and get sometimes more loan than they ever expected, they're going to pursue that avenue versus having to refile their taxes to have a more traditional loan.

Paul: [00:15:54] Right. A lot of people are sitting on tons of investments. And those investments might be all they need right now to survive. They're going to need that type of loan program that's offered through non-QM where you can use just your assets as income in order to qualify for the house. They're looking for a second home and then the real estate investing market. You know, I always look at that market and I say, you have only one primary residence in your portfolio, right? But there's no limit to how many multi-unit investment properties you can have. And if more and more people are steering in different directions for their income. Right. You have the gig economy workers using 1099 as an example. You have customers who are also realizing the power of owning real estate. Sometimes generationally, you see two and three family members going in on an investment property together. Those kind of things will never really go away. I think you'll just find more markets where it's hasn't even saturated or even skimmed the surface with non-QM and that's our real goal in 2022 and beyond at FGMC at First Guaranty to take our Maverick Solutions suite of products and plug them into more and more markets across the country. 

Richard: [00:17:07] Well Paul that's that's been really interesting. I'm sure all our listeners will have found it highly interesting what you've been saying and thank you for providing us with such useful advice. It's been great talking to you and having you on the show today. 

Paul: [00:17:22] I appreciate being on the show and we really hope that all participants in non-QM in the market succeed. I think we need everyone in this market to grow. FGMC is poised to be number one, but we'll take you riding along with everyone else in the meantime. But again, thank you for having us on this podcast and we really do appreciate your support. 

Richard: [00:17:45] Splendid stuff. Thank you. 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. Good bye.

Narrator: [00:17:58] Thank you for listening to this episode of MPA Talk. For more from Paul and the team at First Guaranty Mortgage Corporation. Visit them at fgmc.com. That's fgmc.com for more.