Unlocking the Potential of Non-QM Lending in 2025

Narrator  00:00:03
MPA talk the American Mortgage Professional podcast.

Fergal McAlinden  00:00:11
Well, hello again, and thanks for joining us on another edition of MPA Talk. I'm Fergal McAlinden. I'm the News Editor here at Mortgage Professional America. So it's become an increasingly popular option among mortgage borrowers in recent times, and the non QM space that looks at to continue its rapid growth in the years ahead, if the word of brokers and lenders is anything to go by, today, we are going to be taking a closer look at the space with a company that has been making big waves on a non QM scene, Angel Oak Mortgage Solutions. And I'm very pleased to be joined today by Angel Oak's, President, Tom Hutchens. Tom, First of all, thanks for being with us today. How's everything with you? 

Tom Hutchens  00:00:45
Everything's great, Fergal, and happy to be here. 

Fergal McAlinden  00:00:47
It's great to have you with us. And really looking forward to diving into non QM today. First of all, maybe we'll talk about, I mean, the state of the non QM space in 2025 Tom. It's been such an eventful year so far, but maybe we'll just take a step back and, you know, assess the lay of the land now, where things are. How's the progress that the space has made over the past couple of years for you being?

Tom Hutchens  00:01:09
Oh, it's been a, you know, the real estate industry is still, still struggling a bit. You know, there's a tight housing supply, and no one's immune to that. But it's been a good space for non QM, because we've just seen with with agency rates being where they are, the lack of refinance opportunities in the agency space that you know, as we've built this we here at Angel oak, we've been doing non QM pretty much exclusively for, gosh, almost 12 years now. So we were one of the first, if not the first, to kind of dedicate ourselves to this space back in 2013 and you know, we always wanted originators to just pay attention to non QM, because there's it takes care of an underserved market. But we heard a very long refinance market it. It certainly got really supercharged following COVID when rates went to those record low, low numbers of the threes and below. But we just, we had originators that were busy. So they just, they always thought of non QM as a as more of a fallout product. But what we've seen in the last couple years, we've seen that change, and we've seen the shift to non QM as kind of a lead product for a lot of originators. And that's, that's what's has us the most excited about 2025 and beyond, is that non QM is no longer really thought of as a niche product. It's kind of a core offering for a lot of originators. And you know, we're, we encourage any originator that is not originating non QM loans to get involved, because it's here to stay. It's a big market, and it's a growing market, so we're excited about the future. 

Tom Hutchens  00:02:47
You know, I think it does speak to, you know, lower supply of of agency loans. That's part of it. We I think, what was it 2021 the agency business, or the mortgage industry, originated four plus trillion, and that number was one and a half trillion in 2024 so the overall originations have have gone down pretty significantly, and people have found out that non QM is is as easy to close alone as it is An agency loan, and there's just a lot of focus is non QMS. You know, biggest customer base are the Self Employed borrowers, and they just, frankly, are underserved, but yet, that's a growing population. So when you have underserved, but from the originator side, and but the population itself is is large and growing every single year. That's a that's a space that you want to be in.

Fergal McAlinden  00:02:47
It's interesting that you mentioned that growing originator interest, because at the beginning of every year, I talked to originators brokers about some of the big trends that they see coming for the year ahead. This year in particular, I really noticed that a lot of them were talking about non QM and the prospects that this base was going to offer this year. And I was wondering, Tom, can you explain some of the key factors, maybe behind that, why originators and brokers are not looking to non QM with that type of outlook.

Fergal McAlinden  00:04:04
Absolutely and tell me about Angel Oak's growth and non QM, what are some of the main secrets or factors behind its own expansion?

Tom Hutchens  00:04:11
The expansion has really been just education to originators, education and awareness. You know, we've, we've done a really good job of building our brand over these 12 years that we are experts in this space. We have a lot of experience, both on the sales the account executive side, but also in operations and credit and underwriting and things like that. And that's that's really what has set us apart. And so that's really we just continue to focus on educating loan officers out there that this is what non QM looks like. It's not anything to be afraid of. Once you understand some of the blocking and tackling, it's there. They're easy loans to close, and an originator can use non QM to really differentiate themselves in the market. If you are only offering agency and government loans, you're you're missing the boat on. Lot of potential borrowers and a lot of potential business in every market. 

Fergal McAlinden  00:05:04
Absolutely need to grow that net. I was wondering about the type of borrower specifically, Tom that you're seeing sort of turning to non QM loans at the moment, you kind of touched on a bit earlier. But what are those main borrower types that you've been saying?

Tom Hutchens  00:05:17
You know, that's the thing. There's, there's a lot of sub or smaller kind of products within non QM, but the core, the two biggest products are the Self Employed borrower, who's who cannot qualify for a loan based on their tax returns. You know, everybody knows that an advantage or a benefit of being self employed is that you can work with a work with an accountant and utilize the tax code to minimize your tax exposure, meaning, you know, write offs and things like that. But we have believed since we started this is that the a borrower's tax return, especially, I mean, specifically a self employed borrowers tax returns don't necessarily reflect their ability to repay a mortgage, and so that's where we created this bank statement loan, where we're looking at deposits into either the business or personal account, and we're looking at it at a 12 over 12 or 24 month period, and we're coming up with an income that, and it's really based on on cash flow into their bank account. So I think it's even more reliable than tax returns. And so that's the number one product, bank statement borrower, for buying, sell or buying or refinancing or cashing out on their property. But we've also seen a lot of growth in what's known as a DSC. DSC, our loan, debt service coverage ratio. And that's that's for the investor. It's an investor loan. A lot of times it's a professional investor who has a fairly sizable portfolio of loans and and qualifying, again, using tax returns would be very cumbersome and very challenging. So what we do on that loan is we look at the property itself and come up with a cash flow that that property would generate, and as and then we have a ratio. And based on that ratio, it kind of determines what kind of loan that investor would qualify for. So those are the two big ones. Again, there's some smaller loans within those categories, but as an originator, if you just focused on those two things, you'd be, you know, talking about 95% of the non QM production, and that's that, that's really what we spend a lot of time on is just educating people on the ins and outs of the product, the ease of which we can get these loans done. These borrowers are generally high credit worthy borrowers. It's not when we started this, a lot of people thought this was like the next wave of subprime, and it's not subprime at all. These are borrowers who just have, have, have to qualify differently than what's required by the agencies. 

Fergal McAlinden  00:07:46
I think that changing perception that you just mentioned has been a really big factor over the past couple of years. And again, interesting that you mentioned DSCR. I've heard plenty of that this year as well, so we know that it's going to be a really big factor. Tom Hubbard when it comes to brokers and originators, when you're having discussions with them, or even for our listeners today, what are some of the things that you want them to keep in mind about non QM? I mean, we know that there are obviously a lot of lenders in the space, just about the space in general, and their choice of lender. What's your message to them?

Tom Hutchens  00:08:13
You know, experience matters. You know, we've seen a lot of lenders get into the business as agency pulled back a couple years ago and so, and I think once agency rates come back down, there'll be a lot of lenders exiting the non QM space. And that's that's really something that sets Angel oak apart, is that we've been doing this almost exclusively for 12 years. We've we our commitment has remained, and it will remain. This is, this is not a trade for us. This is our business, and it's what we do. And so with that, we recently had a sales conference with all of our sales people from across the country. All got together, and I was just, I was really amazed at the amount of experience we have in our sales force. I think our average tenure of account executive with Angel oak is over six years, and that says a lot. So we, you know, we spend a lot of time on and kind of preach expertise. So that's what originators that's who originators need to partner with. They need to partner with experts so that lender can walk them through the process and make it as easy as closing an agency loan.

Fergal McAlinden  00:09:18
Yeah, a strong track record is always useful, for sure. How about that first conversation the brokers are having with their client about non QM? Maybe, if their client isn't used to non QM solutions or aren't too familiar with them, any advice on how they should steer that conversation, or some of the things that they should keep in mind Tom? 

Tom Hutchens  00:09:34
You know, I think it's relatively simple. I think most self employed borrowers and professional investors, or even if they're not professional investors, but they understand that the need to qualify for a mortgage is a little unique. There's especially on the bank statement loan. We see a lot of borrowers that have been denied for an agency type loan or a prime jumbo loan, and so they understand that their tax returns are. A good measure of their ability to repay the mortgage. So it's not a difficult conversation. It's simply just knowing, you know, again, a lender and working with the right lender who can can help steer them to the right loan for that borrower. That's that's probably the biggest thing, but the conversation with the borrower is usually pretty easy, and these originators will find it gets easier over time, you know, practice makes perfect, right? So as long as they're having these conversations and and they put themselves out there and market themselves as a non QM or a self employed expert, I think that's kind of where it really becomes important to the originator to to make this a significant part of their business, 

Fergal McAlinden  00:10:38
And whenever they're having that conversation, or even when they're dealing with their lender in general, Tom, are there any sort of common mistakes or missteps in non QM you see originators making that you're advising them against?

Tom Hutchens  00:10:48
It really comes down to the lender that they work with and the account executive that they work with. That is what makes the process go. Well, you know, recently, I was talking with one of our top originators, and he was just said, if he could send every non QM loan to Angel oaks, he would. And I asked him, you know, what are the key factors? And he said, consistency. It's just, it's a consistent our processes are consistent. Our decisioning is consistent. And so they know what they're getting every time they're dealing with Angel Oak. And we really pride ourselves in that, and really makes us a lot easier to work with because of that consistency. 

Fergal McAlinden  00:11:25
All right, great stuff, Tom, and maybe we'll look ahead now and take a look at 2025, and beyond, any non QM trends coming down the line that you've got your eye on? 

Tom Hutchens  00:11:36
In particular, think it's just going to continue to become a more mainstream product. It just, you know, like you said, you've talked to and heard from a lot of people kicking off 2025 and non QM is in their plans, and I think that's going to continue. We saw some research recently that in 2023 there were 73 million American taxpayers, that 20% or more of their income was derived from something, what would be considered self employed, or the gig economy. And I think we all believe and understand that that gig economy is going to continue to grow. So we're not talking about a small base of customers. We're talking about millions upon millions, 10s of millions, and it's growing. So that's really the message to me is, you know, get get into a space that's going to grow, and non QM is certainly that, that space.

Fergal McAlinden  00:12:29
Good stuff well you've kind of teed me up for my last question there, Tom, which was about your closing message for brokers and originators, if you have any on, on why they need to incorporate non QM into their service to clients. Any thoughts?

Tom Hutchens  00:12:41
You know, I would say, start at our website. Angeloakms.com and there's a find your account executive if you don't already have one, and there's a map and and our account executives will really educate them, partner with them to educate even maybe their referral sources, such as real estate agents and and the like. So that that's really how you start. And if you start there, you'll get the education you need, and then you, then you get the the confidence to go out there and that and present that to the next borrower and go find these borrowers. It's, it's kind of an exciting space to be in.

Fergal McAlinden  00:13:16
All right, brilliant stuff. Well, look, we will leave it there for now. But Tom, first of all, thanks so much for joining us in the program today. Um, program today. Great to hear everything that's been happening at Angel Oak and in the non QM space in general. Really looking forward to hearing more about that growth in the months ahead. But for now, thanks again for being with us, and I'm sure we'll talk soon. Sounds good. Thanks, Virgil. All right. Well, that's just about all we have time for on today's edition of MPa talk. My thanks once again to Tom Hutchens and Angel Oak for joining us. Thanks to you for listening, and we will see you next time.

Narrator  00:13:47
MPA Talk. You can listen to the latest episodes on Apple, Spotify, Amazon and all major listening channels. Just search for MPA Talk.