Borrowers and lenders pivot toward non-QM loans, HELOCs, and second mortgages
More borrowers are turning to non-qualified mortgages (non-QM), home equity lines of credit (HELOCs), and second mortgages, according to the latest report from Mortgage Capital Trading (MCT). As traditional agency loan production dwindles, lenders are expanding into these markets to meet growing demand and maintain competitiveness.
Non-QM loan originations continued to rise, with demand extending beyond traditional debt-service coverage ratio (DSCR) products. These loans have become especially attractive to borrowers unable to secure agency loans. Institutional investors are also showing a strong preference for DSCR loans, which offer potentially higher yields and robust performance.
“More and more borrowers are opting for non-QM, HELOC, and second mortgages,” MCT wrote in the report. “That market continues to expand at double digit rates of increases on a quarterly basis and there is no slowing down in sight. Many lenders are expanding into that mortgage space as agency loan production remains low. During these challenging times, new options arise that some should consider.”
The report showed that fair values for non-QM mortgage servicing rights (MSRs) are competitive, ranging between 3.65 and 4.25 times servicing fees. Second mortgages and HELOC MSRs are valued between 2.30 and 3.00 times servicing fees, reflecting their growing presence in the mortgage landscape. Some lenders are now offering closed second mortgages with balances up to $500,000.
Mortgage rate volatility
The mortgage market remains volatile as participants await the Federal Reserve's anticipated interest rate decision following its December Federal Open Market Committee meeting. Market participants are split on mortgage rate projections for 2025, with some forecasting rates to remain above 6.50%, while others predict a drop below this level.
MSR values have remained relatively stable despite market volatility. However, bulk MSR trades have declined throughout 2024, as sellers hold off on transactions, awaiting more favorable conditions. Bulk MSR trading values are currently between 4.95 and 5.20 times servicing fees for agency loans.
“With all the different market signals and predictions, MSR values remain steady and are holding strong as we approach 2025,” the report read. “MSR values during the month of November should remain relatively flat compared to the month of October levels.
“However, one thing is certain, loan production volume is expected to remain timid during 2025, barring any unexpected and unforeseen political or economic events. The current market prices for new origination should remain high as aggregators continue to purchase as many loans as possible just to maintain their current book of business and market share. This brings attention to the recapture business that so many large lenders and aggregators have been counting on over the last two years.”
Read next: How can brokers maximize their success in non-QM?
The report highlighted that lenders and aggregators face challenges in the current environment. Recapture business—expected by many large lenders—has yet to materialize, and aggregators continue to purchase loans at high prices to maintain market share.
Escrows and float income continue to buoy MSR values, bolstered by rising property values and high float income rates. However, the increased costs for borrowers—stemming from higher property taxes and insurance premiums—pose default risks.
Additionally, delinquencies are on the rise across all loan vintages, reflecting growing financial strain among borrowers. Prepayment activity, though historically low, has seen steady upticks, primarily due to the brief drop in mortgage rates during the third quarter.
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