Originators have to continue their education in challenging market
As the proverb goes, ‘the best laid plans of mice and men often go awry’, and that’s never been truer for brokers than today, watching as mortgage rates continue to rise faster than a gas meter on overtime.
With the average 30-year fixed rate jumping to 5.35% this week (that was at the time of writing, so they could well be above that now), interest rates haven’t been this high since 2009.
Accordingly, demand for refi loans has collapsed, shrinking by more than 60% year on year, although this development had been expected by most mortgage professionals in 2021, knowing that record low rates couldn’t last forever.
But brokers who failed to see the writing on the wall and didn’t plan in time will inevitably be feeling the pinch now.
And in a shrinking market, with fewer loans being generated and firms facing margin compression, non-QM lending has gained traction as the go-to alternative to help brokers diversify their toolbox.
Read more: FHFA fee hike on second homes a warning to originators
Unsurprisingly, specialist non-QM lenders have been calling on originators to shed their prejudices and embrace the product. Among them is Jon Maddux (pictured), CEO and co-founder of FundLoans.
He told Mortgage Professional America (MPA) that this was an ideal time for brokers to “reinvent” themselves.
He said: “We have to realize that the world is changing every day. There’s been a shift in the market and the supply of loans is different now than it was a year and even six months ago.”
A broker who had comfortably been doing government-sponsored loans for the last eight years was now finding it much harder because the supply had dried up, leaving them with no option but to figure out how to do non-QM, he added.
The key was to demystify the process, he explained. “It’s like anything in life, the more you do it, the easier it becomes. Originators have to continue their education to stay relevant every year, but all it takes is a few hours learning how to do non-QM.”
That alone would not guarantee success, however. “Another thing is picking a lender who is an expert at non-QM,” he stressed.
FundLoans’ non-QM experience goes back to 2016 when the firm was founded. Its client base is mostly self-employed business owners, largely entrepreneurs with complex, multiple-source incomes with good credit profiles but who are unable to obtain a loan approval from a bank as they don’t have two years’ worth of W-2 forms.
“If you go to someone who only does non-QM on the side, they’re going to have a more difficult experience than someone who’s doing it day in and day out. Underwriters who get conditioned to understand self-employed borrowers are better than underwriters who’ve been looking at Fannie/Freddie government loans all day long.”
Maddux, however, conceded that no-one was immune to the current economic headwinds, pointing out that brokers could not, in any case, expect to see a return to the heady days of the pandemic, when all they had to do was sit back and watch (refi) loan applications quickly pile up in their in-tray, while clients bragged about having the lowest rates over a smoking barbecue.
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Maddux admitted that although Fundloans might not be on track to double loan volume this year - due to those unnerving, “almost daily” rate rises - there were healthy signs that the next three quarters would be a lot stronger than the first.
“We were fortunate in that we didn’t get stuck with any bulk loans that weren’t locked, unlike other (firms),” he said. “The bright spot in the last couple months is that we didn’t do that to any of our brokers.”
But just as brokers have to reinvent themselves, firms have to adapt to changing circumstances. In line with that, Maddux revealed that FundLoans had recently rolled out a delayed financing product.
“We are looking at other ways to tap into people’s equity,” he said, adding that the firm was also intending to update its guidelines to make lending easier.
“Looking at the history of payments default on non-QM it’s really low. That means the guidelines have been very, very good. To give us that kind of result even when tested against COVID, when people’s businesses, especially self-employed people’s businesses, were shut down, shows that the loans performed really well.
“We’re not looking to get irresponsible with our guidelines, but we’re looking for other ways to make the guidelines easier and take advantage of the homeownership dream and continue to build wealth for the family.”
