CEO sees good things ahead in 2024
For the uninitiated, the appeal of non-QM even amid a slowed market weighed down by high rates came as something of a surprise. But to non-QM veterans, it really just boils down to the fundamentals.
Take Deephaven Mortgage for example. The company experienced record-breaking volume levels, helping it to stay profitable even as the industry in general took a nosedive spurred by higher interest rates.
“On the margins side, we’re suffering the same tough margin environment that everyone else is,” John Keratsis (pictured), president and CEO of Deephaven, acknowledged in a recent interview with Mortgage Professional America. “But the difference that we’ve seen is there’s been a lot of attention being given to non-QM. We’ve seen a lot of volume coming our way; it’s been extraordinary. Profits have been tight, but we’re profitable.”
Longtime focus on non-QM pays off
For its part, Deephaven’s focus on non-QM long predates the current appeal. The company was founded in 2012 to provide mortgages to millions of borrowers who are unable to qualify for a traditional, government-backed loan – often given their entrepreneurial status that doesn’t fit neatly into the traditional lending apparatus.
Indeed, at Deephaven, 2023 turned out to be a banner year for non-QM. “By non-QM, I mean non-QM in investor, because DSCR [debt service coverage ratio] and non-QM have sort of been a package deal for whatever reason – the reason is more from the sourcing vehicle for correspondent lenders and brokers out there,” Keratsis said.
The very shifts in the mortgage industry landscape that hurt others financially ultimately benefited the non-QM mortgage lender: “What we found when you have a $4.4 trillion market like you did in 2021 and it gets cut in half in 2022, you got a lot of LOs and a lot of brokers looking to supplant that refinance volume with something. So now, non-QM, rental properties, start to get back into the headlines – it’s ‘wait a minute, we should really think about this property set.’ Whereas if you’re doing a run-rate refinance and it’s basically rate-and-term, you can almost print those out. Non-QM, these are storied loans, typically purchase deals that require a little more time on the narrative.”
What a difference a year makes. The data and analytics division of Black Knight Inc. detailed the record-setting 2021 in its Mortgage Monitor Report in explaining originations volume. That year, the market had shifted to an equity-driven refinance market – a booming period that has long since receded.
This year is sure to be decidedly different. And while the easy pickings of refinance are no longer around, Keratsis sees good things ahead for 2024. The industry was already handed something of a Christmas gift when the Fed opted not to increase rates during its December meeting – an aberration from the 11 increases it undertook since March 2022 to curb inflation.
With inflation, it’s back to the future
“If you look toward 2024, it feels like they [the Fed] learned from the [Paul] Volcker era and effectively curbed inflation,” Keratsis said. “Now it’s a delicate balancing act.”
The 12th chairman of the Federal Reserve from 1979 to 1987, Volcker is widely credited with having ended severe inflation that was in the double digits by 1981 – a year marked by high mortgage rates and an unemployment rate of 7%. Inflation was far worse than the contemporary version, forcing Volcker to engineer a pair of recessions to shock the system – ushering in a booming economy by the end of the 1980s.
Keratsis believes the efforts of current Fed chair Jerome Powell will bode well for 2024. “Look at the fundamentals: If you believe that inflation has been curbed; unemployment is at record lows; it’s an election year; you’ve got, over a 50-year trend a median that is about a 7.6% 30-year fixed mortgage. So you’re about a point lower than that. That all feels pretty good and augers well for 2024.”
Don’t expect another $4.4 trillion market like in 2021, but that may be a good thing, Keratsis said.
“I think we’re well positioned, and I think it is going to be more of a normalized market. I don’t know what the end result will be - maybe it will be $1.6 trillion for 2023. But if you told me we’d get back up to $2.1 [trillion], $2.2 [trillion] for 2024, that feels all right. I don’t think it’ll be irrational – it won’t be a 2020, it won’t be a 2021 – and that’s probably a good thing,” Keratsis said. “We can all kind of get back to perfecting what we have in a good, plateaued environment.”
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