Non-QM Power Panel - Thriving amid the turmoil

Paul: [00:00:29] Hello, everyone, and welcome to the latest edition of MPA TV. A non QM power panel. And if you're thinking to yourself, wait, I've seen you do a non QM panel before. Well, you're right. We visited this topic just a few short months ago. But my how the market has changed. Upheaval has perhaps been the word of the month with a host of market withdrawals and some companies even disappearing altogether. But among those that remain, there is a notable air of confidence. Many of them seeing significant growth as their products continue to resonate with clients. So what happens next and how can brokers turn these testing conditions into a win? I'm delighted to say we have another expert panel on hand to help guide us. They are Will Fisher, EVP of Non-conforming at Loan Stream Mortgage. Nick Harvey, senior VP and regional Sales Manager at Acra Lending. And Tom Davis, chief sales officer at Deephaven Mortgage. So let's get into it, gents. As I said at the top, there's been a lot of upheaval in the market in recent months, with several withdrawals included. How would you assess the overall state of the non QM markets? Will, I'm going to come to you first. 

Will: [00:01:52] Thank you, Paul, and thank you for having us here today. And we're honored to be considered for the panel. So, yeah, it's been a little bit of a wild ride here for the last couple of months. And non-QM and, you know, if you equate it to just normal business cycles, you're going to have periods of expansion and contraction. And depending on how well your business model is, how well you're watching the means, so to speak, and what your plans and strategy are can really determine if you're going to make it through or not. And I think that's what we're seeing with some of the exits in our space, other non QM lenders specifically. And then you also see some of the lenders that were really just agency lenders that try to get the non QM maybe shuttering a retail division or shuttering a wholesale division, but still staying around in their present form. So I think that's just normal in certain business cycles to see that because overall, non QM, has been pretty solid. I mean, you've had to know what to do with your loans before you even fund them, whether you have them pre-sold or some type of agreement to hedge yourself against the volatility in the market. But those of us who have and continue to are doing just fine. And as a matter of fact, even in this market, kind of thriving to a degree. So with that overall outlook is still looking good. We're still delivering one heck of an interest rate to investors on the back side of this. And we plan to continue to. 

Paul: [00:03:26] All right. So this is a normal cycle and the market is still in a strong position. Nick, let me bring you in at this point. Do you agree? 

Nick: [00:03:35] Yeah, sure. Hey thinks Will and thanks Paul and your team for having us on today as well. I agree with that. I mean, I think non QM is strong. The demand is there. There's healthy competition. There's lots of borrowers that need to qualify unconventionally. Right. That don't qualify in the normal standards of the government agency paper. So we have products that are there for them and we're seeing upticks in volume over the last three months, even with the rates where they're at and affordability, these borrowers still need this paper. I mean, you wouldn't have non QM without QM. So we kind of piggyback on all that and said non QM is strong. 

Paul: [00:04:12] All right. So this seems to be a bit of a consensus so far. Tom, if the market is indeed in a strong position, does this mean that the need for non-QM's grow? 

Tom: [00:04:22] Yeah, absolutely right. So if you look at the market overall origination market, last year the market was at a 4 trillion north to 4 trillion number going to be at sub 2.4 trillion. So yeah, a year over year decrease in production by, let's call it 40 plus percent, which the majority of that decrease has been refinanced. Right. So the overall market, not just the origination market, but overall markets in general in finance, whether in mortgage bond stocks have really we've seen this all the volatility from early on in the year. Right. And in the non QM space, you're actually Yes, you have volatility in the interest rates. Right. But the demand for these for these products has been strong. In fact, we have seen an increase in production and actually in 2022 origination into volume securitization volumes, loans that are being held into portfolio, that volume is actually going to increase year over year and we're seeing an acceleration going into the Q4 just had deephaven in the last let's call it 4 to 5 months, we have seen our customer base increase over north of 40 to 50% in both wholesale and. Correspondent. And the reason why is originations are down. People need other products to serve borrowers and they need products to fill it. They need product expansion to fill the refinance forward. So we're very bullish about the non QM space. We see the market continuing to grow, but definitely some volatility there. And it's important that you work with an investor who can navigate and has the expertise, the experience to navigate through the the volatility, not just in the non QM space. 

Paul: [00:06:17] I like that idea of being bullish right now and clearly you guys are confident, but how can brokers feel confident in the longevity of non QM specifically of the lenders that they're working with? Are there any telltale signs that they should be looking for of strength or weakness in the lender partners? Nick, I'll come to you. 

Nick: [00:06:36] Yeah, thanks, Paul. Good question. Look, I mean, cash is king, right? Liquidity is going to allow your lender to be flexible, to move with the market. So brokers should be looking for the track record of these companies. How long have they been originally non QM, What's their experience? Do they specialize in non QM or they do a little bit of non QM but they're traditionally all a paper. So I think if they focus on that, they specialize in it. Looking for a company that's vertically integrated, all in-house. Like Tom had said earlier, not a past year lender having the ability to make your own credit decisions, looking at all those factors when determining who you're going to partner with as a lender is really key. 

Paul: [00:07:21] All right. So it's about that track record, Will, is that how you see it as well? 

Will: [00:07:27] You know, I think that the strength that you're looking for as far as telltale signs of strength or weakness, you have to look at product. I think you have to look at rates. I think you have to look at the overall menu of what lenders are providing. I don't think you need to overthink it. And to that degree, there's stronger lenders out there have secured where they're going to be putting their loans, where they're going to be selling their loans. So if they have a wide range of product, they're probably in a pretty good financial health. If their what I've seen is if their rates are really high, leading the market as far as. Interest rate, then they're maybe not in the best of health or they're a little bit more skittish. And that's kind of what I've seen with some of the participants in the market. I don't I'm not necessarily convinced anymore that having any type of private equity ownership or anything of that degree is really going to save or distinguishes you. I mean, when the largest bondholder I'm sorry, the longest bond firm in the world, PIMCO shutters their non QM lender, that speaks volumes. And so when we saw with COVID too you know they're the ones that were quick to shut down and took long to open back up. And so I think what you're looking for are folks who've been around for a long time, hopefully since 2013 and 14 or 15, I've developed the relationships with the street and where the end where this product actually ends up and can pivot and can adapt to the changing environments and has the other tools, the other products in their quiver to provide those brokers with being all the loans that they need are kind of a one stop shop. So I think when you approach it from that angle and if you're a broker, you worry about where you're going to put your paper or where you're going to put your loans. You want to look for somebody who has a good product breadth and has interest rates that are competitive because that should tell you they're in very good health. If they're an extreme one way or another, then that could be a problem. So when you're evaluating, you're working with. Evaluate how long they've been in the space and what the product looks like. And I think you'll be in a pretty good spot. 

Paul: [00:09:45] It seems like some keywords are emerging here. Longevity, adaptability. Tom, are they among the words that you would highlight as well? 

Tom: [00:09:53] Yeah, Yeah. I think for me, when you work in any profession, you want to work with someone, whether it's in mortgage, whether you're working with an attorney, a financial advisor, you know, you want to work with an expert or professional in the field, right? You don't want to work with an amateur. And I think in the non space, it's critical that you work with an investor that has a proven track record, not someone that's getting into the space or fumbling through it, that it's important to have expertise, knowledge, focused experience, and especially in today's volatile rate environment. If they don't have the the infrastructure or the horsepower and capital markets to kind of navigate through this environment, they're at a competitive, competitive disadvantage. If you're an investor and you're passing your loans into someone that's securitizing and that securitization or that securitize or kind of their appetite, let's call it fades, right, then your product price, your product will fade. As far as your guidelines, the pricing will fade. Right. If so. And we've kind of seen that in Q1 and Q2 and Q3. Right. The securitization market has been wounded. So if so, I would highly recommend that you work with someone that is has a track record of securitizing. We've done, I believe, over 20 securitizations since 2012 when we first entered the space. And so we have the track record of the performance of these products. You know, I hear a lot of times about products and you need to have a wide product set. But if you look at the securitizations year to date that I've been done and even pre-COVID right, 95% of the market is bank statement and so DSCR 95%. The other stuff is the esoteric or the stuff on the fringes of the box, that kind of stuff. When you trade in the market, in the secondary market and you go to trade in the securitization market, that stuff gets you know, the investors don't like that stuff, right? I will tell you bank statement DSCR. You know, originations that's 95% of the market year to date. That's so we focus on down the middle, the stuff that's being originated and we focus. We try our best to do it better than anybody else. And so it's important that you work with someone that's really good at what they do and and has that expertise. And the folks on the call today are friendly competitors. They do a phenomenal job and have a good reputation. And they've  been in the space for a while. 

Paul: [00:12:35] I mean you spoke there Tom about the volatile rate environment and of course, volatility across the board. Right now. We're certainly going through a cost of living crisis. So are there any particular borrowers that that stand to benefit from non QM offerings at the moment? Tom I'm sticking with you. 

Tom: [00:12:52] Yeah there's yeah there's always look that's the reason we came with 9 p.m. because there are borrowers that didn't fit the agency box. And if you look at that box and you look at agency borrowers right across the United States. Right. Big misconception. A lot of brokers or bankers will say, well, I don't really run into these borrowers because they're not looking for them, but non QM borrowers and the need for a non QM just like agency borrowers there's non QM borrowers in every single town there's investors credit event borrowers, there's first time homebuyers. There are let's call it high net worth high income right borrowers right of foreign nationals. You know there's property types of 50 agencies, higher loan amounts etc. So having these tools as an originator is extremely important. And the non QM allows you to to to have products such as arms for interest only some of these other options that 40 year term fixed term that allow just higher affordability. So there's definitely a need from non QM, there's definitely a benefit and we expect that market to continue and the need to continue to be there. 

Paul: [00:14:07] Will, the stronger need out there. Any borrowers that are particularly needy of the product. 

Will: [00:14:12] Well, yes, I think this is an opportunity to expand what a non QM borrower is. You know interest only is something that's unique to the space. And so you'll see that there's probably borrowers that maybe haven't refinanced during the boom or maybe didn't get that the best rate they possibly could during the boom. And they typically would be an agency of fit. But now with interest only and other more expansive terms with interest only, we can still lower their payment to some degree, whether they're just a regular W-2 worker employee or they're self employed, especially for self employed, and they have a tough time showing their income. So with bank statements and then investors, it's still a fantastic time of year trying to create cash flow and look at those opportunities. And so if you haven't moved forward yet or you're just not going to work in that agency model, then non QM is a perfect fit for you with the when you can get an agency and what you can get in QM being so close now you really got to consider non QM as a viable play to get your loan forward, especially if it's an interest only payment. 

Paul: [00:15:24] All right. Great thoughts. And Nick, if I can bring you any any borrowers that you would particularly focus on. 

Nick: [00:15:30] I really think it's that self employed borrower using bank seems to qualify or someone has a credit event lower FICOS that's throwing them outside of the agency standards of what they need to qualify with. There's tons of products that we all offer in the non owned space for massive depletion air in full, no income ratios, different types of properties like condo hotels, non worth condos, all things like that that fall into that non QM space. But really it's those borrowers that aren't qualifying for that conventional paper that really drives them to us. Also a lot of investors right now with those no income, no ratios or fakes and flips and multifamily. So I think there's a lot to offer for all those borrowers. 

Paul: [00:16:16] A wealth of borrowers out there. And of course there seems to be a wealth of offerings as well because there are plenty of new offerings that have entered the market recently, including 40 year interest only loans and so on. So are there any particular offerings that you would highlight as being of a particular interest right now? Will, I'll come to you? 

Will: [00:16:35] There are new products that have emerged. For instance, there's the 40 year interest only, there's the 40 year fully amortization, which are now becoming popular just due to the fact that the payment can be a little bit easier to make to the borrower. And these are all opportunities, I think, in the space. And once you've got to look at is who might be reintroducing product to help expand your ability to make money, your ability to make loans and what's going to be most effective. What are you trying to figure out? What's going to give your realtor that ability to? Get her into the home with the type of qualification for income, or is it going to be a refinance that must happen for cash out purposes? And who's going to give you the most cash out, the best deal where you can afford to do that loan now with a new payment, But it's going to be less on actual. I think the movement right now is not towards how can we qualify more borrowers by expanding guidelines as much as how do we figure out how to lower that payment, how do we make it a more acceptable payment with this rising rate environment? And that's where I see the focus right now. 

Paul: [00:17:44] Okay. So, Tom, it seems to be a case of finding products that fit a specific need. Is that how you see it? 

Tom: [00:17:52] Yeah, absolutely. I agree with the 40 year and the interest only and the arms know serve affordability. Right. But I you know, I like to go back to the basics. Just the bank statement loan. Right. It's two thirds of nine production. Right. And you know, if you're an originator or a broker or a lender and right. And you're you're serving the the veteran with the VA loan. Right. Here's a quick fact. There's actually more self employed people in the United States and veterans. So you should have a a strategy for self employed borrowers. And that strategy is a bank statement option for them. Right? There's multiple options. So obviously, self aware people that are savvy, they have tax write offs, right. That that let's call it accountant. Right. That's they're they're experts at tax strategies. Right. So working with the the self-employed and having a strategy there and the accountants and the CPAs, I think that's where that's a great place to focus for originators today. You know, that it's a place where, you know, a lot of folks just don't focus. And it's probably the biggest opportunity in the non QM space is a self-employed borrower that's one of the main products for or in the market today. 

Paul: [00:19:12] All right so focus on the the self employed And Nick, is there a sweet spot that you would highlight? 

Nick: [00:19:17] Well yeah, again, I would reiterate that I always want to push bank statements and DSCR. However, those aren't new products. I'd say with borrowers looking for light doc. And with the housing shortage, we're also seeing a lot of borrowers that are staying in place, maybe doing some remodels, maybe building on add ons and in the investment space too. So some programs that we've come out with recently are some light doc or written VA. We only at 10.99 P&L and then in the investor sector of that we have the fix and flip and multifamily 5 to 29. Again specific borrowers needs and affordability all play into those products but really it's that bank segment self-employed borrower DSCR That's the main focus with outlying products on the end that can make you all encompassing for your broker. 

Paul: [00:20:06] One last question to start, you gents, I want to know what you think is the biggest missed opportunity for brokers in the non-Cuban market right now. So where should they be concentrating their efforts? Nick, I'll stick with you. 

Nick: [00:20:21] Yeah, two parts to that question, I would think. Look, brokers need to find the right lender to partner with. What should they be looking for there? Well, we talked about earlier, well capitalized has a history of originating quality loans. They're providing training, level marketing to help the brokers get into the space and market to these borrowers. If the brokers are looking for that, they're going to set up a good partnership with a lender that will last for a long time as far as products go. Again, that self-employed borrower bank statements you can do, owner occupied non owner occupied jumbo super jumbo with those and then back to that fixed and flip in multifamily those are some big products that take advantage of in this current market. 

Paul: [00:21:01] Okay. Great stuff. Tom, same question for you. Where should they be focusing their efforts? 

Tom: [00:21:06] Yeah, So for us, I think, look, you've got, if you're going to enter non QM. I think you got have to take a tactical and strategic approach and you have to know your guidelines. Obviously, if you know your guidelines, it allows you to differentiate yourself. From every other competitor in the market. If you become the industry expert in your market, people will line up to do business with you on the 9 p.m. side, right? That's what non QM allows you to do. Conventional in government, it's all about price, right? It's all of the US. It's what's your price. So the opportunity in the non QM space today right we're we're in a purchase heavy market you know the purchase share as far as compared to refinance it's I think it's like a ten year high write refi is are 20% purchase market is like close to 80% of the market. So over the last five years these these originators and the have have it was the flip flop the majority last year 70% of the market is 75% of the market is refinance. So a lot of these originators are having to reinvent themselves. They're going into they're going into Q4, they're strategically planning going into 2023. And non-agency non QM has to be a part of their strategy. If it's not, a lot of them are not going to survive. If they add it to their strategy, they take it serious and they become a market experts, they will thrive once again. Earlier I said the market has really grown in the non QM space versus the overall market. We continue to see that expansion. And so when you're working with an investor, you have to have the right tools in order to be an investor that's going to help you get to be a partner. Right? And we can talk about all those different tools that whether it's a structured scenario, calculator, flyers, etc.. But the biggest thing is working with a partner who's going to teach you about the product, help you leverage those products, leverage their resources and then use, teach you how to go out and find these products. A lot of these loan originators haven't had to go out or don't know non QM. So you have to show them, hey, work with the realtor. The realtor is self employed. They have friends that are self employed, Realtors are investors. Those are DSCR loans, right? Teach them how to go in front of CPAs and accountants, wealth managers, maybe for asset depletion or utilization. Maybe join the local REIA, which is a real estate investment community, or a club that meet once a month at a local Marriott. There's hard money lenders there, right? There's investors there. That's a great place to go and find DSCR loans. So teaching them and just like anything else, once you go through training right or an originator, when they first became an originator, they had to go through training to get certified. They get their animals to become an originator, but it doesn't stop there. So ongoing education and training and over time, if you train, you become a pro or an expert. So I'm a firm believer in working with your investor, someone that's all in dedicated, that's going to invest in you and help you get lift into space. So that's I think the biggest opportunity for brokers is learning the product and becoming an expert in their space will allow them to penetrate realtor relationships and grow their business in today's environment. 

Paul: [00:24:38] All right. Interesting take. The opportunity is in education. Will, let's come to you for the final words on this. 

Will: [00:24:45] So the biggest opportunity in non QM is the fact that it is non QM. You have this whole other sector to get into, especially if you haven't been doing that. If you've been focusing on agency type loans, maybe that's all that your your broker shop is interested in or the company you work for and now they're expanding out. I mean, we're seeing broker packages coming in right and left from very large companies that want to get set up with us because they they see the products that they see the tools available and they see the opportunity. And that's where loan officers are maybe now going off and doing their own thing or working for smaller shops need to understand that it's not just this feeder environment anymore. They have to learn these tools. So not just to help get their loans through, but also to go find these loans out there. The lead systems have definitely changed throughout this in the industry in the last 6 to 9 months. And so having these tools in your back pocket is what's going to make you better. If what I say to my staff here, whenever we bring on new account executives, this isn't a job. This needs to be your career. And if you make this your career, you will make money and markets that are high margins that are low, good or bad, you will do just fine and you'll become a subject matter expert, as Tom mentioned before. So working with a lender that can provide those tools, whether it's marketing tools, education tools, bank statement calculators, you name it, scenario desks, if you partner with those lenders and who have been in the space for at least for almost ten years now, you're going to be in good shape and that's going to differentiate you from the competition that's going to make this a career aspect for you. And instead of just a job. And that's where the opportunity is the. Opportunity is now in all aspects of it. Find a lender that you enjoy working with that provides you the tools that are going to make you successful and enjoy the ride. It's going to be a lot of fun. 

Paul: [00:26:48] A strong message in it and a great way to wrap things up. Huge thanks again to Will, Nick and Tom. No doubt we'll meet again soon and I'm sure there will be plenty more to talk about. So make sure you keep it right here on MPA TV.