What is the outlook for non-QM in 2022?

Paul: [00:00:20] Hello everyone, and welcome to the latest edition of MPA TV. A power panel focused on the non QM market. You may remember we hosted our first non QM power panel late last year, which is still available in the TV section of the MPA website, focusing largely then on the impact of COVID 19 on the space and offering an introduction for brokers who may not have operated in this area of the market before. Well, this time around, as some normality appears to be returning to our day to day lives, can this rapidly emerging product continue to thrive? Where are the opportunities and how can brokers keep on top of the space? Once again, we have an all star panel to answer those questions. They are Steve Cutter. He is the senior vice president at Acra Lending. Will Fisher is the executive vice president of Non-conforming at LoanStream Mortgage. And Eric Morgenson, the VP of Business Development at Angel Oak  Oak Mortgage Solutions. So, gents, great to have you with us. Let's start by bringing everybody up to date on the marketplace. And after a pause in early 2021, the non m market gained traction again in the second half of the year. How do you view the landscape now and how is the outlook for the remainder of 2022? Steve, I'm going to start with you. 
 

Steve: [00:01:51] Thank you, Paul. I appreciate it. Yeah, I think towards the end of 2021, we found out that inflation was not transitory. And so what we've seen in the early part of 2022 is a rates up. Environment rates have moved up fast and violently more than they have in the last 20 years. And what that what's happened there is that it's caught a lot of lenders flat footed or off sides, those that did not hedge or those that did not raise interest rates fast enough, coupled with securitization market, which has been the driver of this industry for for a long time, and the swaps on just to give you an example, the swaps on the Triple A one year ago were swaps plus 160. Now the swaps are swaps plus 180. So the widening of the spreads within the securitization market and rates going up dramatically has caused a dislocation in the market and in across lending. We were the first ones to raise rates. We did our first rate hike in the second week of January. We've had ten rate hikes over the last since that time, over 200 basis points. And our chairman and CEO, Keith Lien, is a 20 year veteran on Wall Street that he discussed and and talked about these changes to the markets as early as October of last year. So we've been prepared for these changes in the market and we feel like we're in a good position to to really end up on on the other side cleanly. And until the the Fed delivers clear language as to where rates are going to go, in our opinion, is going to be it's going to be choppy waters with some whitecaps and maybe an occasional swell or two. 
 

Paul: [00:03:45] Fantastic way to set the scene for us, Steve. Thank you very much. Will Steve's talk there about a lot of change in the market? Is that how you see things as well? 
 

Will: [00:03:54] Yes. And just to pivot off what Steve brought up and maybe kind of break it down a little bit more, non-QM in general had a phenomenal 2021 towards the end anyway. And going into this year, we knew that rates were going to go up. And we also, as Steve mentioned, inflation is taking a hold, unlike we really thought would happen. But what's what you need to know about non QM? And just to break it down, in simplest terms, we need to be one and one half points over prime. And when you start to see rates going up in general for Fannie and Freddie agency product in general, you're going to start to see QM go up even quicker, even faster. And so that's really where you've seen this big dislocation happen here in the market in this first quarter. You know, fortunately, lenders like Angel Oak  Oak and Acra ourselves have been keeping an eye on this and speaking with our secondary partners because at the end of the day, we do have two customers and sometimes the broker who we're speaking to doesn't understand. Our other partner on the other side is Wall Street on the secondary market. And so there's a balance that needs to be struck there. And we try to make it as easy and be as communicative as we can so that it's not such a shock to the system. But we will be seeing a rising rate environment through this year, and it will be you're going to be selling something different other than rates throughout this year while you're watching the rates go up at the same time. So we're actually very bullish on 2022 now in terms traditionally done better in a rising rate environment or with higher rates just in general, we can look all the way back to 2018 and you look at what the ten year was doing and you look at where rates were and how big the year 2018 was. And I think we're going to have that same experience this year, although it's going to be a little white knuckle lending for the brokers, especially the ones who aren't used to this space. But it's going to be a very good year for not in my opinion, in our opinion here, long straight. 
 

Paul: [00:06:04] So Will's bullish. Eric, if I can come to you this this rate picture, though, it is looming over the sector, isn't it? 
 

Eric: [00:06:12] Well, everybody's talking about rate. What borrower out there writes their rate on their mortgage check when they make their payment every month. I've never seen anybody write their rate on it. It's payment. We don't sell. Rate we? sell payment and solution. First off, Paul, thanks for having me here, you guys. Angel Oak  Oak, we had Angel Oak  Oak are extremely optimistic about the future. As a matter of fact, we're seeing record submissions in this rising rate environment. You guys, there is so many underserved borrowers out there that nobody was paying any attention to because of all those rate and easy rate and term refinances. Now, literally, you're dusting off these old applications going, well, I wonder if this one can work. You guys, there's a lot of reasons to be optimistic at Angel Oak  Oak. We love scenarios. It all starts with a loan scenario. And yeah, the borrowers that you used to not pay attention to, guess what they can end up being nice. Commission checks in this non QM world. 
 

Paul: [00:07:21] Well, let's pick up on that idea of of optimism, if we can, because if we sort of reflect back to around last spring, I suppose, bank statement programs made up the largest share of the market, followed by DSCR loans as well. Talk to us though about the opportunities that where they are this year. Will, I'll come to you first with this one. 
 

Will: [00:07:44] Sure. So yes. Bank statement, loans and DSCR are mainstays of the non QM product and were developed over many years, especially the DSCR product in the form it is now. So like anything in a rising rate environment, you're going to see a stress on the payment and you're going to also see values fly, if not soften. Some folks like rating agencies such as Fitch or it's putting out there a 10% possible retreat on values. And so we're working that into our models, and that's going to most directly affect loans like DSCR loans, especially certain LTVs and how we're going to treat those just to insulate ourselves and ultimately insulate the borrower. But we do feel that the bank statement program is going to hold up very well. That specific borrower usually has a certain amount of income that they can bring to the table and can afford some of these higher rates. And we don't see as much stress there. But ultimately the non QM product and all the other pieces of it I think are going to be very strong throughout 2022 and I don't see any large changes in DSCR as far as which ones are going to have more volume this year. One over the other. 
 

Paul: [00:09:01] Thank you, Will. And Steve, it looks like we'll sees both markets as being strong. Do you agree? 
 

Steve: [00:09:07] Yeah, yeah, I agree with the will there. I think the vast majority of loans that we're doing are for borrowers that are self employed, that runs small businesses and investors that are looking for DSCR loans. And we see a rise in the self-employed borrowers with with a lot of people gravitating towards that and we still see the investor market still strong across lending was a big sponsor at the pit bull conference this this last weekend and I think those sentiments were were brought there. The one thing that that we're doing here at after lending for for new opportunities is our new private lending division, where we're focusing on fixed and flips and small balance multifamily 5 to 29. We think those are underserved markets. And we have a specific group led by Robert Jennings, our managing director, to handle that piece. And we see that as a very good business and a good vertical for our sales team to be able to offer the products in addition to the non QM products. 
 

Paul: [00:10:13] I like that answer as well. It seems like you're bullish on both markets, but at the same time sort of highlighting that maybe there are some opportunities being missed there as well. Eric, if you can sort of pick up on that theme, how do you feel about both sides of the market and do you think there are some opportunities being missed as well? 
 

Eric: [00:10:29] I do. Obviously, the bank statement alone is the biggest opportunity out there, bar none. The self-employed borrower in America is alive and kicking, and it's about four times the size of the VA market. The self employed borrower out there taking advantage of our 70,000 page tax code. You see, the tax code is designed to obviously to perpetuate the federal government in California's position, the state as well. But it's also designed for job creation and investment. Those are the people that get the press and the write offs. Yet now it's time to go qualify for a mortgage. And here they've taken all their legitimate deductions and they don't qualify. What an underserved marketplace out there. Listen, rental income, it's at its all time high. So there is an enormous appetite to to park money into US investment property. So that's not going to slow down. But there are some other opportunities out there, like the just missed prime jumbo. What about the borrower that had a maybe a a bankruptcy or a foreclosure under seven years ago? All the money center banks like a chase B of A, all of them make them wait. Season seven years an Angel Oak  on a Chapter seven to only a two year season. Chapter 13 We can do a loan for them one day out of bankruptcy because there's all these people walking around that do want a loan but are told they can't get one. Folks jump into the pool here. The water is fine. In this non QM land with ITIN borrowers for national we have asset depletion asset qualifier. There's a lot of ways to make people to make these loans and put people into homes. Very optimistic here at Angel Oak . Okay. 
 

Paul: [00:12:26] Well, you know, Eric, I feel like you're on a roll, so I'm going to stick with you if you don't mind. Talk to me about the gig economy, because that's been a real area of focus. Tell me about some of the issues in providing loans for that market and how non-QM can help. 
 

Eric: [00:12:40] Well, the gig economy, obviously, if you have a side hustle, it's a self-employed venture, sometimes a swing it swing at the plate and a miss. But sometimes, boy, some of these, especially the millennial generation, is knocking it out of the park so we can take both a W-2 and bank statements for the same borrower to qualify them to buy real estate. You see, it is a phenomenon with this gig economy where people can drop in and have an Amazon play and next thing you know, they're pulling in 10,000 a month from it. So these are not these are not traditional type borrowers that, again, all the traditional lenders are giving them the Heisman Trophy stiff arm right there, telling them they can't. So the opportunity is when somebody applies for a loan and they're told they can't get it, but that they believe that. So what I implore this audience to do is investigate these simple programs. This isn't rocket science. These are non-agency loan programs. And once you understand it, you'll have the confidence to be able to originate these. It's not difficult. 
 

Paul: [00:13:55] I think, at 10,000 a month. I want some details on that side hustle as well. Will, I know this is a big area of focus for you guys. You've got a product very much geared towards this market. 
 

Will: [00:14:06] Yes. As a matter of fact, loan stream has taken the gig economy and this type of worker very seriously for a number of years. We've had a 1099 product that caters specifically towards this type of borrower, and it's designed for this. And actually it has other applications that extend past it. But a lot of gig workers are, as you say, 1099 So we need a way to pull that income without having to look at tax returns, without having to look at full blown bank statements or anything to that effect. And we have a product that's actually geared specifically for their needs with a minimal amount of documentation, just enough of what we need to take them up to, only having to put 10% down on the property. So we're very happy with this product. It's been working very well for us and we're happy to offer it. We actually extend this product into a hybrid of a W-2 worker who's actually receiving tip income as well, where we can use bank statements to supplement if they can show us the tip income and whatnot. So it actually extends past that. We have the 1099 for the gig worker and then we have the hybrid product for that W-2 tip income worker as well. So we keep our our eye on the prize and focused on expanding lending where we can, where it's smart and responsible at the same time, producing a borrower who can perform when the loan is finally made. 
 

Paul: [00:15:37] Yeah. That that word hybrid keeps cropping up as well. Steve, I'm imagining those hybrid work borrowers do present some challenges as well. 
 

Steve: [00:15:47] Yeah, I think again, as Willard mentioned, I mean, first and foremost, I think all three of us, we come from lenders that are very responsible lenders that we're adhering to ATR. But you see a large amount of people that are transitioning out of W-2 into 1099 or doing the hybrid combination between the two. And I think accurate lending is in a good a good place to handle those borrowers. Number one, we 1099 only programs, bank statement programs after lending has a three month bank statement program that allows for not having to source deposits. No panels that go behind that. But I think more importantly is is being able to analyze the whole story, the whole picture of the borrower being able to analyze their cash flow and exactly what they're doing and how they're doing it. And I think we have a long track record of expertise in the marketplace. And our investors love our loans and and and love the the fact that we have that expertise. And so I think we're in a good spot. And I think as this market continues to grow, I think you'll see some more programs around it with with with guardrails. So we're we're bullish on it as well. 
 

Paul: [00:17:04] You know, you guys are bringing a lot of expertise to the table. I'm very grateful for that. But I feel as though I've I've gone too easy with the question. So I'm going to throw a slightly stiffer one at you now, and I'm going to ask you to tell me where brokers are maybe going wrong. So what do you think is is brokers biggest misunderstanding about non QM as an offering and and where are they going wrong when selling these products? Eric, I'll come to you first. 
 

Eric: [00:17:32] I think you are the misconception is out there that I think I heard a step that less than 15% of MLSS licensed loan officers have ever even done a non QM loan. So I think it is we all hate change and I think changing from knowing the agency guidelines, changing your model into non agency might be hard for some people. Another misconception about these loans is maybe a loan officer or two out there, maybe try to bank statement loan five, maybe six, maybe seven years ago and boy, oh boy banks, even loans seven years ago were wonky. They weren't easy. They were it wasn't an easy loan. So you have loan officers. Oh, banks having loans, those don't work. They're going to ruin your relationships out there. Don't try them. Listen, the bank segment loans today are nothing like they were five years ago. We have this down to a science and Angel Oak . We have quite the efficient assembly line. We do a ton of these day in, day out, jump on, end. The water's fine on these banks payment loans. Don't think they're the same loans that they were five years ago. 
 

Paul: [00:18:48] So Eric wants people to jump on in, Steve. But I mean, do you think that brokers really fully understand, you know. 
 

Steve: [00:18:55] Paul I think again, I don't think they fully understand the full opportunities of QM and really what the platform can offer. I mean, I know we hear about bank statements and DSCR, but there's, there's, it's in loans, there's four national loans, there's three and 12 month bank statement loans, there's ATR and full loans, investor products, you name it. And I don't think that brokers are fully, fully utilizing what's out there in the non markets. And I think the other thing is just a a misinformed perception of that these are bad loans when in fact when you when you look at the performance, when you look at the tapes of these loans are FICO scores are north of 725. Our borrowers have more cash down on the on the product are borrowers have more in reserves than than agency paper. And I just think that again with the easy easy way of doing rate term refinances in in the two and 3% I think brokers haven't haven't really fully gained the exact capabilities of this market that that that that I think they should. 
 

Paul: [00:20:06] I mean listening to to what both of you have said, the you know, Eric referred to them said that they've been perhaps seen as wonky loans in the past. Steve, you said they perhaps seen as bad loans in the past. I mean, Will, if I can bring you in as well, I mean, do you think that perhaps there's a misunderstanding that just how smooth that you guys can actually make this whole loan process work for brokers? 
 

Will: [00:20:30] Yes, as a matter of fact, I mean, that's where I've seen a lot of hiccups and a lot of the rubs, if you will, is how long? It can take for an hour to get blown to get done, especially if there's something like 24 months of bank statements to the borrowers using multiple accounts to qualify. So back in the day, you had an underwriter who is doing this all by hand, and now you have technology and you have processes that can cut that time down from multiple hours down to 15, 20 minutes. And so the misconception is that they take too long. The terms are going to change at the end, or lock doesn't last long enough. That rate is too high. And these are the kind of things that we used to hear back in 2013 through 1718. And the landscape has changed so much for now. Well, obviously, rates are competitive. You're selling, as Eric spoke about, mostly payment. And that's really what you want to be speaking to. You got to change your vernacular or change your language on how you approach this. But don't be afraid that the loans are going to take a long time to get done because DSCR, for example, quite frankly, you're underwriting a property at 1003 and a lease agreement, not much there to underwrite with bank statements and asset utilization and some of the other income types. Now we have automation and processes that we can actually give you the income calculation before you even submit the loan. So there really shouldn't be any fear to this product except for where you're going to get leads from and how you're going to find more of it. Because you will close this and you will close it timely. 
 

Paul: [00:22:03] Yeah. And will you talk to there as well about the landscape changing? So if you don't mind, I'm going to stick with you for a minute and just ask you about the guidelines around non QM because they seem to be changing regularly as well. What what tips do you have for brokers who are trying to keep up with it all. 
 

Will: [00:22:19] Get close to your account executive, get close to the companies that are working for you. Stick with the companies that are tried and true and in the non space. There are a lot of folks trying to come into the space right now that are mostly prime agency lenders and they want a piece of this. Unfortunately, they don't have the years and years of expertise that the folks, the companies that we represent or the folks on this panel have. We've seen it. We've been there. We have the industry knowledge. We have the seat time to know what a loan is and how to direct you as a broker, which ones you should go after and which ones you shouldn't, how to structure them up. You're going to see some guideline changes with certain folks. Maybe you haven't been in the space a very long time or a little nervous, but the tried and true lenders loan stream, for example, we have not changed our guidelines. We actually supported our brokers, honored our locks and have been there for them to see them through and take care taking care of it with our secondary partners. So the landscape is going to change. But if you're with a good partner or a good account executive and a good team behind you, you're going to do just fine in this market. 
 

Paul: [00:23:30] I think that's great advice. But Steve, perhaps perhaps some lenders out there have been stretching the guidelines a little bit. 
 

Steve: [00:23:37] Yeah, we've seen that, Paul, I think since since we came back from the pause and COVID. You know, we started out, you know, everybody started out with really tight guidelines, high rates. Actually, there were there were points included on that. But it quickly the the guidelines stretched and they kept stretching, stretching until recently where where we've seen some tightening of those of those guidelines. We have not changed any of our guidelines as as of yet. But we do have and have had conversations about putting some guardrails around around some of them. You know, as we talked about, we've seen the best market in home prices ever in the last two years. And fortunately or unfortunately, all good things come to an end. And, you know, as Will had mentioned, you know, is it going to be a decline in prices? Is it going to flatten? You know, I think that that all remains to be seen. I think a lot of that has to do with the with the Fed and how they react, the double bump, you know, expected in May. But in the end, higher rates will equal lower affordability. And so we're we're we're thinking that there's going to be some programs that that that are going to have some some some high focus. We think that the DSCR loans that are under under 1 to 1 that are not cash flowing, I think those are in the crosshairs of the investors. Also, the higher LTVs, your 90 LTV loans. You know, again, we've been pricing those about 150 basis points higher over the last few months just just seeing that trend coming. I think you'll also see some of the exotics, the condo, hotels, the rules, the iTunes and the foreign nationals will probably end up having some more guardrails around them, guardrails, meaning maybe lower LTV, higher FICO requirements or reserve requirements. So that's kind of the view that we have here at Acra Lending. 
 

Paul: [00:25:49] Thanks, Steven and Eric. I guess in an environment like this, it's really important that the brokers just educate themselves as much as possible. 
 

Eric: [00:25:57] Yeah. Here it aims to look like the the other fellows who saying we haven't changed our guidelines. They work these loans perform. But what is constantly changing is the mortgage industry. Listen, if you don't like change, this business is not for you because it's always going to change. You know what's changing there is we are now in a complete purchase and cash out market. That's the big change. No longer rate in term refis, no tangible net benefit anymore. There, put that up on a shelf for another ten years. That'll roll around. But now it is purchased in cash out. Now look at this home appreciation run we've just been on. There's an extra tons of like $4.5 trillion in equity out there. Here's what I think these brokers should look out for is what's coming up is going to be people tapping into their equity and before COVID and you look at a non prime program. But right now there is zero appetite on the secondary market, on the with investors with any type of impaired credit watch that's going to change. So, folks, this business is always changing and that's a good thing. 
 

Paul: [00:27:17] I like that sentiment and all of you guys have been absolutely brilliant on the panel today, but it's getting to that point where I want to ask one final question in traditional style. I like to ask each of you to to leave our broker audience with one key tip or take away as we look at the non QM market for the remainder of 2022. So what is your your tip or your takeaway for our audience? Steve, I'll come to you first. 
 

Steve: [00:27:45] Well, thank you, Paul. I think the one tip I would have is choose your lender wisely. I think this is the type of market that that you're going to need to be aligned with. A well capitalized company across lending is owned by HBS investment or $75 private equity firm. We have a large balance sheet. We're aligned with some of the largest capital partners in the world. We have money center warehouse lines, which which gives us favorable terms or a company that's going to honor their commitments, whether it's on correspondent or wholesale or any of our. Our departments. And most importantly is I think we have the most seasons and experienced leadership team. I recently came back to to to act where I started at Citadel with Will Fisher exactly seven years ago yesterday. And I came back to Acra Landing six months ago is strictly because of Keith Lien, our chairman and CEO. And Keith is probably the sharpest guy I've ever met in this business. And and I've been doing it a long time. And at the end of the day, he's a 20 year veteran of Wall Street. He's ahead of he's ahead of the curve on just about everything. And I think that gives us a huge advantage navigating these choppy waters. And and again, we're going to get through this. I think we'll all get through this and we're all going to be stronger for it. So thank you both. 
 

Paul: [00:29:20] Thank you, Steve. And congratulations to you on Will on the seven year and one day anniversary. Will, I'll come to you next. Give us a tip or a takeaway. 
 

Will: [00:29:30] For brokers out there who who haven't really gotten into this space yet or thinking about it and trying to figure out which ways to put together a strategy, start to think about what borrowers you want to go after, think about how you want to approach them. Think about where you're going to find that. We were just working with a lender who actually submitted us about brokers that is 85 million over the course of two months. And where were they getting their loans from? Their book of business, because they were actually a stockbroker, an investment advisor in their previous life. And so they had a huge book of business with borrowers who were interested in owning DSCR rental properties, cash flow. And this was a huge windfall for them and they didn't realize how big a market this was, but it was outside the box thinking that brought them there. And that's what I think brokers need to start to work with. And then next, as Steve alluded to, really think about the partner you want to use. You want to be with somebody who's well capitalized, somebody who's done this loan since the beginning, who has the understanding, the expertise and the team around you to make it happen next. Innovative products, things that other folks may not have or may have taken off the shelf. I can think of one we just brought out, for example, unless the 40 year fully amortized loan, to my knowledge, we're one of the very few who do that. But what do we do that? Because it's going to help with the payment, it's going to make the affordability better. So you want innovation, you want experience, and you want a solid team and good product and good and quite frankly, good interest rates in the market if you can get them. So that would be my takeaway for your audience today. From us, Paul. 
 

Paul: [00:31:20] Yeah. Thank you, Will. So that sort of choosing the right lender theme is is run through both of the tips so far. In fact, Eric, let's let's move to you next. Give us a tip or a takeaway. 
 

Eric: [00:31:32] Here's a tip. Angel Oak , a quarterly national. We have quite the coverage. We have a very experienced account executives that I'm very proud to be working with. Give us a call here at Angel Oak . We will literally hold you hold your hand, show you exactly how to market to this underserved market out there, show you marketing techniques that truly work. We have a boatload of marketing material for you and techniques that really work. Now, probably 9% of the people watching this will take me up on that. And I'm talking to you nine percenters. Get in touch with Angel Oak  and we will show you how to make a lot of money and your clients delighted with these non-agency loans, folks. It works. 
 

Paul: [00:32:24] Yeah. Fantastic stuff. All of you, in fact. And huge thanks to you all again to to Will, to Steve and to Eric for sharing your insights with us all today. Clearly, a lot of opportunity in this market. Remember, we have a dedicated non-prime channel at Mortgage Professional America. So stay tuned there for all of the latest news. And we'll see you next time here on MPA TV.