Monthly Archives

June 2019

Why Non-Qualified Mortgages are the Future of Mortgage Lending

By | Mortgage | No Comments
NEVER AGAIN PROVIDE LOANS TO HIGH-RISK BORROWERS.” 
I think we all remember this mantrainstilled in all lenders and regulators since the 2008 mortgage-backed security crisis. 
But what if I told you this idea is proving to be pretty outdated?
It turns out, the non-qualified mortgage market is expected to experience 400% growth over the next year. In this post, I’ll share six reasons behind why this shift is occurring.
Now:
Six years after the crisis, on January 1, 2014, the Ability to Repay (ATR)/Qualified Mortgage (QM) Rule established the distinction between qualifying and non-qualifying mortgage loansThis rule sets borrowing standards for all lenders and homeowners. QM loan requirements abide by a strict checklist that can often eliminate many borrowers from conventional lending products based on one or a few inconsequential factors of their overall credit profile. 
What’s the bottom line?
As the number of potential QM loan candidates dries up due to these rigid prerequisites, there becomes an abundance of credit-worthy borrowers when measured such as a weighted average FICO greater than 700These borrowers present as super-prime candidates but represent a different demographic than a QM-qualifed credit borrower. 
As the significant missed market of low-risk, non-qualified mortgage lending has become clear, the growth potential for this industry over the next few years proves exponential. 
Here is why: 
1

QM Loan Borrowers are Exhausted

The maximum amount of borrowers who fit the QM loan profile have already been awarded loans. Knowing this, banks are turning to the low-risk, non-QM borrowers to increase the assets on their balance sheets.
2

Proven Record

Non-QM loans have reported extremely low delinquency and default rates, demonstrating their credit-worthiness.

delinquency rates
3

Shifting Economy

The 36% of American workers that are employed by the gig economy have clean credit histories but are non-traditional W2 wage earners. This makes them an immediate “NO” when applying for a QM.
4

Increased Consumer Awareness

Credit-worthy individuals who do not meet the requirements for a QM loan turn towards non-QM loans if they know about the option. As the size of the industry increases, the consumers knowledge about the possibility of getting a loan increases as well.
5

Non-Traditional Home Situations

Of all the new households being formed nationwide, 78% are from diverse communities who oftentimes have atypical financial practices — such as pooling capital among family members and multi-generations to purchase a first home.



This large percentage of new homeowners would typically be rejected for a loan, but non-QM loans make owning a home possible.

6

Jumbo Loan Financing


Jumbo loans are used to finance luxury properties and homes in highly competitive real estate markets that are not eligible to be purchased, guaranteed, or securitized. This is usually because they exceed limits set by the Federal Housing Finance Agency (FHFA).


The ability for non-QM loans to encompass jumbo loans increases market share.

What does this mean for institutional investors?
In the past, banks have focused purely on QM loans due to the perception that non-QM loans are illiquid upon origination. Now that this is changing, many institutional investors will need to rethink the top questions that guide their loan trade
Since learning that these loans are not as risky as once thought, a secondary market has developed. Stackfolio is a large player in this secondary market, connecting sellers who need capital with buyers who want to benefit from margins and diversify their portfolio. Although the market share of non-QM loans is increasing, Stackfolio’s online marketplace is necessary to create connections as this industry takes off. 
Omar Esposito serves as the Chief Revenue Officer of Stackfolio. His experience stems from over 15 years of whole loan trading, banking, and balance sheet management experience. At Stackfolio, Omar focuses on executing the company’s go-to-market strategy, scaling and aligning all revenue-generating aspects of the business, and building long-lasting client relationships with financial institutions across the country.
Stackfolio is an online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.
Sources
Joseph, Donna. “Non-Qualified Mortgages: Then and Now.” TheMReport.com, 18 Mar. 2019, themreport.com/daily-dose/03-18-2019/defining-todays-non-qualified-mortgages.
Kagan, Julia. “Qualified Mortgage.” Investopedia, Investopedia, 12 Mar. 2019, www.investopedia.com/terms/q/qualified-mortgage.asp.
Kapfidze, Tendayi. “2018 U.S. Mortgage Market Statistics.” MagnifyMoney, Magnify Money, 21 Dec. 2018, www.magnifymoney.com/blog/mortgage/u-s-mortgage-market-statistics-2018/.
Kearns, Deborah. “The Skinny On Non-Qualifying Mortgages.” Bankrate, Bankrate.com, 18 Jan. 2019, www.bankrate.com/mortgages/non-qualifying-mortgages-qm/.
Lane, Ben. “PIMCO Hits Secondary Market with First Non-QM Mortgage Bond Offering.” HousingWire.com, HousingWire, 11 Apr. 2019, www.housingwire.com/articles/48780-pimco-hits-secondary-market-with-first-non-qm-mortgage-bond-offering.
Nyitray, Brent. “Must-Know: Understanding Non-Qualified Mortgage Loans.” Yahoo! Finance, Yahoo!, 21 Aug. 2014, finance.yahoo.com/news/must-know-understanding-non-qualified-210014883.html.

The 3 Most Important Questions that Guide Whole Loan Trades

By | Loan Trading | No Comments
I think we can all agree that whole loan trading has MANY aspects to consider.
And you may be wondering:

“Where do I even start?”

Deciding to begin whole loan trading in the secondary market is a huge leap for any institution. Not only is whole loan trading tedious and cumbersome — it is also extremely complex and requires a lot of forethought.
Even with 15 years of experience in the banking industry and after strategically advising hundreds of financial institutions on balance sheet management, I’ve found that educating financial institutions on how and when to execute a whole loan trade still requires a lot of time and consideration.
Well, it turns out, there are three important questions to ask yourself when trying to figure out what the best option is for your institution. With these tips, you can be a part of the $2.5 billion worth of listings on the loan trading platform, Stackfolio.
To guide my thinking, particularly for whole loan purchases, I always look to answer 3 main questions:
  1. What do I need to earn from this trade for it to make financial sense for my institution?
  2. What type of diversification do I need to achieve in my portfolio from this trade?
  3. How much risk am I looking to absorb?
Why these three?
Each question gives me insight into not only the type of loans and transactions I should be looking at, but also the type of trading partner I’m looking to engage with and the level of complexity I can expect from this transaction. Here’s how I try to answer each question:
1

What do I need to earn from this trade for it to make financial sense for my institution?

More so than just looking at the expected yield from a trade, this question asks you to dig into the full monetary benefits a loan trade can bring. With so many institutions searching for loan growth in their communities, organic loan growth has become harder and more expensive to compete for. So, I would look to answer how much money will my bank or credit union save in origination costs from a whole loan trade. Will these loans bring me a larger opportunity to cross-sell new borrowers from new markets? Also, is there an opportunity to save in fees by trading online instead of using legacy brokers?


yield diagram Yield analysis tool for listings on the Stackfolio Marketplace
2

What type of diversification do I need to achieve in my portfolio from this trade?

While this is often a regulatory concern and question, determining the type of loans that I want to acquire is often a larger strategic initiative. For example, do I need to do a loan trade to achieve our residential loan growth targets for the quarter? Will I be able meet my CRA loan target needs without a whole loan trade? Or do I need to buy a niche loan pool to reduce concentration in core parts of my loan portfolio? Being able to answer these questions and knowing how to execute them efficiently is critical in engaging in a whole loan trade.


loan asset mix
Asset mix available for any Bank or Credit Union via their Stackfolio Scorecard
3

How much risk am I looking to absorb?

Like the answers around diversification, determining how much risk your institution is prepared to absorb is key when preparing to enter a whole loan trade. One key insight to get here is not just around what level of risk in the loan asset type, but the credit characteristics within those asset types as well. So are you only looking to acquire prime borrowers in unsecured consumer loans? Does a barbell distribution of risk work if it brings you the loan assets you need?


Distribution 
PlotDistribution plotting available on all listings on the Stackfolio Marketplace

While there will be more questions asked during a whole loan trade and many more answers needed to complete one, answering the big three questions above will ensure your institution can begin its journey of trading in the secondary market with confidence.

Omar Esposito serves as the Chief Revenue Officer of Stackfolio. His experience stems from over 15 years of whole loan trading, banking, and balance sheet management experience. At Stackfolio, Omar focuses on executing the company’s go-to-market strategy, scaling and aligning all revenue-generating aspects of the business, and building long-lasting client relationships with financial institutions across the country.
Stackfolio is the online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.

What is the Manufactured Housing Market?

By | Mortgage | No Comments

Traditionally seen as undesirable, could manufactured housing be making a comeback?

Different from the pre-fab homes that dotted the landscape post-WW2, manufactured home assembly now predominantly takes place on factory lines rather than on-site. 
However, the notion that manufactured homes, or mobile homes, remain undesirable may be shifting in the new market. 
Here’s why:

As young people struggle to afford new construction houses or secondary market houses, the number of renters in the United States hits new records. An alternative to renting could be found in manufactured housing. 

Distribution of Renter in the U.S. by Age
By allowing new upgrades and the option of modular housing — manufactured housing has expanded to meet a new customer base. Beyond the ‘trailer park’ connotation, companies have begun producing models with upgrades such as french doors and granite countertops. 

In fact, the industry appears on track to produce more than 100,000 units in 2019, the highest in a decade. 

Manufactured Home Shipments Per Year

The industry could continue to improve for manufactured housing makers due to the Department of Housing and Urban Development’s announcement of plans to review regulations on manufactured houses. While no official changes have been made, the Trump administration’s previous records of removing regulations show promise that HUD will act the same. 

The advantage of regulation reform mainly presents itself in the ability to add new amenities to manufactured housing. The real test of manufactured housing lies in its ability to integrate itself into ‘acceptable’ housing for the majority of Americans. Mobile home parks are typically viewed negatively and zoning can often be difficult — which falls under state zoning laws. If zoning laws were more favorable, manufactured housing could reach beyond its traditional customer. 

What does this mean for banks and borrowers?

Another key area of development in relation to manufactured housing lies in Fannie Mae and Freddie Mac’s commitment to expand their loan purchases to include chattel loans. Chattel loans are key because many manufactured homes reside on leased land and classify as personal property rather than real estate. 

Chattel loans are typically more expensive to acquire than a traditional home mortgage due to higher rates and shorter terms. The industry-wide failure rate of non-mortgage mobile homes sits at around 28%, while the current delinquency rate of single-family mortgages sits at 3.4%. 

This suggests that borrowers financing manufactured homes are more likely to default than traditional single-family house borrowers. An additional concern that should be noted lies in the lack of secondary market value for manufactured homes. However, as credit boxes continue to expand, and the manufactured customer base changes, this may change as well; particularly for non-depositories. Within banks, manufactured housing loans help fulfill CRA requirements which makes them an asset. As banks prep for upcoming exams, they may begin to look at manufactured housing loans as potential areas to meet their mandatory CRA requirements. 

“Insufficient information and lack of access to manufactured home financing options are two negative factors that still affect the manufactured housing industry. To offset their impact, well-established industry participants, such as MHI, FHFA, CFPB and specialized lenders, will continue to develop buyer education programs and bring more financing solutions to the manufactured housing market. Considering that the secondary market for manufactured home loans is still limited, the success in meeting these objectives should have a notable positive effect on the entire industry”  – Triad

Pav(leen) Thukral serves as the Chief Executive Officer of Stackfolio. His experience stems from over 6 years of technical experience with the NSA, Bloomberg, and pattern recognition research with Thad Starner, the father of Wearables. Pav is a co-founder of Stackfolio and has steered it’s vision of transparency and market access since inception. He marries the deep technical talent at the company with the deep capital markets talent, and acts as the bridge that helps make that special magic work.
Stackfolio is an online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.