Why Non-Qualified Mortgages are the Future of Mortgage Lending

By June 19, 2019Mortgage
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But what if I told you this idea is proving to be pretty outdated?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.
Omar Esposito

Author Omar Esposito

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