WE'RE HEARING there is a lot of interest in originating non-QM loans but it is going to take a while to develop a secondary market for those higher-priced and higher-risk loans.
Investors will want to see a few legal cases first to get an idea of the litigation risk associated with non-qualified mortgages, according to Bose George, an equity analyst at Keefe, Brunette & Woods.
It will also be important to see how far Fannie Mae, Freddie Mac and the Federal Housing Administration will go in meeting the demand for mortgage credit.
“There are plenty of companies interested in the non-QM loan market,” George said. “Funding will be available if the ratings agencies are comfortable with the loans.” But the KBW analyst does not expect to see a non-QM secondary market in 2014.
It will probably take longer to establish. But some parties are pushing the envelope. Top executives at Ocwen Financial Corp. claim the supply of mortgage credit is being restricted by “tighter underwriting standards and the decline in the creditworthiness of the U.S. borrower.” This tight credit is “going to be further exacerbated by the QM rule.”
The giant mortgage servicer is forging a strategic relationship with Lenders One, a mortgage cooperative based in St. Louis, to originate what it calls high-margin “nonprime, nonagency” mortgage loans.
Ocwen’s chief financial officer insists these loans will be QM-eligible product. But it appears to be skating on the edge of eligibility.
“We can provide competitive pricing for their mortgages, retain the servicing and distribute the prepayment risk to other investors,” an Ocwen executive said at a Feb. 6 investors meeting. “It is not our intention to hold this exposure long-term on our balance sheet,” he said.
Auction.com executive vice president Rick Sharga expects a secondary market for non-QM loans will take hold by the end of 2014. And he expects nonbanks will lead the way, not the banks.
The nonbanks—and their capital providers—will figure out how to make risk-based pricing work, and have already been working on models since the QM rules were first announced,” he said.
In the meantime, FHA lending will get a boost from the QM rule, particularly from “borderline QM loan candidates,” Sharga said. “That will be an easier route than creating new, non-QM loans. At some point, I do believe that there will be enough private capital back in the market that we’ll see a variety of non-QM loans offered.”