I read with great interest Kate Berry's recent article, "1,000 Shades of Non-QM: Home Lenders Court Niche Borrowers," and found that it rings true with what I am seeing in the industry today. I do, however, have a different take on the perception that warehouse lenders are not interested in products falling outside of the QM sphere. In fact, their interest is actually much broader.
Warehouse lenders are severely aware of the potential risks of non-QM loans, but right now, they have a huge appetite for earnings and sustainability. In fact, the warehouse lenders I speak with have been extraordinarily willing to entertain and go after business that is outside the realm of "normal." Their palate includes not only non-QM origination products but alternatively collateral such as mortgage servicing rights, the "tails" of previously securitized reverse mortgages, and construction loans.
This trend is particularly significant since so many warehouse lenders are new to the market and it's only been five years since the housing collapse decimated the sector. But does this mean that warehouse lenders are not concerned with risk? No way. But warehouse lenders are concerned most about profitability, and many of the products being added to their portfolios have excellent margins and very manageable risks. By reaching outside of what one might view as a warehouse lender's "comfort zone," today’s warehouse industry as a whole is proving itself to be both creative and highly motivated to find ways to continue lending.
And they have to. The biggest challenge facing warehouse lenders right now is the lack of origination business, QM or otherwise. Warehouse line utilization rates (i.e., the ratio of outstanding balances to actual commitments) are currently averaging 25%-30%. Not only are these historically low levels for warehouse lenders, but many mortgage bankers are renegotiating their warehouse commitments even lower. Of course, this is largely a reflection of the overall market and current origination volumes, which we all know have been lagging. The effect is that it is creating intense competition and lower pricing among warehouse lenders, who have rarely been so hungry for business.
Mortgage banking and warehouse lending businesses work in parallel to each other in a balancing act that, when all is well, creates a healthy lending environment. Basically, I see both sides of this spectrum as being extremely open alternative products, including non-QM loans. If mortgage bankers can find warehouse partners willing to invest in non-QM products—and I have no doubt they will—this could be good news for the entire industry. Given the yields for non-QM loans, this could help encourage the return of private capital, tap a very large creditworthy (but underserved) market and give the housing recovery, which Fed Chair Janet Yellen characterized to the Senate Banking Committee on July 15 as "disappointing," an additional boost.
My point is simple—let's not underestimate the warehouse lender’s enthusiasm for any type of business that can sustain their customer base and earn them a profit. To them, "1,000 Shades of non-QM" is apt to sound like "1,000 Shades of Green."
Stanley Street manages the strategic vision of Street Resource Group Inc., a provider of information systems and business process consulting to the financial services industry.