Competitive pressures have opened the door for a new use of warehouse lines of credit: providing mortgage bankers with financing to originate loans that fall outside of the qualified mortgage definition.
Non-QM lending is just the latest new product that warehouse providers, also known as warehouse lenders, are offering in an industry channel that has gone from moribund to highly competitive in just a few years. Warehouse lenders are now letting their mortgage banker partners extend their lines of credit to other originators, and are also offering hospital lines to finance buybacks, servicing-advance lines for working capital and even lines secured by mortgage servicing rights, said Bob Rubin of The Business Loan Connection, a consulting firm based in Southfield, Mich.
As the stricter underwriting standards of the QM rule took effect in January, the most likely source of non-QM funding was thought to be banks originating for their own portfolios. Others believed that a non-QM market couldn't take off without the return of private-label securitizations.
Given the many permutations of lines and sub-lines of credit that warehouse lenders are offering, funding non-QM loans is a logical next step for warehouse providers to build market share. And mortgage bankers including Angel Oak Funding, United Wholesale Mortgage and W.J. Bradley are getting in on the ground floor.
Regulatory and litigation risks could have kept the warehouse channel out of non-QM lending. But with other third-party investors dipping their toes in the non-QM waters — mostly with loans made to highly creditworthy borrowers — warehouse lenders have a measure of comfort that they will get their money back if they allow mortgage bankers to put non-QM loans on their lines of credit.
Some warehouse providers are letting mortgage bankers carve out a portion of an existing line of credit to use for non-QM originations. Others are providing facilities specifically for those loans.
"I was very surprised to actually be able to find lenders who were willing to do this," said Michele Perrin, a consultant at Perrin & Associates in North Tustin, Calif.
"Warehouse lenders definitely want to increase their outstandings and so they are looking for the next thing. What's the new flavor of the month?" Perrin said. "That actually seems like what all my conversations were at the Western Secondary [Conference in San Francisco in July] with the warehouse lenders and the mortgage bankers. What's the new flavor of the month? Vanilla is getting old."
Non-QM carve-outs can be as large as 20% of the total warehouse line. There are no extra fees and the haircut and interest rates are the same for non-QM loans placed on the line, said Rubin.
Mortgage bankers want to fund non-QM loans from their warehouse lines, but volume is still low, warehouse lenders tell Rubin, adding that one of the remaining challenges is that providers need assurance that there is a secondary market buyer for the loans.
Angel Oak Funding, which originates primarily in the southeastern U.S., California and Texas, has been aggressively growing its nonagency/non-QM business. The Atlanta-based lender's retail channel originates all products types, while the wholesale channel it launched earlier this year exclusively originates nonagency/non-QM loans.
Angel Oak Funding uses a warehouse line to fund some of its non-QM production. It also relies on its sister company, asset management firm Angel Oak Capital Advisors, to fund and purchase its production, said Tom Hutchens, senior vice president of wholesale sales and marketing.
A mortgage banker with an asset manager or investment banker partner is the safest arrangement from the warehouse lender's point of view because "they are the first line of defense," said Rubin. So long as a loan is written to the investment banker's parameters, it will be a buyer, even if the originator isn't getting the best price for it.
Angel Oak's wholesale unit makes nonprime loans to borrowers affected by recent credit events — like borrowers with credit scores above 700, but have items in their credit files that prevent them from going the conventional route, Hutchens said.
Multiple investors are buying these non-QM loans, but Angel Oak Capital, which has more than $3.5 billion in assets under management, predominately in nonagency residential mortgage-backed securities, is the primary purchaser. The tie with Angel Oak Capital is why the mortgage banker's warehouse providers are comfortable with providing credit to the mortgage lending business.
"If we were a nonprime wholesaler out on our own on an island, it would be a much more difficult venture," Hutchens explained. "But our relationship with Angel Oak Capital, meaning there is a source for our loans to go to, that is the key ingredient."
Angel Oak Funding is in the process of creating a mini-correspondent channel in response to requests from its mortgage broker clients that have warehouse lines of their own. The Consumer Financial Protection Bureau's guidance on mini-correspondents is not a cause of concern for the company because Angel Oak will be dealing with firms that already have the infrastructure in place to manage a warehouse line, Hutchens said.
Another mortgage banker using a warehouse line to fund non-QM loans is United Wholesale Mortgage, which rolled out a product for borrowers with high credit scores and the ability to repay the debt, but for some reason have fallen outside of the QM box.
UWM's "Big and Easy Plus" is a jumbo program that allows borrowers with a FICO score above 740 to get a mortgage with a loan-to-value ratio of up to 75% and a debt-to-income between 43.01% and 49%.
The company funds Big and Easy Plus loans from its warehouse lines but so far, there has not been a lot of consumer demand for the product, said Mat Ishbia, CEO and president of Troy, Mich.-based UWM. There is no difference in pricing, but UWM's warehouse providers have set a dollar limit for how much of their lines can be used for the loans.