Why there’s a twist in the broker-led return of outside-the-box lending

Brokers are playing a key role in restarting the private market for home loans that the pandemic disrupted in 2020, and growing numbers of non-traditional borrowers, such as the self-employed, may need to turn to it as government-related programs change.

While the amount of self-employed Americans dropped precipitously last March to a seasonally adjusted 8.2 million from nearly 9.5 million, it’s been steadily climbing since then, Bureau of Labor Statistics figures show. As of March 2021, it was nearly 9.9 million.

At the same time, the pending redefinition of the qualified-mortgage ability-to-repay rule and caps set on certain loan products at government-sponsored enterprises are opening up private lending in complex ways consumers might find easier to navigate by working with brokers. Also, in contrast to last year, private-loan buyers this year have had a hunger for non-agency loans far in excess of what lenders have been able to originate.

“Right now, the investor demand is a lot greater than the origination production,” said Tom Hutchens, executive vice president of production for lender Angel Oak Mortgage Solutions.

So in contrast to 2020, which was a perfect storm for non-agency and non-QM loans, the stars look more aligned now; and third-party originators are positioned to bring it all together at the outset as lenders seek the quickest route to introducing new products.

“I think brokers are going to play a pivotal role to start,” said Bill Dallas, president of lender Finance of America Mortgage, which recently acquired Parkside Lending’s wholesale channel. “If you want to innovate, you do it with TPO.”

The new non-QM market

Disparate types of companies are funding various types of non-agency loans, some of which are referred to as non-qualified mortgages or non-QM. Non-QM, in essence, describes mortgages borrowers get when they don’t have standard indicators of an ability to repay.

“Many lenders have come back into this marketplace and the guidelines have started to become more aggressive,” said Melissa Cohn, an executive at William Raveis Mortgage, a lender and broker of non-QM loans.

Non-QM lenders are hesitant to guess as to how much volume there will be in 2021 after the market’s disruption by the pandemic last year, but based on renewed investor interest, they’re optimistic.

“The appetite for a non-QM loan in the secondary market is insane,” said Shea Pallante, president of lender Sprout Mortgage.

That’s in part because investors want higher returns after a year of record-low rates, said John Lynch, CEO and founder of PCMA Mortgage, a private client lender.

“We have more buyers for our assets today than we did pre-Covid,” he said. Lynch currently sells closed loans, but is also considering becoming a buy-and-hold investor, and is open to inquiries from brokers with large numbers of high-net-worth clients.

As Lynch’s customer profile demonstrates, some lenders and investors in the non-QM market may specialize in one of a wide range of niches outside the most common product: bank statements income-verification for the self-employed, who don’t qualify based on tax returns alone. While some non-QM lenders focus on self-employed people looking for owner-occupied homes, others may be more interested in helping fill the new market gap for second home and investor loans that stems from a change at the GSEs.

One thing all these loans tend to have in common is that they cost more because lenders can’t assess the borrower’s income in traditional ways.

“The trick with these deals is that in this current, extraordinarily low rate environment, borrowers are reluctant to take one on because of the relatively higher pricing,” said Jon Bodan, strategic financing advisor at Real Estate Bees, in an email.

Nevertheless, with non-QM potentially being the only option for a growing number of borrowers, even more mainstream, multichannel lenders are coming back to parts of this broad market this year.

“The non-QM market fills a niche need,” said Mike Jones, a national sales manager at Union Home Mortgage.

At the same time non-QM is making a comeback, new standards for the ability-to-repay rule’s qualified mortgage definition are poised to expand “safety” standards in the non-agency market in ways that could help open it up, primarily by removing a debt-to-income limit.

"The new rule will enable more loans to be deemed QM, and for some loans that were previously relegated to the ranks of non-QM to now receive QM status," said Meg Burns, executive vice president of the Housing Policy Council.

However, the National Association of Mortgage Brokers was concerned at press time that the Consumer Financial Protection Bureau’s recently announced delay in the new QM definition’s mandatory implementation to 2022 could discourage lenders from utilizing it on a voluntary basis during the transitional period allowed this year.

The new definition is supposed to be expanded, in part, to minimize changes to the GSEs’ underwriting related to the expiration of their temporary QM status; and it aims to allow more borrowers to get QM loans without compromising consumer protections. NAMB at deadline was calling for a reversal of the delay.

“This policy yo-yo only confuses the mortgage industry and wastes time, product development expenses … and loan originator time,” the group said.