Unqualified mortgage lenders are crawling back into the market, but the lack of consistency in forbearance policies is raising concerns among security buyers and in the secondary market.
"The reason we're not buying is because we think the future is very bleak right now," said Caroline Chen, senior research analyst at Income Research + Management, a $ 83 billion pension manager. However, those who did not buy QM securitisations before the spread of the coronavirus began are not currently on the market.
Approximately $ 5.7 billion in non-QM deals have been closed since May, and all loans have been oversubscribed, Chen said.
"The picture is more mixed on credit factors," she said.
Prime Jumbo loans usually have borrowers with high credit scores and complete documentation. Forbearance here is in the low single digits. However, most non-QM loans have a credit score below 700 and documentation status varies.
"Deal by deal, you can see differences, shelf by shelf, vintage by vintage, but in general for some deals … arrears averaged 20% to 25%," said Chen.
All post-COVID-19 emissions were pre-pandemic, Chen said. Some of the more recent transactions involve borrowers whose initial forbearance has expired and subsequently extended. Ultimately, the industry will see harm reduction strategies for some borrowers as not everyone has access to current salary status.
Quontic Bank, a chartered community development financial institution, does not indulge borrowers of new origins. However, any borrower who was current as of March 31 and indicated that they were affected by COVID-19 were granted a three-month grace period with extensions if required, CEO Steven Schnall said.
It was a "very, very mixed bag among borrowers. Some people who asked for a respite ended up paying," said Schnall. They had the money, decided not to accumulate the debt, and just paid the mortgage. Some missed the first or second payment and then started paying.
But some who have taken the postponement "urgently need extra time," said Schnall.
Then there are the call options, which many non-QM deals have, where the issuer can buy back the bonds. If the arrears reach a certain level or remain high, the call option will not be exercised "because it makes no economic sense" to cancel the deal, Chen said.
According to data from DBRS Morningstar, the vast majority of loans in non-rated QM stores, over 42%, came from California, one of the current hotspots for coronavirus. The closest state was Florida with over 15%. Texas and New York were each in the range of 5% within the non-QM universe.
"To date, the volume after COVID-19 origination has been very limited, but we are seeing [the newer] loans drawn with a much tighter credit box," said Chen.
Quontic was one of the many non-QM lenders to step on the sidelines after the secondary market disrupted. From March to around mid-July, the bank "shut down our wholesale business and drastically reduced our non-QM loans for private customers," said Schnall.
Since Quontic is a community development institution, it can keep mortgages on its balance sheet. She can also use deposits and funds on that balance sheet to raise borrowings.
Instead of having to sell loans at distressed prices like some non-bank lenders, it was able to hold onto them until prices in the secondary market stabilized.
But its policy changes are being driven by concerns about forbearance, Schnall said.
"What we have done to mitigate this risk are two things. First, all borrowers are required to sign a certificate which essentially confirms that they have no forbearance to existing mortgages that their business or employment does not have." what are concerned is that business is up and running at a level to support the debt. They also acknowledge the fact that they understand that they are not entitled to indulgence, "said Schnall.
The non-QM market that Quontic serves includes people with small businesses whose incomes are volatile and difficult to document to meet repayment requirements.
He gave the example of a restaurant owner whose industry was badly affected by the pandemic. To be considered for a Quontic loan, the restaurant should be open for takeout and delivery for revenue. They should also have cash for the Payroll Protection Program to prove they have a viable business, Schnall said.
During the underwriting, Quontic does a "cursory Google check" to ensure that the borrower's business has a website, that the website does not say the business is closed and that it is a consumer-facing business.
Quontic also reduced the loan-to-value ratio from pre-pandemic levels and increased creditworthiness requirements. "So we made the loans a little more secure than the loans from COVID," he said.
Tom Hutchens, Executive Vice President of Production at Angel Oak Mortgage Solutions, also confirmed Chen's argument about stricter guidelines.
Still, "the origins come back quickly," he said. The company has taken out bank statement mortgages for business owners.
For example, for consumer products, in terms of those adjustments, "it's more like the lower half of the curve … they're not big, bigger changes," Hutchens said. For example, if Angel Oak once had a product with an LTV of 90%, it is now 85%.
"It's not that the LTV went up to 60%, it's just an optimization," said Hutchens. That counts."
These loans are made through Angel Oak's retail channel, which also offers a home loan cover product for investors.
Both Quontic and Angel Oak have developed non-QM in the wholesale channel. Angel Oak also makes bulk purchases through the correspondence channel.
Quontic is in the process of rebuilding its wholesale sales team as it re-enters that channel, but it is battling to get mortgage brokers' attention for the product, Schnall said.
Prior to COVID, much of Quontic's non-QM business came from the wholesale channel. Today, with mortgage rates at or near record lows, "many of the brokers who sent us the non-QM deal are deeply entrenched in refinancing their agency portfolio so they don't focus as much on non-QM loans as that they were, "said Buckle.
He expects brokers to bring Quontic non-QM clients with them when they learn that they are resuming those origins.
"It's a big market and there are no more non-QM players, we're one of the few," he said.
For example, Impac Mortgage Holdings, a non-bank, closed completely in March and only recently started taking compliant and government loans. The company has announced plans to re-enter non-QMat sometime in the third quarter when secondary markets return. Almost all of the company's non-QM came from third-party providers.
While Angel Oak Mortgage Solutions is not a lender, the company has a sister company in the Angel Oak family that acts as a take-out investor.
Although Angel Oak took a hiatus with no QM in March, it was back in the market by the last week of April, Hutchens said. So far, Angel Oak has not yet hit the market with an issue consisting of loans created after the coronavirus first shut down the economy.
But it wasn't just secondary market disruption that drove Angel Oak's decision. On the upstream side, when the businesses closed due to the existing housing, "we had no way of determining a borrower's ability to repay. So it was like the perfect storm why we had to pause things." Said Hutchens.
In the past few years, the non-QM loan volume has grown exponentially. According to Fitch, MBS issuance rose from $ 483 million in 2015 to $ 14 billion in 2018 and between $ 25 billion and $ 26 billion in 2019. This should be another year of nearly 100 annual growth % for the product. However, only $ 9.5 billion was securitized to non-QM in the first half of the year. While the pandemic hiatus got that under control, Hutchens said those loans are now making a comeback.
"Our non-QM business is growing extremely fast, much faster than expected. Non-QM borrowers have not left because of the pandemic.
"But we believe that the economy will recover and there will always be a need for products and programs that are outside the guidelines of authorities and agencies. And we – and the entire non-QM area – really have before the pandemic our progress made, "said Hutchens.
And that's a sign that the product is now an integral part of the industry, said Hutchens. "It's still on people's radar while that might have been a different story five years ago because we worked really hard to get it there."