HousingWire spoke with Tom Hutchens, Executive Vice President of Production at Angel Oak Mortgage Solutions, about the outlook for no QM in 2023 and why lenders should keep an eye on the non-QM space.
Housing wire: How has the non-QM space evolved over the past year?
Tom Huchens: The non-QM space has evolved a lot over the past year. There is good news and some bad news. The good news is that the challenges this space has faced have nothing to do with demand. Investor demand is still solid, although more reserved. But there is still a huge demand from borrowers. In fact, the number of borrowers who need non-QMs is constantly increasing due to the increase in the number of people becoming self-employed or gig workers.
The main challenge for non-QMs has been the extreme volatility in the secondary markets. This volatility has led to extremely rapid and dramatic price changes. The volatility has also led to stricter guidelines in some of the non-QM programs. For years, prices and programs were stable with relatively few regular changes. That has evolved this year with how quickly things have changed. These rapid changes have resulted in large price fluctuations as well as guidelines to be adjusted often, making it more difficult for borrowers to qualify.
HW: What is the outlook for non-QMs in 2023?
E: Despite a turbulent end to 2022, I am confident that the outlook for 2023 for non-QMs is quite promising. As I said before, the demand from borrowers is increasing every day. Self-employed borrowers, real estate investors, and creditworthy borrowers who have recovered from credit issues will still be in the market. The outlook on the demand side is therefore quite solid, even with higher rates.
Another key is that these loans perform well. Volatility is not a question of credit, but a question of price. These loans were executed through COVID and continue to perform. This is good news for the future of non-QMs.
To really get back to the growth trajectory, however, what we really need is for the market to stabilize. It doesn’t matter where rates settle, as long as they do. Once that happens, the product and pricing for non-QM loans will stabilize, bringing with it more certainty to this part of the industry. And with more certainty will come better prices and a return to guidelines in early 2022, before rates are higher.
Non-QM space will increase again as the need to serve the underserved borrower continues to grow. Product and price stability will return, allowing non-QM volume to return to when it doubled year after year.
HW: Why is it so important for lenders to keep tabs on the non-QM space?
E: Initiators need to keep an eye on the non-QM space for several reasons. First and foremost, for the reasons discussed earlier, non-QM is not going away because it is too large for a large population of borrowers. Originators should be careful not to turn away potential borrowers who do not fit traditional lending options.
In today’s small marketplace, it’s more important than ever for creators to have access to a wide variety of diverse product offerings. When they have a qualified borrower in their office, they must be able to provide a solution to that borrower’s specific financial situation. Otherwise, they will lose that borrower to a competitor.
With almost non-existent agency refinances, the absence of QM can help protect volume and referrals. By having this diverse set of products, your referral partners know they can count on you to save deals that others can’t. And that’s why it’s so important to keep an eye on the non-QM space.
HW: How does Angel Oak advance non-QM?
E: Angel Oak has always prided itself on being a technology and service focused lender. Everything we do operationally is based on this premise. We are building on this momentum by working to streamline the origination process for loan officers through improved technology and processes. We are working on new tools to ensure a better customer experience for our partner initiators.
From a service perspective, we have the largest AE sales force in the country to help educate and assist starters. Our account managers will work closely with originators to go through scenarios and even accompany them on calls with real estate agents to help them talk non-QM.
We continually navigate volatile markets doing what we do best: educating on the benefits of non-QM. The market will be back and those who now learn to do non-QM with us will have a head start. Our message to initiators is simple: Now is not the time to sit on the sidelines. Enter the non-QM game and earn more business to help grow now and in the future.