August 3, 2020
Orion’s brokers know that we offer a wide array of products. And even if we don’t specialize in offering a certain product for our brokers, or originate very little of it, we like to track what is happening with it as an indication of the health of the overall market.
One product, which was really hammered nearly five months ago in mid-March, is a set of products that don’t fall into the Qualified Mortgage category, namely non-QM mortgages. As COVID news threatened world economies, mortgage products not guaranteed by the United States Government quickly lost favor, liquidity dried up, and investors pulled their products from the primary markets since there was no secondary market in which to sell them.
In the last few weeks, however, a few non-QM investors have come back into the marketplace by offering certain products. That is a healthy sign. Underwriting standards for non-qualified mortgages, which are not the subprime mortgages of old and must meet the Ability to Repay requirements, are rapidly evolving.
In the secondary markets, investors in the secondary market demonstrate strong demand in a world starved for yield. MBS with non-QMs originated before April have been met with strong demand from investors, helping lenders loosen underwriting compared to standards offered early in the second quarter.
Securities are being issued. For example, Fitch Ratings rated residential mortgage-backed certificates issues by Angel Oak Mortgage Trust, assigning the securitization’s top tier a AAA rating. The securitization, designated AOMT 2020-4, includes 734 loans with a balance of $300.39 million. The securitization consists mainly of non-QM mortgages (80.4%). The borrowers in the pool have strong credit profiles, with a 720 weighted-average FICO and moderate leverage. The pool contains 51 loans over $1 million, with the largest being $2.9 million. Self-employed borrowers make up 69.7% of the pool, Fitch said.
Currently the industry is commenting on a set of proposals issued by the CFPB slightly over a month ago, including a proposed extension to QM guidelines (“the GSE Patch”) and new definition of non-QM, much of which goes along with industry thinking. Given that it would appear that non-QM loans will account for somewhere between 1 to 5 percent of overall production, and the huge majority come from three states (CA, FL, and NY), plenty of lenders either don't care about the product or aren't even licensed in those states. And a large percentage of non-QM loans flow directly into the portfolios of credit unions and banks who often price it very competitively and like owning the asset. But it is still a good idea for Orion’s brokers to see who is doing what, and what the trends look like.