Non-QM: To QC or Not to QC? Pamela Hamrick from Incenter Diligence Solutions

Pamela Hamrick is President of Incenter Diligence Solutions, which provides due diligence, QC and document management services for lenders and depositories.

Late last summer, Fannie Mae’s pre-funding quality control review requirements for agency loans caught the attention of an unexpected mortgage industry segment: Non-QM/Non-Agency loan originators. MBA NewsLink asked Pamela Hamrick, President of Incenter Diligence Solutions, to explain.

MBA NewsLink: What type of pressure has today’s market put on loan quality in general?

Pamela Hamrick: Well, we saw what Fannie Mae did when they created stricter parameters around prefunding QC. This was a proactive move that requires originators to ensure compliant loan production while fixing issues up-front that could potentially become very costly down the road. 

A tightening credit market has resulted in more emphasis being placed on verifying the borrower’s income and creditworthiness. There’s also been a lot of pressure on the MSR market to make sure portfolio loan profiles are accurate. These assets are bought and sold to optimize the balance sheet so from both a pricing and a risk standpoint, it’s extremely important to understand exactly what’s in those portfolios.

As for Non-QM/Non-Agency originations, they’re not facing pressure from the GSE’s to ensure loan quality but they are definitely feeling it from the secondary market as investors shop non-conforming loans with a cautious eye on borrower creditworthiness in a high rate economy.

NewsLink: Do Non-QM loan/Non-Agency QC reviews serve the same purpose as traditional loan reviews?

Hamrick: The objectives of a Non-QM loan review and traditional loan review are the same: mitigate risk to avoid deal fall through and expensive buy backs while improving asset quality so you can get best ex pricing. As with GSE QC, Non-QM/Non-Agency QC also provides originators invaluable feedback on their processes, and in some cases even certain correspondent lenders and brokers, regarding whether or not they are consistently meeting underwriting and compliance guidelines. Armed with this knowledge, the originator can provide remedial training or even use it to improve process guidelines and management.

That said, the value of loan quality reviews to Non-QM and DSCR originators goes well beyond these diligence goals. While these are attractive assets, there is often higher risk associated with loans originated outside of the GSEs. Even though Non-QM assets have long been securitized, lenders and investors may not have full confidence in loans that rely, for example, on bank statements instead of a W2 for income verification.

Regular and transparent Non-QM and DSCR QC creates investor trust not only in the loans themselves but in the originator as well. This can only help to increase participation in the Non-QM/Non-Agency secondary market.  

NewsLink: How is a Non-QM or DSCR loan review different from an Agency loan review?

Hamrick: In the Non-GSE world you’re not comparing what’s in the loan file to an automated GSE decision engine because there isn’t one. You are looking to confirm that the loan conforms to the originator’s underwriting guidelines. That’s the biggest difference between the two. You’re taking the same methodology but applying it to a very a different product with very different ways of documenting borrower income and creditworthiness. Even within Non-QM, there are different products with different guidelines and documentation requirements. Expanded prime is different from non-prime is different from a DSCR loan or second mortgage. Underwriting guidelines change with the market so you have to be sure you’re using the most up-to-date guidelines for the right product.

NewsLink: What types of errors do you see most in Non-QM?

Hamrick: In the Non-QM world, some of the biggest mistakes are in income calculation. There is a great deal of manual analysis required for a 24-month bank statement loan. That’s a lot of data you have to take in and therefore there’s a lot of room for error in those calculations. 

The same goes for DSCR loans. Not only is it important to verify the documentation being used to determine accurate property cash flow projections, the calculations themselves are detailed and complicated.

Another area of concern is appraisal integrity and making sure the home’s value is supported using comparables reflective of the property. Ensuring property marketability is especially important in Non-QM since many borrowers tend to be self-employed, or are entrepreneurs or business owners with less predictable income streams. 

NewsLink: What are the cost ramifications of Non-QM loan QC?

Hamrick: I would advise any client, Non-QM or otherwise, to look at what loan QC costs you and then look at what it saves you. For Non-QM, there may be extra costs involved with training on manual data gathering and calculation processes. While most QC professionals are very familiar with agency loan guidelines, few have the expertise to QC non-conforming loans.

On the savings side of the equation, preventing a single loan buy back, which can cost $100,000, is enough to justify the upfront expense of ordering a QC review. Then there’s the reputational benefit. How much is it worth to a Non-QM originator to grow investor trust in the quality of its assets? You tell me.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)