Non-QM on the Upswing: A Conversation with Dane Smith, President of Verus Mortgage Capital

MBA NewsLink talked with Dane Smith, President of Verus Mortgage Capital, Washington D.C., about why the firm has chosen to work with correspondent lenders to build its portfolio of Non-Qualified Mortgage assets

Verus focuses on acquisition of non-agency mortgage loans from correspondent lenders. Its acquisition programs are designed to address the issues limiting a borrowers’ access to credit through common-sense underwriting. All programs focus on the borrowers’ ability to repay.

MBA NEWSLINK: What’s the current state of non-QM lending?

DANE SMITH: The market for non-agency mortgage loan production is definitely coming back in earnest. We are seeing considerable borrower demand for all non-agency products. The liquidity challenges facing the market in March of last year have improved considerably.  Consumer demand for housing and non-agency finance came back very quickly.  Today there is a great deal of unmet demand in the market.

Liquidity is now flowing back into the Non-QM space. Investors who have been frustrated by low yields in other asset classes due to low interest rates and tight credit spreads are looking in this direction again. We are seeing considerable interest in securitized non-agency mortgage credit and we have completed eight securitizations since March of last year.

The good news for lenders is there isn’t much competition for borrowers yet, certainly not to the level we saw pre-COVID, but we expect that to change. Non-QM offers a huge opportunity for growth, which will become evident to everyone within the next two years. Lenders who start originating these loans now will create a competitive advantage.

NEWSLINK: What is the biggest challenge to growth in non-QM?

SMITH:

The current challenge is lender capacity. There is significant demand in the market. Borrowers need more lenders actively originating these loans. For about a year, most lenders have been, and rightly so, focused on originating conventional agency product.

Lenders who make the move back to Non-QM will gain a foothold because there is less competition for consumers and a higher willingness on the part of investors to help them get up to speed.

The other challenge for lenders will be broadening their existing relationship with their warehouse lenders. These firms are back in the Non-QM space but have been moving in slowly. Many have eased restrictions and become more comfortable with the product. Over the course of our conversations with them over the last 30 days, we’ve seen attitudes among warehouse lenders changing dramatically.

NEWSLINK: Has the borrower profile changed at all?

SMITH:

Profiling the Non-QM borrower has always been a bit of a challenge for some because Non-QM itself is a misnomer. It’s really expanded non-agency.

With the expiration of the QM patch and changes to the QM rule, loans that previously were considered Non-QM loans are now QM. That could attract new investors that haven’t previously participated.

In our case, we purchase these loans for our portfolio and carefully underwrite the borrowers income on ATR loans so QM safe harbor isn’t a requirement for us.

There are still plenty of borrowers who don’t fit into the GSE credit box and need the flexibility offered by an expanded non-agency product.

NEWSLINK: What’s the hottest non-QM product right now and why?

SMITH:

Jumbo loans continue to be hot.  We are experiencing high demand right now. The improving economy and low interest rates have created significant demand for higher priced homes.

Loans to real estate investors and bank statement loans are both coming back. We expect the traditional Non-QM loans to catch up fairly quickly.

NEWSLINK: What does the 12-month outlook look like for non-QM? What industry or outside factors could impact that?

SMITH:

What does the 12-month outlook look like for non-QM? What industry or outside factors could impact that?

DANE SMITH: The outlook for the next 12-24 months is very, very good. Demand right now is high for these products and we expect that to continue through this year and into next.

There are some outside factors that will impact demand as we go forward. If rates stay low and lenders continue to handle refinance work and agency production, demand for Non-QM will continue to grow because there won’t be enough lenders offering these products.

We don’t see anything on the horizon that makes us think this part of the industry will experience another downturn anytime soon.

NEWSLINK: How is the COVID crisis impact on Non-QM different than the mortgage crisis in 2008?

SMITH: These two events are fundamentally different. The financial crisis of 2008 was a massive industry correction that resulted from years of excessive credit that had been extended to unqualified borrowers. When 100% LTV loans made without income documentation to go into default there are not a lot of good options. When the bubble finally popped, it was catastrophic.

The COVID crisis is something different. When news of the pandemic broke, market fundamentals were strong. The economy was doing well, housing was fairly priced, and there was limited housing inventory.   The underwriting and credit of existing mortgage loans were sound. This was an economy that was humming along and 8 weeks later 20 million people unemployed. While that was a very dramatic shift, there was a significant and coordinated response from policy makers and legislators to address the issues.  That created a solid footing for the economy to get back on track and many jobs have returned.

It took the better part of a decade to recover from the financial crisis. Because our system was sound when COVID struck, within one year, home finance is stronger than ever. With liquidity flowing back into the Non-QM space, we couldn’t be more excited about the future.

(Views expressed in this article do not necessarily reflect policy 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 Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)