Sam Verma of Peoples Processing: Automation–A Critical Element for the Emerging Non-QM Sector
Sam Verma is CEO of Peoples Processing, Volente, Texas, and is a mortgage industry veteran of 25+ years’ experience. She brings institutional-level loan servicing experience and spent two decades originating mortgages and/or managing origination teams and is a go-to consultant who advises mortgage processors on how to work smarter to drive down costs and close loans faster.
Non-Qualified Mortgages have seen increasing interest among progressive mortgage lenders lately.
Against the background of plummeting refinance activity, there has been a growing level of competition to service limited loan volume. Coupled with the tighter business conditions, market norms have rapidly changed, and so have the borrower profile. These changes have been encouraging lenders to consider getting into the Non-QM space to ensure smooth business continuity.
The Evolving Face of The Mortgage Market
The present and future prospects of the Non-QM space appear quite promising. Factors that can be attributed to the same include:
- Stricter Regulations
Regulatory bodies and Fannie Mae and Freddie Mac have tightened their restrictions, limiting the percentage of loans based on their perceived risk criteria. This has resulted in a smaller government box, disqualifying a growing fraction of borrowers that do not align with the GSE. Moreover, the bank lending restrictions have also become stricter, helping non-QM emerge as a more accommodating alternate for loan seekers.
- Evolving Borrower Profile
The employment profile across the country has been undergoing a radical change. A large fraction of salaried individuals have been turning to entrepreneurship to cope with the job losses that were triggered by the Covid-19 pandemic.
Statistically speaking, the number of start-up businesses across the country has grown by 24 percent from 2019 to 2020. Since the self-employed individuals typically fall out of Fannie Mae and Freddie Mac that favor the salaried class, a growing portion of candidates are now natural candidates for Non-Qualified mortgages.
- Soaring Home Prices
Home prices over the past year have been witnessing a steady rise. Simultaneously, the level of refinancing activity has slowed down. This has strengthened the demand for large-sized loans – primarily in the form of Non-Qualified Mortgages, as the GSE guidelines around investment properties has been disqualifying most candidates for agency loans.
All of this has culminated into growing attention towards the Non-QM sector that was overlooked by most lenders.
The Emergence of a Lucrative Non-QM Market
The data points indicate that in 2020, the Non-Qualified Mortgages sector closed fairly strong, touching a sum of $18.9 billion.
This, when coupled with the fact that Non-QM is characterized by lower competition, higher interest rates and faster underwriting, explains the presently growing interest among progressive lenders in the segment.
Key Challenges Faced by Lenders in the Non-QM Space
Despite the growing interest, the sector does face some basic functional challenges that lenders are required to overcome. The key ones are detailed below-
- Managing Error-Prone Manual Processes
Manually processing Non-QM loans can be a tricky task. Not only is manual intervention more expensive, but it is also error-prone. As per statistics published by IRPA, on an average, individuals tend to have a 10 percent chance of making human errors when executing different steps in loan processing.
Even though there does exist an abundance of technology solutions available for helping out with mortgage processing – a relatively growing and niche segment such as Non-QM currently does not have many specialized technology solutions available.
Moreover, non-QM products do tend to be a bit diverse. This makes the requirement of proper technology to streamline tasks and improve efficiency levels across the organization quite a pressing one.
- Mitigating Risks of Frauds
Mortgage fraud as an industry trend has been escalating steadily over the last decade. Statistically, the pace of rising frauds have touched 37 percent since 2010.
As lenders, it becomes vital to exercise increased caution to safeguard interests and detect signs of suspicious activities promptly. When delving into a newer segment of business such as Non-Qualified Mortgages, the natural concern multiplies further due to limited past practical experience in identifying and mitigating frauds pertaining to the same.
- Dealing with Changing Cost Structures
As the market is in a state of transition, it gets difficult for lenders to predict the demand levels in the near future. Due to this ambiguity, the decision to increase fixed costs by investing in additional capacity becomes a tricky one.
On the other hand, if the volume of loans rise it will get difficult to seamlessly manage with a limited resource base. Needless to say, this inability to take the decision at the right time affects business prospects.
- Auditing & Meeting Compliances Accurately On Time
For any mortgage lender, an audit of internal processes forms a critical task to ensure there are no leakages in terms of compliance and documentation. Moreover, with the government regulations constantly changing, keeping track and adhering to the changes emerges as a challenge.
The Pivotal Role of Specialized Technology & Automation in Overcoming Functional Challenges
Specialized technology and mortgage process automation helps to overcome the key functional challenges faced in disbursing Non-Qualified Mortgages.
Automation involves using modern technology such as AI to simplify the lengthy tasks pertaining to disbursing a typical non-QM loan – right from pulling in, underwriting, pricing packaging, and delivering.
The technology is designed to be workflow driven and follows the same set of rules that are adhered to when tasks are manually executed. With the use of intelligent algorithms, the pace of execution significantly increases, and the probability of costly human errors is also mitigated. The use of modern technology ensures that redundant tasks are replaced completely by automation. The algorithms ensure that chances of fraud are minimized.
Non-QM Mortgage lenders gain increased freedom to take on additional workload without worrying about capacity constraints due to the automation introduced at several points. This empowers the lenders to place their undivided focus on growth and expansion as against micro-managing redundant activities.
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