Hello, and thank you for joining me. My name is Fernando Zoota and I am your host for the podcast and blog, Non-QM Insider, the show where we talk about regulations, guidelines, and anything having to do with non-qualified mortgages. Today we will continue with our discussions about the secondary market. Let’s get into it.
I wrote my first book, “An Insider’s Guide to Non-QM” as a non-QM 101 guide to assist Mortgage loan originators. At the time (circa 2016), many of the calls I received from loan originators were probing questions. By that I mean, not scenarios, but inquiries as to what can and cannot be done in non-QM lending. Of course, a lot of comparisons were made to sub-prime. Both non-QM and sub-prime are forms of Non-Prime lending. However, what differentiates non-QM from other non-prime products is the Dodd-Frank Wall Street Reform Act. Specifically, the ATR rule. Without going into detail, unlike sub-prime lenders, non-QM lenders are required to make a good faith determination a borrower has the “ability-to-repay” (ATR) their loan back. If you’d like to learn more about ATR you can visit my website, non-qminsider.com. On the website, I have additional articles specifically about ATR. Essentially the book lays out the ATR rule and how non-QM guidelines are influenced by it.
That was then, and this is now. Post COVID-19, I’ve found the biggest guideline influence comes from the bond rating agencies like Kroll Bond Rating Agency, DBRS Morningstar and Standard & Poor’s.
As an example, Citadel Servicing’s most recent mortgage-backed security (MBS) is a head-scratcher. First of all, the bond is small in comparison to other non-agency MBS, $51.3M. Deephaven and Vista Point are both prepping MBS worth well over $300M. As Citadel hasn’t originated a loan since March of 2020 their MBS undoubtedly consists of pre-COVID-19 loans. If so, Citadel must have a heck of a lot more loans on their books or warehouse line. What’s going on with the other loans?
Maybe it’s bond rating will give us some insight. According to DBRS Morningstar, Citadel’s received an A-rating. As a point of reference, all other non-QM MBS have received a better AAA credit rating. My guess is that’s there’s nothing abnormal in Citadels offering. What’s different is that the bond agencies are predicting a higher rate of default for loans originated pre-COVID-19 and in general for the non-QM sector.
During a conference call, Kroll stated they predict non-agency loans for self-employed and non-self-employed borrowers using alternative income documentation are 20%-30% more likely to default vs prime loans.
On that same call, Kroll admitted that the country is in a fluid environment and they reserve the right to update their assessments as applicable.
From what I can extrapolate, as originators of non-QM loans we need to have some patience. Non-QM lenders, actively originating loans should be applauded as they are doing their best to navigate a turbulent market and produce profitable loans worthy of a AAA bond rating. That’s not easy, just look at the May jobs report, the proceeding stock market run, then subsequent drop. For now, guidelines are tight but I’m optimistic there will soon be a pre-COVID suite of non-QM loan programs.
What do you think? If you agree or disagree feel free to post in the comment section.