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. The topic of discussion is the coronavirus. Let’s get into it.
I’d like to first start by saying I’m late to the discussion about the coronavirus. I intended to produce a podcast and blog at least a week ago. However, I was busier than normal and did not have the time or energy to properly do the research required to speak intelligently about the subject. I’m glad I didn’t.
No one could have predicted the twists and turns that have happened. Nor will anyone be able to accurately predict what the future holds. Although I’ll give it a shot.
According to the website thelender.com, The Lender, a non-QM wholesale lender, effective immediately will no longer originate non-QM loans. This means, loans in process will be put on a temporary hold. Additionally, there will be no registering of new loans, processing, locking or funding of current non-QM loans. Furthermore, they state “the coronavirus has resulted in unprecedented government coordination to reduce the spread of the virus and as such, has temporarily altered the way we live and work as each of us look at the potential…… You get the idea. So, what happened? I’m not picking on The Lender, because other non-QM wholesale lenders will follow suit. But, why did The Lender stop originating non-QM loans?
On March 15th, the Wall Street Journal published an article, Feds Cut Rates To Near Zero & Will Relaunch Bond Buying Program, by Nick Timaros. The article states, the Federal Reserve slashed its benchmark interest rates to near 0 on Sunday and said it would buy $700 billion of treasury and mortgage backed securities in an urgent response to the new coronavirus pandemic. The article also says the Fed’s rate setting committee will hold rates at the new low level until it is confident that the economy has weathered recent events and is on track. Ben Lane at Housingwire.com, published an article on March 18th, claiming “the mortgage market is suffering from whiplash.” The article points out “Just two weeks ago, mortgage rates fell to an all-time low, which drove mortgage applications to levels not seen since 2009.” Conversely, “interest rates rose in the immediate aftermath as both lenders and investors moved to keep up.”
How did the coronavirus become the catalyst that caused The Lender, and possibly other, to stop originating non-QM loans? Anyone who knows me or is familiar with my book, articles or podcasts knows I can’t stand the title, “Expert”. “Experts” tend to condescend and speak in complicated terms. If you can’t understand what an expert is trying to tell you, it’s because he doesn’t want you to know. I’ll explain to the best of my ability in plain English. The issue is liquidity. Most non-QM lenders have a warehouse line of credit. A giant credit card. Loans funded by non-QM wholesale lenders are paid for by the warehouse line. Just like a credit card, lenders must make payments, or pay the balance on the warehouse line. Lenders sell their loans on the secondary market for a profit. They use the profit to pay their warehouse line.
What happens when you can’t sell your loans on the secondary market? You have a liquidity issue.
With record low interest rate there becomes a rush to refinance. However, rate and term refinances are finite. At some point their gone. As interest rates increase, non-prime loans (non-QM) become very attractive to mortgage loan originators. Think about it this way. Hypothetically, you’re a loan originator and for the past 5 years, you’ve been originating, easy rate and term refinances. Now you’re in a pickle. All the easy refi deals are gone, the money is drying up and you still have a mortgage payment, two car loans, credit cards and your 18-year-old son wants to attend a private university. In this scenario, you’ll take any life preserver tossed your way. Your savior is non-qualified mortgages (non-QM). Potential non-QM borrowers are typically ignored while rates are low. Simply put, you can originate 2 prime loans for every 1 non-QM loan. Non-QM loans, loans have layered risk built in. However, they’re attractive in the secondary market, if the price is right. The right price is an above average interest rate with high margins. The inverse is true as rates lower. A non-QM loan with inherent risk built in becomes a lot less attractive as rates lower and margins decrease. Ultimately, you’ll get to a point where there’s not enough meat on the bone to entice purchasers on the secondary market. Add to that the economic downturn caused by the coronavirus and you have a disaster on your hands. I’m speculating, but this line of logic is probably the same line traveled by the executive staff at the lender.
Why originate a pile of loans, that can’t be sold or sold at a loss in the secondary market? That’s a great way to get your giant credit card revoked.
What’s going to happen next? I hate it when experts tell you what the future holds because they’re always wrong. I suspect they will be wrong again. What I offer you is straight up speculation. Currently, no one in the secondary market wants to purchase non-QM loans. I’ll get to why in a separate blog. Is this the end of non-QM? Yes and no. I believe non-QM loans are good for the mortgage industry. They offer loans to good borrowers who, 5 or 6 years ago had no lending options. I also believe they will continue to exist after this crisis is over. I’m sure you’re all familiar with the law of supply and demand? As we’ve already established, there’s no demand for non-QM loans in the secondary market. That will change. I’m going to call it a reset. When non-QM was first introduced to the mortgage market, it was three things. Loans for;
- Low fico borrowers
- Bank statements for self-employed borrowers, and
- Debt Service Coverage Ratio loans for investment properties (aka DSCR) (aka – stated loans)
Now, with all the new players entering the non-QM wholesale market, we’re flooded with an abundance of worthless products.
- Non-warrantable condo’s
- ITIN loans
- Non-permanent resident aliens
- Foreign nationals
- 1099’s for income
- 1 bank statement for income
- K1’s only
- Etcetera
There’s too much going on! The industry is due for a reset.
As a whole I believe surviving lenders (I’ll get to that in a moment) will pare down the product offerings back to loans for;
- Low fico borrowers
- Bank statements for self-employed borrowers, and
- DSCR loans for investment properties
Guidelines will tighten and there will be less loans to originate. That’s not bad though, because there will be fewer wholesale lenders in the market. Wait, what?? Yes, there will be fewer lenders. Who’s first? Prime lenders or lenders who specialized in government loans like FHA, VA or USDA will be the first to exit the market. Let face it, this isn’t what they do and they’re not that good at it. They dipped their toe in the water and it was too cold. Well established non-QM lenders should be fine. They’ve been in the market for a while and, if managed properly, are well capitalized to ride out the market. Recent entries into the market will suffer. If you’re a recent entry into non-QM wholesale lending, you probably don’t have the resources to see this through to the end. I can’t predict who will be left standing, but whoever they are will be in a great place to gobble up market share.