Non-QM Lending — Where’s the Beef?
As compliance costs continue to soar and product selection is limited to government-regulated Qualified Mortgages (QM), mortgage bankers have tightened their belts, forced to diet on celery sticks and carrots. It seems only fitting to ask “where is the beef?”
I am not recommending the mortgage industry should feast like Henry VIII on the irresponsible lending practices that saturated the market prior to 2007, but isn’t there agreement amongst us that living on government products alone does not make for a balanced diet?
Where is the beef? Some are thinking it just might lie with Non-Qualified Mortgages (Non-QM). Yet as lenders continue to battle for their lives with app counts slowing, volumes shifting and values stalling, Non-QM lending remains not only an underserved market but almost a non-discussion. It is as if the countless rules and regulations associated with QM have slowly and methodically hypnotized the industry into a perpetual state of lending fear. When I speak with lender CEOs nationwide it is apparent that many are waiting for investors to flip a switch that gives the green light for Non-QM lending. Then, as I speak with investors it is clear how most of them are waiting for lenders to provide some level of Non-QM risk structure. Lenders and investors continue to struggle to no end with the idea of how to turn on the Non-QM spigot. This continued impasse was further evidenced at this year’s MBA Annual in Las Vegas when the conference agenda had only one sixty-minute discussion dedicated to the topic of Non-QM, Private Label MBS. With little apparent progress being made on Non-QM lending and the accompanying fear of billion dollar fines, the industry remains stagnant.
While some Non-QM business has been originated, it remains on a very limited scale. The industry continues to stand by, waiting to see the results of the first MBS issuance containing non-QM loans. While this is encouraging, there remains no structure, guidelines or tolerances established for Non-QM lending. Recent history leads me to believe that if the industry continues this course the government will eventually step in. Can someone say “Déjà Vu?”
It is time for industry leaders to snap out of it and not only recognize the opportunity that lies ahead in Non-QM but take charge by initiating self-regulation. It is time for the industry to design and implement a quality Non-QM product structure.
It would seem that if bureaucrats in Washington are able to sit around a table and scale the risk of QM, for better or worse, a group of industry leaders should be able to sit at a table and define a workable quality Non-QM product. A consortium made up of lenders, investors, attorneys and ratings agencies working together should be able to define a Non QM product based on a logical extension of existing QM parameters and providing for higher quality investment. Expanded parameters that might allow for 5% more DTI, credit bands capped at 50 or more points lower than today’s average FICO, max fee parameters plus well-defined documentation requirements. Similar to the safeguards of QM loans which protect lenders from buy-backs due to the safe harbor and rebuttable presumption clause, it would seem plausible to formulate a clause that safeguards lenders from default on quality Non-QM loans. Perhaps a binding disclosure that recognizes a particular transaction as a quality Non-QM loan that grants specific rights to the lender and ensures a rapid foreclosure process with no form of retribution against the lender. Am I over simplifying the possibility? The sooner the industry can think outside of the box and define the rules for a workable Non-QM product, the sooner technology can be configured to support it and the credit box can be expanded with greater confidence.
Would the implementation of a quality Non-QM loan structure not only ensure a higher-quality loan but make it easier for lenders to educate the general public and gain social acceptance for reentering the non-prime market? Could this structure help to avoid misinterpretation by consumers that lender’s are sliding back into recklessly originating in a replay of the sub-prime market? Rather than waiting to see if regulations will be modified or scaled back in the next year, perhaps the industry can self-impose lending guard-rails that further demonstrate the mortgage industry’s long-standing commitment to engage in responsible mortgage lending. It has been a long, hard fought battle to re-invent, rebrand and restructure the industry and for lenders to regain credibility. It is time for the industry to step above the regulatory spell that has been cast. It is time to start strengthening our partnerships and working together to design sound secondary investments that help move our nation forward. It is time to answer the question, “where is the beef?”