More and more mortgage executives contend that lenders who avoid nonqualified loans are passing up on a profitable boost to their businesses.
Here are five important reasons behind their argument, according to conversations from two recent industry conferences.
The risks are relatively small: Nonqualified mortgages are "really non-risky lending," Ari Karen, an attorney for Offit/Kurman in Fulton, Md., said at SourceMedia's
Non-QM lenders are looking for borrowers with high FICO scores and lots of money to put down on the home, earning a low loan-to-value ratio. That is a far cry from subprime lending, he said.
"We don't want to go back to the bad old days," he said at the meeting, held in Arlington, Va.
Gregory Korn, vice president of Merrimack Mortgage Co. in New Hampshire, agreed with that sentiment at the New England Mortgage Bankers Conference, held in Newport, R.I.
"We've always loaned with a borrower's ability to repay in mind," he said. Nonsubprime, non-QM loans can be a good credit risk if the borrower demonstrates an ability to repay, he said.
You can make more money:How much? About 100 to 250 basis points more, according to Jeffrey Lemieux, senior vice president for correspondent and wholesale originations at Bayview Asset Management in Coral Gables, Fla.
So, if Fannie Mae and Freddie Mac mortgages are pricing at 4.5%, a non-QM loan can go for 5.5% or higher, he said at the New England conference.
You can boost originations: The new mortgage rules took effect in January, and the current hesitation to make non-QM loans will mean a 7% or so reduction in originations for the industry this year, Korn estimates.
Using the Mortgage Bankers Association's
Adding non-QM to a lender's portfolio has the potential to boost originations at individual shops by 10%-20%, Korn said.
Comerica "decided that on a select basis we would look at [non-QM lending]," Paul Dufault, a senior vice president at the Dallas bank's Detroit wholesale mortgage unit, said at the New England conference.
And Lemieux, who is responsible for bulk-and-flow acquisition of closed mortgages and servicing at Bayview, said that of four portfolio products the firm has, three are QM and one is non-QM. A lot of the non-QM business comes from self-employed borrowers "who don't meet traditional investor qualifications for income."
Another way borrowers can fail to qualify for QM loans is by exceeding the maximum 43% debt-to-income ratio. But according to Laura Bowles, the chief financial officer at Movement Mortgage, that does not have to be a dealbreaker.
"DTI on its own is not all that predictive," she told the SourceMedia meeting. "You have to look at the whole package."
You can limit your liability: It is best to have an audit trail on your non-QM lending to show if the feds come to call, said Christopher Tiso, the chief executive at LitigationGuard.com in New York, who spoke at both meetings.
"It's easier if a lender establishes a good-faith belief the borrower could repay," he said.
"Technology plays a very large role in what lenders can do," he said. They need to develop a process to "open communications between the lender and the borrower. Technology makes sure the borrower and the lender are on the same page."
Karen said that "defending cases is not that difficult as long as the files are clean. You need documentation of the process. The real risks of doing non-QM are really pretty small."
The government wants you to do non-QM: Despite their issuing a tough
Will lenders do more non-QM? Karen thinks so. "When there's an opportunity and a need, they eventually meet somehow," he said.
Mark Fogarty, Editor at Large at National Mortgage News, brings more than 30 years of sector experience to his analyses of the mortgage market.
