$500 billion a year: Luxury Mortgage's Adamo on non-QM potential

November 22, 2024 5:00 AM

David Adamo has been in the mortgage business since the 1980s, starting in between freshman and sophomore years while attending New York University. Though it began as a summer job, he was running the company by the time he graduated college.

David Adamo CEO Luxury Mortgage — David Adamo is the founder and CEO of Luxury Mortgage, Stamford, Connecticut.

Adamo then founded Luxury Mortgage in 1996, targeting the upper end of the market (thus, the inclusion of the word 'luxury' in the name). After concentrating on this segment for the first 12 years or so of the shop's existence, the company made some shifts resulting from fallout on housing during the Great Financial Crisis. In 2013, Tiptree Financial acquired a majority stake in Luxury Mortgage. However, Adamo repurchased 100% of the equity and interests in Luxury Mortgage in 2023. The company completed a recapitalization with Barings and Massachusetts Mutual Life Insurance shortly thereafter.

Luxury Mortgage remains headquartered in Stamford, Conn., currently originating in 36 states through the wholesale, correspondent and conduit channels.

With his specialization in non-QM product, Adamo has a particular insight in the possibilities for growth in this oft overlooked segment of the market. Below he details just how much potential he sees for it in the months and years ahead.

The following discussion has been edited for length and clarity.

On choosing the name Luxury Mortgage

Adamo: Because I was going to college while I was working at the same time, I decided it just made sense to focus my time and energy trying to originate larger loans, since I had less time, and because the larger loans resulted in larger revenue and larger income for me. It was a niche strategy, a startup mortgage banking firm that exclusively focused on making large loans to high-net-worth individuals against luxury homes throughout the country, which is what we did for the better part of the first dozen years leading up to the global credit crisis.

The shift the Great Financial Crisis forced Luxury Mortgage to make

Adamo: Leading up to the global credit crisis, we, like everybody else, saw a surge in the amount of subprime lending. We actually decided to go against industry trends and take a contrarian strategy. Rather than going down-credit and up-margin, we decided to go in a complete opposite direction. We went up-credit and down-margin. We decided to fiercely compete for the most desirable borrowers in the country, while everybody else was competing for the least desirable borrowers. The good news is that leading through the credit crisis, we were a prime jumbo lender. We didn't have much exposure at all to the subprime market. The bad news was we were a prime credit jumbo lender, and nobody was solvent enough to buy loans from us anymore, the secondary market collapsed.

On making the pivot post-crisis

Adamo: Prior to the crisis, I could aggregate $100 million worth of prime credit jumbo loans, send out a data tape in the morning, and by the end of the day, I'd have five or 10 bids back and then just select the best [execution]. After the crisis, it was hard to find somebody to buy even one loan at a time. That obviously forced us to pivot our strategy and broaden out our product base. Pivoting to a broadened product strategy is what ultimately kept us in business. We got Fannie Mae approved, Federal Housing Administration approved, and started originating agency and government loans in addition to jumbo loans. We offered a broad array of products to broaden out the demographics of the market that we were addressing.

How the introduction of qualified and nonqualified mortgage definitions affected Luxury

Adamo: It's interesting, because Luxury had developed an expertise in originating non-agency and prime credit, jumbo loans, which are all by and large, manually underwritten. That credit discipline really positioned us well to originate non-QM loans. The manner in which those loans go through the manufacturing facility is very similar to how prime credit jumbo loans go through.

You have to really know credit, and much of the industry was, I guess, spoiled by having the ability to run loans through automated underwriting engines. The underwriters didn't have to do as heavy a lift in underwriting agency and government loans that went through automated underwriting engines as we did having non-agency loans that were manually underrated.

How the transition to non-QM happened

Adamo: We sold the majority interest in Luxury to Tiptree Financial back in 2013 and in 2016 we were approached by another public company that wanted to develop a relationship with an originator that knew how to originate and underwrite non-agency loans. It was that public company that actually came to us to get us interested in non-QM loans.

When non-QM loans first came out, we avoided them and felt that they were synonymous with subprime loans. But the more we looked into them, and the more we looked at the loans that were actually being originated, loans that today, if you look at the securitizations that are being done, and I'll speak for our own production we're like a 69% average loan-to-value and a 740 average FICO and these loans perform extraordinarily well.

It was because we were approached for our ability to originate and underwrite non-agency loans that we actually got into the non-QM space, and we've been in it since then. Since 2016, we have effectively been one of the nation's leading originators of non-QM loans.

On conforming and FHA loan limits over $1 million for certain markets

Adamo: I would say we're not competing against agency and government products. We're supplementing agency and government products, and we are originating an addressable market that is not able to qualify for an agency or government loan for one reason or another. What we do is really important to the scaling and sustainability of the industry, because there is a tremendous amount of untapped demand for non-QM loans. Most estimates are somewhere approaching $100 billion a year volume in this product segment. I believe for this product, the total addressable market is $500 billion a year.

Bridging that gap for non-QM

Adamo: The bridge between the current volume, and what the potential is, is really engagement and education. Not everybody, even in our industry, knows what a non-QM loan is, and so we find ourselves spending a great deal of time educating not only CEOs, but also loan officers and operation staff on what a non-QM loan is, how to originate it, how to manufacture it.

If you think about how an originator needs to spend as much time as we spend educating the industry and just imagine how much time the industry needs to spend educating the community, the real estate brokers, the business managers, the accountants, the advisors on what a non-QM is and how to identify individuals that are best suited with a non-QM loan.

On today's non-QM secondary market

Adamo: From direct conversations that I've had with large institutional investors, asset managers and insurance companies, there is way more demand in the institutional appetite for non-QM loans in the secondary market than there is supply of those loans. When you start to see the nation's insurance companies, who tend to be on the more conservative side of the way that they manage their portfolio, have an insatiable demand for non-QM loans, that lets you know that the product is now mainstream. Luxury is now in partnership with Barings and Massachusetts Mutual Life Insurance Company to originate and hold in portfolio, and they are very comfortable buying every and any loan that we can originate under this program,

What the name Luxury Mortgage means today

Adamo: Luxury Mortgage, when I founded the company, really spoke to the loan amount and types that we specialized in. Today it speaks to the service offering. Our slogan is luxury service for all of your mortgage needs, and we effectively offer white glove service and treat every non-QM borrower as though they're a prime credit jumbo borrower. These loans range from anywhere as low as, $75,000 or $100,000 into the millions and everything in between.

It's a much broader demographic of customers that we're servicing today than when we were focused exclusively on prime jumbo prior to the global credit crisis. We are now also extending our product back into prime credit jumbo through the sale of non-QM loans; we've been able to get institutional investors interested again in prime credit jumbo loans.