The non-QM product gaining steam in a low-volume market

June 14, 2023 4:00 AM

Some lenders in search of business during the mortgage market's holding pattern are turning attention to a niche product with millions of prospective borrowers.

Community banks, credit unions and other originators have a surging appetite for Individual Taxpayer Identification Loans, or ITIN products. The loans are easy to complete, relatively safe, and can deliver higher yields for mortgage players if a company is ready to step into the space.

The conversation around ITIN loans picked up earlier this year, experts told National Mortgage News, as origination volume continued to nosedive.

"It seemed like every other conversation I had was about ITIN loans and I think what was probably driving that was yield," said Brian Simons, president of fintech Maxwell. "ITIN loans carry a higher coupon. People were looking for yield as interest rates were going up, so that's probably what began to drive the conversation."

Lenders characterize ITIN borrowers as hardworking people from a wide variety of backgrounds who are dependable borrowers. An institution opening its doors to them brings multiple benefits.

"If you are able to do one or two of these ITIN loans and gain their trust, you will get grandparents, aunts, uncles, cousins, their business too," said Andrew Stachak, vice president at First National Bank of America. "Because they trust you. You earn Realtor trust as well."

National Mortgage News spoke to veterans of the ITIN lending space about the product, its possible risks, and what lenders need to know before getting into the space.

A simple origination process

U.S. nonresidents and resident aliens, spouses and dependents can apply for their nine-digit ITIN with the Internal Revenue Service, according to the agency. The origination process for an ITIN loan is similar to a traditional mortgage, with financial vetting replacing a Social Security Number with the same nine-digit ITIN.

"We run the same credit reports, we get the same tax returns and bank statements of someone who's here," said Melissa Cohn, regional vice president and mortgage banker at William Raveis Mortgage. "There's no special training that you need."

Lenders said they offer ITINs with loan-to-value ratios around 80% and down payments between 10% to 20%. The loans don't carry mortgage insurance, experts emphasized, a barrier to a lower down payment.

The borrowers may have a lot of money order transactions and different names on tax forms in their financial profile, said Bryant Ottaviano, founder, CEO and senior mortgage loan originator at Littleton, Colorado-based Pivot Lending. His firm partners with credit unions to develop ITIN programs.

The loan doesn't cost any more than a conventional loan to originate, and closing times can be just as fast as a conventional loan, if not faster. First National Bank of America representatives tout wholesale closing times on average between 26 to 28 days.

"They're all manually underwritten and there's really no 30-day purchase agreements going on with these," said Stachak.

The language barrier is likely the biggest hurdle for a lender to get into the ITIN space, lenders said. ITIN lenders say they employ bilingual loan officers and provide documentation in native languages.

The prospective borrowers are everywhere

The IRS couldn't provide an exact figure of the number of ITINs in circulation today, but the market spans over 21 million underbanked customers, according to research by the Filene Research Institute. The report also states there were over 3 million ITIN applications between 2019 and 2021.

The vast majority of ITIN borrowers are Hispanic, lenders said, with plenty of volume in the Southwest. However, originators also mentioned states like Illinois and Massachusetts as hot spots, and emphasized that a wide variety of nationalities apply for the products.

John F. Sexton of correspondent lender Sierra Mortgage Capital said he sees many hardworking, primarily blue-collar borrowers.

"A lot of folks in the trades, construction, electricians, landscaping, a number of folks in restaurants and hospitality-related items," he said.

The lenders leading the charge

The nation's largest mortgage lenders don't typically offer the product, but CrossCountry Mortgage and Guild Mortgage are the largest nonbanks touting the product. A Filene survey of 108 credit unions found 76 offered the product, while other non-QM players like Angel Oak Mortgage Solutions offer the mortgage.

Local institutions will offer the product to fulfill Community Reinvestment Act obligations to minority borrowers, said Stachak. His company comes in once local lenders fulfill their CRA obligations and offers to buy closed ITIN loans and take them to the secondary market.

"A lot of times it's the smaller shops that are most successful, that have the access to the minority community, the minority real estate agents," Stachak said. "And you really only need one or two good LOs that understand the product and they will start cranking these out, and they're happy because they can do a ton and they get the referral business."

No securitizations, at the moment

ITIN loans, under the non-QM umbrella, don't go to the government-sponsored entities. A few private-label securitizations of ITIN loans may exist, experts said, although they are mainly a portfolio product.

"They're such a small percentage of the overall offering in the securitization that the rating agencies were allowing them through, which again, is a good thing for the ITIN borrower because it was allowing them better rates and LTVs," said Stachak.

The non-QM market evaporated almost overnight when COVID hit, he said, and aggregators had to turn away from the loans. Securities, however, are trickling back.

"There is still a little liquidity in the non-QM market as it is," said Stachak. "So you haven't seen the securitization at nearly the same pace as it was pre-COVID."

What about the risks?

The Mortgage Bankers Association doesn't track data for ITIN loans, and it's difficult to find delinquency statistics, experts said. However, lenders in the space who service their loans in-house say they see few incidents of late payments.

"When you go in and say zero or 0.1% (delinquency) it doesn't compute because there's no other asset class that carries such a low delinquency," said Ottaviano.

Lenders attribute the loans' stability to strong family structures, in which numerous household members typically contribute to the bills.

Sexton said his firm has never had an ITIN foreclosure, never reported a loss on a loan, and only seen a handful of past dues in his firm's large portfolio. Even when a borrower has been deported, which has occurred a few times, the situation remedied itself.

"The customer came into our office scared to death and said, 'Oh my gosh, my husband's no longer here, but I want to let you know we're going to make the bills,'" said Sexton. "Had she not come in to tell us, we would have never known."

Why should lenders explore the product

Each lender who spoke to National Mortgage News emphasized the goodwill toward borrowers who, as nonresidents, can't access the same financial resources as U.S. citizens. The borrowers view the mortgage as an opportunity rather than U.S. citizens who may see a mortgage as an entitlement, Ottaviano said.

"They look at it as a form of building wealth that is not it's not allowed in a lot of cases from whatever country that they're coming from," said Ottaviano. "There's a whole different understanding of being able to acquire a form of wealth."