Surviving non-QM lenders are gaining business now

Non-QM lender Acra Lending is projecting mortgage originations will increase in 2023 to about $2.6 billion, up from $2.1 billion last year, says CEO Keith Lind, “and we’ve been profitable every month this year, and every quarter.”

Lind says Acra’s success in a punishing operating environment that has caused a number of non-QM mortgage lenders to exit the market is due to its efficiency as well as its foresight in keeping its rates on pace with the spate of interest rate hikes by the Federal Reserve

He also said two other major factors have created tailwinds for the lender. 

• The consolidation in the non-QM lending space, which has allowed Acra to expand its market share. “So, the number of non-QM originators that are exiting the space has been pretty significant,” Lind said. “Our pipeline is a lot bigger than it was at this time last year, and rates have doubled, so we’re definitely getting market share.” 

Lind points to Finance of America MortgageFirst Guarantee Mortgage Corp.Athas Capital and Sprout Mortgage, among others, as examples of non-QM lenders who have exited the market.

• The other major tailwind for the non-QM lending market has been the turmoil in the banking sector, including a spate of bank failures earlier this year; upward pressure on deposit rates, set against low-return portfolio assets, such as legacy residential mortgage-backed securities (RMBS); and increased regulatory-capital pressures.

“I think we’re seeing more business today because of what’s going on with the regional banks, the PacWests of the world, who we’re competing with for loans on a daily basis, just as an example,” Lind said. “They have tightened their belts. They’re not doing the lending that they were, and I think that is a tailwind for us. 

“We’re gaining that business. And we’re going to continue to gain market share from regional banks that are stepping out of the business.”

The uncertainty in the banking industry — sparked, in part, by the mismatch between fixed legacy RMBS portfolio earnings and rising deposit costs — and the resulting regional bank pullback from the mortgage origination market may be good for non-QM and other nonbank mortgage lenders. 

At the same time, however, that volatility and the banks’ resulting reduced role as buyers of loans and RMBS is sparking pricing woes for non-QM lenders in the secondary market. 

“It’s a double-edged sword,” Lind explained. “We’re getting more loans because of it. That’s the tailwind. 

“The headwind is we’re not getting the [loan-sale] prices that we should be getting because of the volatility from the banking crisis.”

That secondary-market pricing pressure, in turn, is compounded by the liquidity woes created for non-QM lenders due to the rising financing costs for the warehouse lines used to fund originations. Consequently, only the most efficient lenders are able to eke out modest profits in this environment, industry experts told HousingWire.

Market snapshot

The non-QM sector accounted for half of the estimated $25 billion in total nonagency RMBS issuance over the first half of 2023, according to a recent report from Deutsche Bank. That share, however, is set against the backdrop of overall nonagency originations and RMBS issuance being down considerably over the first six months of this year, compared to 2022 levels.

A recent report from Morgan Stanley shows that year to date through the end of July this year, total nonagency loan originations finished at an estimated $44 billion, down 58% from the same period last year. Similarly, RMBS issuance in the secondary market overall in the first half of 2023 was down significantly — by some 73% from the same period last year, according to the Deutsche Bank report. 

A major reason for the depressed originations and securitizations is that there are simply far fewer loans being made in the current high-rate environment, where a good share of potential housing inventory is locked in at much lower rates, industry experts explained. 

“We think non-QM [RMBS] issuance volume will remain light in H2 2023 but should still be the sector leader in issuance as other RMBS sectors are expected to be down more,” said Namit Sinha, managing director and chief investment officer at Angel Oak Capital Advisors, the investment management arm of non-QM lender Angel Oak Cos. “Rates remain the single biggest driver in loan-origination volume and hence [securitization] issuance volume. 

“It is just difficult to project, but if the Federal Reserve starts to cut rates in Q1 or Q2 2024, as futures are implying, we may see production pick up more in H2 2024.”

Capital markets experts who spoke with HousingWire pointed out that the direction of interest rates is never a sure bet, however, despite hopeful signs in the futures market.

The mortgages backing non-QM securitizations include loans for owner-occupied properties, investor-owned rentals and second-home properties that don’t qualify for sale to government agencies, such as Fannie Mae and Freddie Mac. The investor-owned property segment now accounts for about half of all non-QM originations as well as half of the loans backing non-QM securitizations, according to industry experts.

“We’re about 50%, owner-occupied bank-statement loans, and about 50% DSCR [debt-service coverage ratio] or investor [rental-property] loans,” Lind said. “That investor percentage is absolutely up from previous years. 

“There’s more [rental-property] investors definitely taking out non-QM loans.”

The other major components of the nonagency RMBS market, according to the Deutsche Bank report, include transactions backed by jumbo loans as well as reperforming and nonperforming loans; institutional single-family securitizations; credit-risk transfer deals and “other” — such as deals backed by home-equity loans. 

Market headwinds

Lind said despite the tailwinds from the consolidation in the non-QM lending world and the accompanying pull-back in the regional bank sector, a major headwind still confronting the non-QM lending sector is the “choppiness and the volatility in the capital markets.” 

He said that disruption is largely attributable to the uncertainty around interest rates, inflation as well as the concern over the fate of the huge volume of low-rate mortgage-backed securities now stranded on bank balance sheets as their cost of deposits skyrockets.

“A lot of the traditional buyers [investors] or the people that you think would be flooding into the space, they’re waiting [on the sidelines],” Lind added. “So, you still have that fear over the capital market side of what happened in the banking industry, and we’re not out of that yet. 

“And I think that’s made it a little more difficult for us on the execution side of selling our loans and getting a better premium because there is still a sense of volatility in the markets with the overhang of what’s happening to all these regional banks.”

Alan Qureshi is managing partner of Blue Water Financial Technologies, a technology-solutions provider for the secondary mortgage market offering mortgage-servicing rights (MSR) and whole-loan pricing, trading and risk-management services. He said pricing in the secondary market for loan originators is not likely to get better in the near future if the banks pull out as buyers of whole loans and mortgage-backed securities. 

Having fewer buyers also negatively affects what aggregators will pay for whole loans bound for securitization.

“If I’m substituting a bank investor who can borrow at the Fed funds rate for a private capital participant who has to borrow at [a much higher rate], they’re going to do what’s best for them, and so spreads are going to have to be wider because private capital demands more [return],” Qureshi explained. 

Alexander Suslov, head of capital markets at A&D Mortgage LLC, said whole loans in the current mortgage market, on a weighted average, are selling in the range of 102 or 103 — with par being 100.

“When mortgage originators get 102 [for a whole-loan sale] and their cost to originate is around 102 as well, those who have less efficient production … they tend to [exit] the market, while those who can get as efficient as possible survive and thus acquire larger market share,” he said. 

Ben Hunsaker, a portfolio manager focused on securitized credit for Beach Point Capital Management, said the challenge now is that if a lender is selling loans to the secondary market, “at 103 servicing released, that’s an incremental profit margin versus your cost structure, but it is not what it was in 2021 or Q1 2022 … when prices were at 107, 108 or 109.”

“But it’s [103 is] enough to keep the lights on if your cost structure is reasonable,” Hunsaker stressed. 

Hunsaker added, however, that he doesn’t think there is a shortage of buyers on the RMBS side of the market now, but he sees it being more a problem of supply. 

“I don’t think there’s a lot [of RMBS investors] waiting in the wings,” he said. “You’ve seen more of the non-QM originators selling into insurance companies, or via alternative channels, so the securitization pull-through rate is down, even though bond buyers would like to see more of this coming to market. 

“I think bond buyers have gotten excited to add the risk, but there just aren’t enough deals lining up to fill that demand.”

Lind said insurance companies, who work with unleveraged funds, have become much more active in the non-QM whole loan market, adding that “those loans don’t get securitized.” Still, if leveraged investors are paying in the 103 range, insurers don’t have an incentive to pay much more for mortgage loans, given they can now make 5% or more by just keeping money in nearly risk-free money market accounts, several industry experts point out. 

Lind said rates for non-QM loans tend to run about 1.5 points above prevailing 30-year mortgage rates — putting them in the 8.5% range today.

“It’s a tougher market for lenders today because of the tougher market [higher interest rates] for investors to finance the loans,” said Ryan Craft, founder and CEO of Saluda Grade, a real estate advisory and asset-management firm specializing in alternative lending products in the nonbank sector. “Investors can only pay a premium to a certain degree for loan and debt volume based off of their financing.

“So, you’re seeing insurance companies and other types of real money buyers step inside of where levered, or financed, purchasers are buying today.”

Michael Warden, senior managing director and CEO of Invictus Capital Partners, one of the largest players in the non-QM securitization space, is quite bullish on the future of private capital in the mortgage market. He said of the estimated $14 trillion in outstanding mortgage volume, about 75% is in the agency space, while historically some 20% resides on bank balance sheets, with private capital accounting for the balance. 

“What we’ve seen is that the bank balance sheet is shrinking as their lending standards have tightened, and there’s no debate about that,” Warden said. “They’ve now discovered that a 30-year asset [a mortgage] funded with daily deposits may not be a great idea.

“The bank participation is shrinking, and private capital is the beneficiary [and] I think the biggest sea change that’s going to occur over the next several years is private capital becoming a standard in the U.S. residential mortgage market. For those that are prepared for it and have the infrastructure, they’ll be the biggest beneficiaries.”