Looking out for new opportunities in the wake of reduced reverse mortgage volume can lead lenders into spaces that are not often considered. While some companies are expanding their operations into forward lending, others are taking that expansion attitude one step further by dipping their proverbial toes into the waters of non-qualified mortgage (non-QM) lending.
The qualified mortgage (QM) rule was adopted by the Consumer Financial Protection Bureau in 2014, which required lenders to offer loans with stricter guidelines and more stable features to try and help borrowers avoid getting into mortgage arrangements they may not be able to afford.
The four principles of a QM loan center on an ability to repay that is verified by reviewing income and employment status along with credit history, restrictions on loan features that may be risky, limitations on how much of your income can go toward a mortgage payment, and caps on fees that can increase borrowing costs.
Non-QM mortgages are loans that do not meet the standards of a qualified mortgage. While this may conjure images of the subprime loans that helped lead to the 2008 financial crisis, data from the Urban Institute suggests that the quality of non-QM loans themselves are generally high.
“These loans are often made to highly creditworthy borrowers who cannot qualify for agency-backed loans because they do not meet agency documentation requirements, are self-employed, have nontraditional incomes, or for other reasons,” an August 2018 Urban report reads.
Expansion into non-QM from both former and existing reverse mortgage practitioners naturally leads to a question concerning why a crossover between the two is taking place. For some, it’s a matter of taking advantage of established skills first learned in reverse lending, while for others it comes down to a desire not to let potential business escape because of preconceived notions.
The skill sets shared among reverse and non-QM lending
When he moved out of the reverse mortgage business in his day-to-day operations, Sprout Mortgage Vice President Kenneth Peskin found himself with a set of skills he’d been cultivating in the reverse space that he didn’t want to give up when transitioning into forward mortgage lending.
“The challenge for [reverse mortgage] people when moving into [forward mortgages] are trying to transition by moving from a unique craft into this highly-commoditized product, forward mortgages. Fannie, Freddie, FHA, all that,” Peskin told RMD in an interview. “That is, in many cases, what so many of these reverse lenders, including myself, were trying to avoid: just to be a commoditized product that really offered no unique value to your customer. Now, all of a sudden, they’re trying to shift a culture, or a salesperson or a company [into the forward space].”
While Peskin admits that moving that culture into the forward space is possible, he sees the non-QM space as a more viable solution for originators with well-developed consultative skill sets that were honed while operating in the reverse mortgage space: where much of the work in the reverse mortgage business is focused on communicating education, culture and uniqueness, Peskin has identified those same concerns when working with potential borrowers in the non-QM space.
“That’s where I think that something like what we offer in the non-QM market is a solution. Because, I think that [a loan officer moving into forward] doesn’t necessarily want to change who [they] are, but [instead] want to expand on what they represent,” Peskin says.
For those making the transition into the forward mortgage space, they shouldn’t necessarily try to brand themselves as part of a “me-too” business, Peskin says. Moving into non-QM lending will allow loan officers not only to maintain the skills they developed while originating reverse, but to also expand on them into a channel that will ultimately make for an easier transition.
“If you were going to focus on the non-QM space, that is more along the lines of a consultative measure, it’s a lot more solutions-oriented and very consistent with a reverse mortgage culture or process,” Peskin says. “The reality is that most of our customers, from an underwriting perspective, are very similar to [those in] a reverse mortgage situation to the extent that the underwriting for the lender is effectively outsourced. So, there’s a lot of dovetailing going on there, I think. Those are the things I think to allow that transition to be very manageable.”
Reverse companies expanding into non-QM
Beyond the crossover in skills observed by Peskin, other companies with a notable presence in the reverse mortgage space have publicly stated their intentions to expand into non-QM offerings as a part of their ongoing business strategies. RMD has previously covered two companies who have made explicit statements to that effect, including HighTechLending and Nationwide Equities.
“[Our] philosophy is that no loan hits the basket,” says Nationwide Equities president Glenn Wallace in an interview with RMD. “So, a lot of loans, for whatever reason, can’t go the conventional route, but it needs to find a home.”
While some may see the full phrase of “non-qualified mortgage” as synonymous with aforementioned subprime mortgages, Wallace makes clear that the nature of modern non-QM products have more stringent requirements in place that, to him, make the comparison an invalid one.
“While non-QM does give alternatives to income verification and down payments, etc., it’s not subprime. People need to understand that,” Wallace says. “And, they’re not slam dunk deals. Non-QM investors make sure you’ve got all your bases covered. So, they don’t go through as quickly as you would think.”
Wallace acknowledges that hearing about non-QM loans might conjure images of subprime mortgages in the minds of some, but the rules and guidelines in place for modern non-QM loans involves a lot of work to find buyers of the loans that fulfill the requirements that investors can have for them.
“You not only need to have investors, but you need to have warehouse lines that believe in you to be able to fund that product, because if you can’t sell it [then] you’re stuck with it,” Wallace says. “There’s a big risk on the non-QM side. These loans are not small. So, [it goes back to our philosophy to] walk before you run.”
Wallace says that while Nationwide has only been conducting non-QM business for roughly six months, there’s always the potential to offer them on a wholesale basis. Before that can happen, however, the company is focused on doing the ones conducted on a retail basis well before they think of expanding into wholesale non-QM offerings.
“Our goal is not to necessarily do that on a wholesale basis right now until we really, really have it down pat,” Wallace says.
