Elliot Saltzman, who is the director of consumer policy and underwriting at BBVA Compass, said in a recent article (Origination News) “Someone out there is going to say they will gobble up the non-QM loans, but they need to have a standard of how to meet the ability to repay rules. It’s going to be just another product, like stated income was, and they are going to put a criteria around it and securitize it”.
Wow, is this the first step to going back to originating the low or no doc loans, or maybe sub-prime?
Non-QM loans do represent an opportunity for lenders to do more business however not without some risks. Mr. Saltzman and others discuss these risks in the article; mainly from the perspective of a lender’s failure to properly determine and document a borrower’s ability to repay the loan. Some banks are doing these loans and retaining them on their balance sheet as investment for potential securitization and sale, in a few years, based on performance. But, what if they don’t perform as expected? What happens to the bank’s balance sheet then, and who may have to bail them out (again)?
They key is to do non-QM lending with your eyes wide open. Have the systems and processes in place to carefully and accurately determine the applicant’s ability to repay (a novel concept), but also to evaluate the overall risk inherent in the product being originated. Lender’s shouldn’t layer additional risk in the quest to approve more borrowers.
Non QM loans, like low and no doc loans, have a place in the lending world. It just got out of hand. All factors need to be taken into consideration, not just income, but assets, reserves, employment type and history, credit score and history, ability to carry debt, number of people in the household, age of the security, the market in which it is located and so on. A lender must have the capability to evaluate the entire loan picture, not just a borrower’s ability to repay. Too many factors may contribute to an unwanted default. Then, it may be up to a federal judge to decide in court whether the lender, being the expert, did the proper evaluation of the borrower’s ability to repay.
Although opportunity exists in non-QM lending, it’s not without some risk. Look for the ways to mitigate that risk through thorough analysis and complete documentation and you might just come out okay. Quality and compliance are the keys. Good luck.