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According to one all-in Non-QM lender, the sector is expected to see a leap into near double digits in 2022, growing from 5% to 10%. This is already on top of the staggering figure of $18.9 billion that this segment pulled in during 2020. When you survey the landscape it’s easy to see why opportunity is ripe.
Generally speaking, we know purchase markets, rising rates and prices, as well as low inventories make it hard for to capture market share. Compound that with the buffet of refis the industry ingested last year and the pickins’ get even more slim. The GSEs have also tightened up their risk appetite for what they’re willing to take in.
Then there are borrower trends making Non-QM more attractive. To begin, the number of ‘gig’ or independent freelance workers is expected to grow to 54% over the next 5 years. Self-employed borrowers, ideal candidates for Non-QM products, are also rising in spite of the many shops that we know were forced to close (for some temporarily) at the onset of the pandemic. Between 2019 and 2020, there was a 24% reported increase in start-up business applications, growing the pool of this profile of borrowers.
“As opportunity for Non-QM products expands, so must a lender’s focus on quality.”
Non-QM also helps the industry on its quest to support more underserved borrowers who have more weak or unique credit profiles. With growing pressures from the CFPB, banks in particular, need to find ways to support and reinvest in their communities. Non-QM could be part of the answer.
As opportunity for these products expands, so must a lender’s focus on quality.
Purchase originations being far more complex than your standard refi, coupled with the fact we’ll be seeing more of them in 2022 slow down an already lengthy process. Add on the complexities of the non-QM loan and the underwriter’s eye must be even more critical. As a result, the amount of loans they can turn in day can drop to as few as two. To infuse more confidence and speed into in the underwriting process, the comparison of data across system and documents should be fully automated. Technology that acts like a digital assistant can process critical borrower documents and data at the time of receipt with upwards of 95% accuracy and feed those results immediately to underwriting teams. Confidence scoring can even be deployed to notify users that the system’s automated results have fallen below a customizable threshold, thus creating an efficient “manage by exception” workflow.
Furthermore, amping up pre-closing and discretionary reviews based on certain loan profiles, branches, newer production staff, etc. is a great way to minimize eligibility defects and address recurring issues sooner. The automation of audit tasks, including the verification and validation of data used within them, can help make this process less cumbersome and more accurate. Adding reverifications upfront in the production process will also help mitigate risk.
As originators seek to sell their loans on the secondary market, aggregators looking to invest will be heavily focused on conducting pre-funding reviews. Automated rules-based audit platforms and service providers who use them, offer tight-knit integrations with fraud detection and verification vendors to make it easy to identify red flags on a given loan prior to purchase. Given the importance of a speedy acquisition for both counterparties, real-time, robust reporting helps identify issues more quickly further reducing risk for investors.
If you’re looking to increase your Non-QM volume in the year ahead, and want some support in improving the quality and salability of these loans, reach out to LoanLogics.
