An Untapped Market

The non-Qualified Mortgage market remains a niche market. Lenders and investors are gradually increasing their appetite for these loans, but a fully functioning secondary market has yet to take off.

 

Mortgage Banking

May 2016

 

By Robert Stowe England

 

More than two years after federal regulators published a final definition of what constitutes a Qualified Mortgage (QM), lenders have shown very little appetite for anything that falls outside the QM standard.

 

Based on origination volumes, the $54 billion non-agency, non-QM market represented only a 3 percent niche in last year’s $1.735 trillion in originations, according to Inside Mortgage Finance, Bethesda, Maryland. Non-QM Lending was lower at $47 billion in 2014.

 

Market observers expect modestly higher non-QM origination volumes this year. “I think it’s inevitable it will grow in 2016,” says Guy Cecala, chief executive officer and publisher of Inside Mortgage Finance. “Given the fact the overall mortgage market will be flat or shrinking this year and non-QM is poised to continue growing, that’s good news,” Cecala says. “It’s just not a rapid pace of growth.”

 

Portfolio lenders such as banks, thrifts and credit unions are exceedingly cautious about non-agency, non-QM lending.

 

According to data from the Washington, D.C.-based Urban Institute’s Housing Finance Policy Center, the share of non-agency, non-QM portfolio lending--as measured by borrower total debt-to-income (DTI) ratios above 43 percent--has been cut in half since the advent of QM. Such lending stood at 10.3 percent of overall lending by portfolio lenders in January 2014, when the QM definition was finalized, but then fell to 4.2 percent of overall lending by August 2015.

 

The weak and underdeveloped non-QM segment of the market keeps the mortgage market from meeting the needs of borrowers, according to Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute. “A lot of borrowers are being squeezed out of the market. Clearly, there’s a need for more non-QM lending,” she says.

 

Left-out borrowers

 

Goodman identifies borrowers with lower FICO® scores as one segment of the population being left out of the current mortgage market that could be served by an expanded non-QM market. This includes borrowers unable to access the Federal Housing Administration’s (FHA’s) expanded credit box by lenders who have imposed overlays that require higher FICO scores and higher down payments than FHA rules actually allow.

 

According to San Jose, California-based FICO, 45.2 percent of the U.S. population it tracks had a credit score below 700 in 2015. Those with FICO scores below 650 accounted for 32.2 percent of that population; those below 600 totaled 21.9 percent.

 

Taken together, that represents a large segment of the population. To the extent borrowers with lower credit scores are squeezed out of the credit box, it creates potential demand for non–QM lending.

 

Some of those with low FICOs are among the estimated 5 million who went through foreclosure since the housing market crashed but who otherwise have no credit dings on their records. Add to that group people who have done short sales or gone through bankruptcy and are on the mend, but cannot qualify for a QM mortgage.

 

The self-employed represent another large population of borrowers who find it difficult, and sometimes impossible, to get a mortgage. Part of this is because their incomes may be variable and standard underwriting practices require income verified by two years of income-tax returns, which often fail to reflect the ability of self-employed households to afford a given level of mortgage debt.

 

There are 14.6 million self-employed people in the United States economy. That’s 10 percent of the economy’s 146 million workers, according to the Washington, D.C.-based Pew Center’s tabulation of data from the Current Population Survey (CPS) from the U.S. Census Bureau, using the most recently available data set (2014). It is difficult to calculate precisely the share of the self-employed population with a good credit history and sufficient income that is unable to obtain a mortgage.

 

When people talk about the non-QM market, they generally mean the non-agency, non-QM market. Unlike agency loans, these loans are owned by the private sector either as portfolio loans held by banks, thrifts and credit unions or by investors who hold whole loans or invest in mortgage-backed securities (MBS) issued against a pool of non-QM mortgages.

 

The non-QM category can also include prime-credit jumbo mortgages that violate the terms of the QM rule, such as interest-only (IO) mortgages. Most of the large portfolio lenders offer jumbo IOs.

 

Higher interest rates that borrowers have to pay for the non-QM loans that are available could be holding back their market potential, according to Jeff Bode, president of Mid America Mortgage Inc., a mortgage banker based in Addison, Texas. Bode’s company sells into the secondary market any non-QM loans the company originates.

 

“We thought it would be bigger than it is,” but the non-QM market has just not blossomed,” Bode says.

 

For hedge fund investors, the attraction is the higher yield. But that also translates into a higher rate for borrowers--“typically 2 [percent] to 4 percent higher” than agency mortgages, Bode says.

 

“For the independent mortgage banker, I think it’s going to be a very limited product--it’s just not a competitive rate,” he adds.

 

Non-QM mortgages at higher rates, however, sometimes make sense for borrowers unable to qualify for funding elsewhere because of single dings to otherwise good credit. These borrowers are likely to take out non-QM loans until they can later qualify for an agency refinancing at lower rates, Bode says.

 

Bank of America

 

Most of the largest mortgage lenders offer at least some non-QM lending, often made to affluent existing clients of the bank who have expressed interest in such loans. Bank of America Home Loans, Calabasas, California, falls in this category.

 

“In general, the vast majority of lending that Bank of America does is in QM,” says Providence, Rhode Island-based Peggy Lawler, first mortgage product executive for Bank of America Home Loans.

 

“We understand and agree with the points that the Qualified Mortgage regulation have made. And that is that we should make sure that the customer cannot only purchase a home, but can remain in a home,” Lawler says. “Sustainable homeownership is certainly our mortgage strategy, and we think QM works for that.”

 

In the non-QM niche, Bank of America offers an interest-only mortgage for its affluent customers and holds these loans in its portfolio. Bank of America qualifies the IO borrower on a 43 percent DTI, a key requirement for a QM mortgage. “These customers can well afford to make the full payment, but they choose to pay interest only,” Lawler says.

 

Some of the bank’s affluent borrowers prefer the cash-flow flexibility of an interest-only payment, perhaps because in some cases their income varies from month to month, Lawler explains. Such borrowers may decide to make an extra principal payment when they receive a bonus check.

 

Bank of America also does an asset-dissipation jumbo mortgage for affluent clients who do not have a particularly high income but have a lot of assets, according to Lawler. The bank qualifies these borrowers with a 43 percent DTI requirement, recognizing that some of the income comes from investable assets that the borrowers gradually deplete to make the mortgage payment. “That would be a non-QM loan,” Lawler says.

 

These niche jumbo products are part of a broader strategy at Bank of America “to make sure we are meeting our own customers’ needs,” Lawler says. “These are not mass-market products.’”

 

American Financial Network

 

Mortgage bankers that offer borrowers a wide array of non-QM products may be best positioned to gauge the level of interest in such products. For example, American Financial Network, Inc., a mortgage banker based in Brea, California, with 113 branches around the nation, sees a pick-up in the origination of non-QM mortgages but finds the pace of such originations still quite modest.

 

“True non-QM, non-prime loans are coming back. I’ve started to see them for a couple of years but I haven’t seen much traction from the investors,” says Jonathan Gwin, chief executive officer at American Financial.

 

“The true non-QM deals, the bank statement deals, the stated-income deals, I’m seeing them again,” Gwin says.

 

American Financial originated $3 billion last year and expects to do a similar volume this year. “We are correspondent lenders with the major banks and with investors,” explains Gwin.

 

American Financial Network originates roughly 1,000 loans a month, and only about four out of those would be non-prime, non-QM loans, according to Gwin. The total category of non-QM loans, dominated mostly by prime loans, represents about 7 percent of the lender’s monthly volume.

 

The ability to ramp up non-QM lending volumes will depend in part on the degree of demand from private-sector investors. “In terms of what I’ve seen, there’s only a handful of [investment fund] players,” Gwin says.

 

American Financial, which originates loans in its own name, services 20 percent to 25 percent of the loans it originates. It sells off 75 percent of its volume to other lenders, such as PennyMac, West Lake Village, California; Chase Home Finance, Edison, New Jersey; Wells Fargo Home Mortgage Inc., Des Moines, Iowa; Pacific Union Financial LLC, Irving, Texas; and Caliber Home Loans, Inc., Irving, Texas, among others.

 

Demand is weak in part because borrowers are hesitant to seek out non-QM mortgages because they come with higher rates--typically 5 percent to 7 percent, according to Gwin.

 

“Because of low mortgage rates today and because everybody thinks they are entitled to a 3 percent-something loan, I don’t see everyone jumping at the opportunity,” he says.

 

Gwin offers a hypothetical example of a prime credit borrower who would like an interest-only jumbo loan, but who has a DTI higher than 45 percent. That borrower could probably get a mortgage from a credit union for 3.5 percent, he says. “Or you could take it to a [hedge fund] lender and get rates for an interest-only mortgage at 6.25 percent. Which are people going to choose?,” Gwin asks. The lower rate, of course, he adds.

 

Borrowers who cannot find a mortgage anywhere else and hope to refinance down the road are applying for the investor-funded, non-QM mortgages, Gwin says, echoing what Mid America’s Bode has said about the market.

 

Even so, prospective borrowers who are unable to qualify for a QM mortgage may choose to wait until they can qualify, instead of financing today, according to Gwin. “So I don’t anticipate non-QM taking over the space unless agency rates tick up into the 4 [percent] or 5 percent range. At that point, 6 [percent] and 7 percent may sound amenable to those borrowers,” says Gwin.

 

Educating consumers

 

One of the reasons that non-QM is not taking off, in spite of growing investor interest, is that consumers are largely unaware that such products exist, according to Jeff Schaefer, executive vice president for national sales at Verus Mortgage Capital, Washington, D.C., a correspondent investor affiliated with Invictus Capital Partners, Washington, D.C.

 

“There’s this significant education that needs to take place in the mortgage space: the consumers, the Realtors®, the builders and referral services who don’t know these products are readily available in the marketplace,” says Schaefer.

 

Verus Mortgage Capital got into the mortgage lending business in the third quarter of 2015, offering mortgages to nonprime borrowers with mostly single dings to their credit, as well as to self-employed borrowers.

 

Invictus Capital Partners researched the potential for the non-QM market and came up with an estimate that the availability of the right loan products could generate $150 billion to $250 billion annually in non-QM originations for home purchases.

 

“We believe there’s an opportunity in this space that could last anywhere from seven to 10 years,” Schaeffer says.

 

Verus Mortgage’s Credit Ascent mortgage product, for example, is designed for what it calls “near-miss” prime and jumbo borrowers--those with single dings in their credit history. Under this program, Verus will buy loans with up to an 85 percent loan to value ratio (LTV). It will accept debt-to-income ratios up to 50 percent with compensating factors, and FICO scores down to 500. All its loan products are underwritten to be compliant with the ability-to-repay rule.

 

Verus Mortgage’s Self-Employed Solutions mortgage product is underwritten for income demonstrated through cash flows that can be verified with 24 months of bank statements. Loans can be for amounts up to 85 percent of the value of the home, with FICO scores down to 600, and debt-to-income ratios up to 43 percent. This, too, is compliant with the ability-to-repay rule.

 

Verus works with correspondents to buy loans that meet the specifications it has for a line of mortgage products aimed at non-QM borrowers. “The loans are underwritten by the correspondent seller and Verus performs a pre-purchase review,” explains Schaefer.

 

Verus Mortgage holds the loans it purchases in portfolio for now. “At some point we plant top optimize our financing through securitization while maintaining a first loss piece.”

 

Non-QM securitization

 

Investors have filled the void in the non-QM market left by the absence of traditional government and agency lenders, as well as portfolio lenders. They entered this market even before the final QM rule and continue to participate in the market in search of higher yields at a time of widespread low interest rates.

 

Non-QM lenders operate under a variety of business models that partner investment management funds and hedge funds on the one hand with mortgage loan acquirers on the other, who may originate or purchase the loans.

 

Angel Oak Capital Advisors LLC, Atlanta, a $6 billion investment management firm, has spent five years evolving its own non-QM mortgage business model with two affiliated mortgage companies. One is Angel Oak Mortgage Solutions, a wholesale non-prime lender that originates and services mortgages. The other is Angel Oak Home Loans, a retail mortgage banker specializing in non-QM loans. Both affiliates are based in Atlanta.

 

Investing in non-prime mortgages got off to a slow start because potential investors were wary of the term non-Qualified Mortgage. “It’s an unfortunate name,” says John Hsu, head of capital markets at Angel Oak. “People were shocked. ‘Why would you even consider doing this? This is illegal. If we invest in this, we’re going to jail,’” he recalls hearing people say.

 

Angel Oak was attracted to the non-QM market because it saw an opportunity for higher returns in providing funding for a large segment of the population not being served by mortgage lenders that were almost entirely doing business inside the QM box, according to Hsu.

 

Angel Oak Mortgage Solutions, launched in 2013, originates most of the loans for Angel Oak. “We underwrite them. We are making the credit decisions. Investors buy them,” explains Tom Hutchens, senior vice president of sales and marketing at Angel Oak Mortgage Solutions.

 

Interest rates for Angel Oak’s non-QM mortgages are risk-based, explains Hutchens, and range from 6 percent to 7 percent. “What’s interesting is that it’s not necessarily borrowers that have a problem with the risk-based pricing. The challenge is getting originators,” Hutchens says. “All they’ve had since the crash is agency and government loans. Those rates have been at all-time lows.”

 

Most of the loans underwritten by Angel Oak Mortgage Solutions have had at least a 20 percent down payment, with the average at 25 percent, according to Hutchens. Angel Oak requires a debt-to-income ratio of 43 percent or less and the average for its borrowers is 35 percent, says Hutchens.

 

For self-employed borrowers, Angel Oak underwrites the loan for income based on 24 months of bank statements.

 

Most of the Angel Oak borrowers are non-prime borrowers primarily because of a single credit event--a foreclosure, bankruptcy, short sale, job loss or medical event, according to Hutchens. Angel Oak fully documents the ability of borrowers to repay the loan.

 

In December 2015, Angel Oak Capital successfully issued $135.3 million in non-prime residential mortgage-backed securities (RMBS), which Hsu calls the largest non-QM securitization of new loans since the RMBS market crashed in 2007.

 

Angel Oak Mortgage Trust 2015-1 holds $150.4 million in non-prime loans and is an unrated private deal that was placed with investors by Nomura Holdings Inc., New York. The average FICO score of the borrowers in the deal is 683, according to the description of the deal provided to investors. Select Portfolio Servicing Inc., Salt Lake City, services the loans in the deal.

 

Angel Oak Capital reported in a public statement that the securitization deal was oversubscribed, “indicating very strong investor demand into a re-emerging market.” The investment fund sees its first securitization as just the beginning with more to come.

 

While Angel Oak Capital did the largest non-QM securitization deal of new loans since the crash, the title of first non-QM securitization deal apparently should go to the private-equity firm Lone Star Funds, Dallas. The private-equity firm, which has $45 billion in assets, was founded in 1995 by billionaire investor John Grayken.

 

In August 2015, Lone Star’s Colt Funding did a $72.11 million bond offering backed by 219 non agency and non-QM loans made during 2014 and 2015 for home purchases and originated by Irving, Texas-based Caliber Home Loans Inc., according to someone familiar with the deal. Half the loans were Qualified Mortgagew and the rest were Non-QM. All the loans were qualified under the ability-to-repay rule, That lender is owned by Lone Star Funds. (The ownership of Caliber Loans is not confidential, so it does not have to be attributed –re) Credit Suisse, New York, was the lead manager for the deal, according to the source familiar with the deal.

 

The name of privately-placed transaction is COLT 2015-A.[Janet, I already identified it as the first non-QM earlier, so this is repetitive. –re] The weighted average coupon was 7.39 percent, according to Inside Nonconforming Markets.

 

Lone Star sold COLT 2015-A senior tranches representing 85 percent of the deal to investors and retained the subordinate first loss tranches, roughly 15 percent of the deal, according to someone familiar with the transaction.

 

The average principal balance in COLT 2015-A was $329,000, the average FICO score was 688 and the average LTV was 67 percent, according to someone familiar with the deal.

 

In November 2015 Lone Star’s Colt Funding completed a second larger transaction called COLT 2015-1. This $105.6 million securitization of 275 non-agency and non-QM loans was backed by a pool of loans originated by Caliber Home Loans for home purchases, with 53 percent of which are Qualified Mortgages and 47 percent at non-QM loans, according to someone familiar with the deal. All were in compliance with the ability-to-repay rule.

 

The average loan balance for the COLT 2015-1 transaction was $384,000, the average FICO score was 697, and the average LTV was 76 percent, according to someone familiar with the deal.

 

As with it earlier deal, Lone Star sold senior tranches representing 85 percent of COLT 2015-1 to investors and retained the subordinate first loss tranches, again roughly 15 percent of the deal, according to someone familiar with the transaction.

 

 

Puzzled regulators

 

Regulators have for years expressed disappointment with the unwillingness of banks, thrifts, community banks and credit unions to do any significant volume of non-QM lending.

 

In May 2013, for example, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray told a gathering of credit unions they “have little to fear” if they write non-QM loans, as long as the loans  are supported by strong underwriting.

 

In March 2013, Comptroller of the Currency Thomas Curry told community bankers that if they have assets less than $10 billion, they will not be facing the CFPB when those non-QM loans come up in a bank examination. Instead, banking agencies will be “applying the law on the ground” for smaller community banks, he said.

 

To emphasize the point, Curry added that banking regulators “don’t want to see our institutions not make non-QM loans--we were pretty clear that we did not see that as being a safety-and-soundness issue for those institutions.”

 

Speaking at the March 2014 Annual Directors & Presidents Conference sponsored by community bank consultant FinPro Inc., Gladstone, New Jersey, Robert Tillman, an assistant vice president at the Federal Reserve Bank of Philadelphia, told the gathering that “we would love for you to figure out how to play in that space,” referring to non-QM loans.

 

In February 2016, Cordray tried to find ways to soothe worries by credit unions about non-QM lending. “Some said no one would make non-QM loans because the risk of litigation was too great,” he stated. “But now, more than two years later, so far as we can tell, not a single case has been brought against a mortgage lender for making a non-QM loan,” he added.

 

The reassurance over the absence of litigation may, however, be misplaced because the lending cycle has yet to experience a downturn since the introduction of the ability-to-repay rule and QM standards to test the performance of non-QM lending.

 

Fear of the unknown

 

So why are so many lenders holding back from non-QM?

 

“The bottom line is that in addition to retaining risk on the lender’s books and tying up liquidity, and posing potential salability concerns, from our perspective, non-QM loans really come with a certain amount of unknown potential liability,” says James Brody, founding and managing member of the American Mortgage Law Group PC, Novato, California.

 

Without more specific guidance, the development of the non-QM market will rely on those who are willing to take up the risk because they see sufficient rewards to justify it, according to Brody. Meanwhile, most all other lenders will hold back.

 

The lack of non-QM regulation has turned out to be an impediment to non-QM lending, according to Brody. “We don’t have a clear set of rules around them and we don’t know the extent of what the risks and repercussions are going to be with doing them,” he says.

 

“I think right now it’s somewhat of an intangible risk that can’t be quantified. It’s that fear-of-the-unknown risk and the liabilities that keep many of the lenders and investors away from it,” Brody says.

 

A Fannie Mae survey of lenders found that 80 percent said they would not pursue non-QM loans or would prefer to “wait and see” before they did, according to commentary posted in August 2014 by Li-Ning Huang, senior manager, economic & strategic research at the agency.

 

The Fannie Mae survey also found that larger lenders were more likely than smaller and medium-sized lenders to report that they plan to actively pursue non-QM loans, according to Huang. The vast majority--84 percent--said they expect that 90 percent of their lending would likely be QM-compliant.

 

“It’s not that lenders are opposed to non-QM, but that they want to know the rules of the game before they go ahead and play it,” says Brody. “With time, we’ll see the fear of the unknown fade away and these types of loans become more common.”

 

As non-QM lending volume grows, the industry’s best standards and practices will emerge, gradually creating comfort for lenders to enter the market, according to Brody.

 

Non-QM risks

 

Brody sees two categories of risk: operational risk and litigation risk.

 

As for operational risk, originating and servicing non-QM loans will require different policies and procedures, Brody says. A lender needs to have a clear policy for what types of non-QM loans they are going to originate, what the program criteria will be and then translate those criteria into a set of procedures.

 

Once non-QM loans are being originated, lenders should “make sure they have a clear audit trail behind them as to how the program requirements were met, including supporting documentation,” Brody says.

 

Probably the No. 1 legal risk surrounding the non-QMs is making sure the lender is compliant with the CFPB’s ability-to-repay rule, according to Brody.

 

“The Qualified Mortgage is going to be presumed to meet the ability-to-repay rule and the non-QM isn’t. But the non-QM loan is still subject to that same ability-to-repay rule,” Brody explains.

 

The decision on how a lender goes about determining if a borrower has the ability to repay is going to end up being “somewhat of a subjective one,” says Brody. “That goes especially for non-QM loans, where you might be looking at alternative collateral or capacity that wouldn’t qualify for consideration under a QM loan,” he adds.

 

To mitigate litigation risk around the ability-to-repay rule, lenders should lay out clear criteria for their non-QM loan products and the processing of the loans, then follow the criteria in every detail and, finally, document what is being done every step of the way. “They need to make sure they do all the work upfront to populate really a perfect package that’s going to help them down the road,” says Brody.

 

Greater clarity around what is or is not allowable in non-QM lending may not come until there is an enforcement action from the CFPB or private litigation, according to Shayna Arrington, an attorney at American Mortgage Law Group.

 

For better or worse, “many of the bright-line rules and guidance for mortgages have to come through consent orders,” says Arrington.

 

Non-QM automated underwriting

 

In the end, it may be up to the mortgage industry itself to develop the bright lines and standards for non-QM lending by agreeing on a common set of underwriting guidelines, according to David Kittle, CMB, vice chairman of the Mortgage Collaborative and former chairman  of the Mortgage Bankers Association. The Mortgage Collaborative, which is headquartered in San Diego, also has an operational office in Twinsburg, Ohio.

 

In fact, Kittle adds, a very important project is underway to do just that--design a non-QM underwriting platform. That project has been undertaken by ADFITECH Inc., an Edmond, Oklahoma, company that is an industry leader in pre-funding reviews for authenticity, post-closing delivery, post-closing audits and servicing quality controls.

 

ADFITECH’s approach incorporates a common set of standards for automated writing.

 

“All of us all want to have a system where we just push a button and it works, and it’s an investor-friendly, lender-friendly and regulator-friendly environment. But the system we envision is built around more of coming up with a way to reinvigorate the non-QM market by doing it the right way,” says Jay Lustig, chairman and chief executive officer of ADFITECH.

 

ADFITECH’s system is designed to create the right private-sector regulatory role that Washington failed to establish in its regulatory response to the financial crisis. A key failure in Washington was to create a new government regulatory environment that “placed a lot of undue burden on the end-investors,” Lustig says.

 

Under the current government regulatory regime, in the event there is some irregularity in the origination process for non-QM loans, there is a common view in the mortgage industry that the liability burden would fall on the end-investors, Lustig explains. And, importantly, there are no regulatory safe harbors, he adds.

 

“This puts the burden of due diligence on the investors who want to fund non-QM loans. That’s probably the thing that’s keeping away would-be participants in the market,” he says.

 

“In many ways we’re trying to become a non-governmental agency regulator of non-QM lending,” Lustig says. In taking on the role, ADFITECH has put together key technology components of what the new non-QM market should look like.

 

ADFITECH’s new technology system will be operated by a new company called the Verified Lending Network. The system would not only allow for industry standard underwriting but also create a platform for an exchange to trade whole loans among members of the exchange. The traders on the Verified Lending Network platform would be members of an exchange, an idea that is  based in part on the stock exchange model where only exchange members can trade on the  stock exchange.

 

In its initial stages the system would be a mix of automated and manual underwriting, “as we find the right mix of what borrowers need versus what investors are willing to buy,” says Lustig. “But, as we figure that out, time will be spent automating the process. We will probably partner with a company that already has a pricing engine and teach it our requirements,” he explains.

 

“What we are doing is bringing conformity to the Non-QM market, or creating conforming non-QM,” says Lustig. “Who say's Fannie, Freddie, VA, and FHA can be the only conforming products?”

 

“For these loans to be liquid and ‘tradeable,’ they all have to be built to the same set of plans and a non-biased third party has to validate that the originators followed the rules,” according to Lustig.

 

One fundamental difference for the Verified Lending Network is that it is designed from the ground up to provide transparency for each and every loan in a given portfolio of loans. This would give investors the ability to see the documents behind every loan and analyze the loans, sorting them by interest rates, geography, maturity, coupon rates and other categories.

 

“To us, that’s the key. It’s transparency and it’s accuracy in the documentation,” says Lustig.

 

ADFITECH would verify every loan in the system for authenticity to ferret out problems and fraud. This is very different from the past, when securitizations went ahead with reviews of only a sample of loans but never more than 15 percent, Lustig says.

 

Investors would be able to look at the appraisals or bring up a photograph of the house behind each loan and see its location, just as homebuyers can do today on the Zillow website, according to Lustig.

 

With the increased level of detail and documentation that both sellers and buyers of loans can review, it will lead to better price discovery, Lustig says.

 

The technology for the underwriting system and the trading platform have now been developed, and ADFITECH will over the next 90 days begin recruiting investors “who want to dip a toe back into the non-QM market,” says Lustig.

 

The Verified Lending Network will bring liquidity into the market, which would make it easier for warehouse lenders to be comfortable with funding non-QM originators, according to Lustig.

 

ADFITECH is talking with a wide variety of non-bank investors, including hedge funds, private-equity funds and pension plans. “We’re giving them some options about how to get involved,” Lustig says.

 

The Verified Lending Network’s underwriting will be compatible with Fannie Mae’s Desktop Underwriter® (DU) and Freddie Mac’s Loan Prospector® (LP) systems. Indeed, loans will be run through a variety of filters, including DU and LP, before they are evaluated on the Verified Lending Network’s underwriting system, according to Lustig.

 

Loans will require a 20 percent down payment, which Lustig feels is necessary to bring confidence to the non-QM market. It will also allow for qualifying self-employed people by using 24 months of bank statements, already a key feature of the existing non-QM market.

 

Loans will be thoroughly documented for ability-to-repay compliance, and sellers and buyers will be able to see the documents.

 

ADFITECH also wants to make its system open to government regulators. “We welcome government scrutiny. We believe we’re going to do it the right way,” says Lustig.

 

In the end, Lustig hopes its new system of verified loans, standard underwriting and a trading platform will be able to bring back the non-QM market. “If we don’t do it, it won’t be from a lack of trying,” Lustig says.  MB

 

 

bio: Robert Stowe England is a freelance writer based in Milton, Delaware, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Coptyright © 2016 Mortgage Banking Magazine

Reprinted with permission

 

 

 

Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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