With the gig economy booming, these unconventional loans are gaining popularity
With interest rates rising and mortgage applications falling to 22-year lows, mortgage lenders have seen refi volume all but dry up. The boom that made 2021 a banner year for many has officially ended, leaving lenders grasping for other avenues to make up for lost revenue.
Are non-QMs part of the answer?
Certainly, the growth of the gig economy has given rise to a significant number of workers whose non-traditional income streams present real issues when applying for a home loan. According to Pew Research, this contingent represents about 16 million self-employed Americans – that’s a lot of potential for the non-QM market and lenders are definitely taking note.
While the share of non-QM volume fell to 2% of the total market during the pandemic (a result of the fact that some banks were no longer processing them), this number has recently doubled with non-QM loans comprising 4% of the mortgage market so far in 2022, according to recent CoreLogic data.
The debate rages as to how much of the total market non-QMs could really seize, with some analysts capping its potential at 5% while others claim 10% is not beyond the realm of possibility.
In a rising rate environment, this begs these questions: Can lenders turn to non-QMs to make up for losses elsewhere? Will more lenders start exploring the non-QM market?
A recent article in Business Insider noted that the potential borrower pool for non-QMs is pretty significant considering that 8% of mortgage applications are denied each year.
And those lenders who specialize in these non-traditional loans – like Angel Oak, Carrington and Sprout Mortgage – are crushing it this year while mainstream mortgage lenders continue to struggle. Angel Oak recently said it expects to see the non-QM market reach $100 billion this year – a massive, nearly five-fold jump from 2019’s $22 billion.
Some lenders are eager to get in on the game. United Wholesale Mortgage just started offering “bank statement mortgages” – a move National Mortgage Professional called “the biggest single indicator yet that lenders and LOs are looking to non-traditional mortgages to make up for a huge decline in traditional volume.”
But expanding into the non-QM market is not without challenges. It requires a specific underwriting expertise that traditional lenders must master, not to mention the fact that underwriting non-QMs can take longer than traditional lenders are used to.
Learning to market non-QM loans to the self-employed set that these loans are intended to help is another challenge for lenders to tackle. And once the marketing piece is in place, switching to the right Mortgage LOS to manage the steps specific to a non-QM may be necessary to help move these loans faster down the pipeline.
While only time will tell what the true potential is for this non-traditional product, one thing is likely: Non-QMs will gain some traction in the coming year as lenders grasp for volume.
As National Mortgage Professional’s Doug Page succinctly stated: “To originators holding onto the idea that conventional mortgages, backed by the GSEs, are the only ones to offer, it will likely be a challenging year. To those holding an alternative view, there’s a cornucopia of opportunity.”