Non-QM lenders, it’s time to embrace automated underwriting systems
Despite 2020’s pause in originations and securitizations, the 2021 outlook for non-QM lending is promising. In fact, a recent report from S&P Global estimates that “non-QM issuance volumes will return to 2019 levels this year, reaching an estimated $25 billion” as agency refinance activity slows down and the purchase market remains strong.
Even with 2020’s liquidity problems and subsequent pause, the non-QM sector closed out the year strong, with $18.9 billion in total securitizations – only a 33% decrease from its 2019 high. Investors are returning to the space with more confidence, and new investors like private equities and insurance companies are showing interest.
There are also increased opportunities for non-QM originations. For example, the number of self-employed borrowers has grown as more people go into work for themselves or join the gig economy. This makes it more likely that their best loan fit falls under non-QM rather than agency products.
Additionally, the rise in home prices over the last year has led to more need for jumbo non-QM loans as borrowers look to purchase or refinance higher value properties. And investors are turning to non-QM products like a Debt Service Coverage Ratio program as GSE guidelines around investment properties shut them out of agency loans.
Plus, as rates rise and the refinance boom slows, non-QM lending is a way for many originators to expand their product offerings to replace volume.
However, amid this growth are a number of changes affecting the non-QM market.
Evolving market conditions
The issuance of the Revised Qualified Mortgage Rule by the Consumer Financial Protection Bureau could expand funding options for non-QM borrowers. The new rule establishes a pricing threshold that effectively replaces the DTI limit of 43% with a price-based approach. Its mandatory compliance date is now Oct. 1, 2022.
Fannie Mae and Freddie Mac recently confirmed that they will be moving to the new non-QM pricing definition beginning July 1, 2021. Loans purchased by the GSEs with applications dated on or after July 1 will be required to meet the standards of the new QM Rule.
Under the new rule, mortgages currently labeled as non-QM per the DTI ratio cap could be eligible for agency backing. Lenders will still need to carefully verify borrower documentation to ensure ability to repay.
In addition to regulatory changes already in motion, the new administration brings new leadership for the CFPB. President Joe Biden’s nominee for CFPB director, Rohit Chopra, is expected to reinvigorate the bureau with a new energy for enforcement, heightening the need for lenders to ensure compliance. And there may be further changes as Fannie Mae and Freddie Mac continue to move toward the conservatorship exit.
Given the changing rules and wave of new entrants coming back into the non-QM market, it’s an excellent time for lenders to evaluate their tech stack and consider adding an automated underwriting system (AUS) to ensure compliance and expedite the origination process.
How lenders benefit from an AUS
An automated underwriting system can be a critical tool for non-QM lenders navigating the changing regulations or even beginning to offer new products.
An AUS helps accelerate the origination and underwriting of non-agency products, enabling lenders to better serve a broader range of borrowers. Just as Desktop Underwriter and Loan Product Adviser do for agency loans, a non-agency AUS, like LoanScorecard’s Portfolio Underwriter, can help non-QM lenders understand whether a borrower fits their market and product.
The non-QM market has a pull through rate of about 50%, as these borrower scenarios tend to be unconventional and complex.
By implementing an AUS early in the origination process, lenders can understand more quickly whether a borrower fits their product profile and can avoid untenable loans moving further into their manufacturing process. This improves the pull through rate and decreases touches by underwriting staff, resulting in increased efficiency overall.
In addition, using an AUS can assist lenders with compliance risks. Lending decisions are fully documented at the time of origination, providing clear audit trails for CFPB reviews and regulatory audits.
Automated solutions keep lenders compliant with HMDA, Fair Lending, ATR/QM and CECL to ensure that loans are underwritten without bias. These solutions can be updated easily, facilitating immediate changes to loan programs as guidelines change.
An AUS adds accuracy, consistency and transparency to the loan qualification process, helping take risk and structuring out of the equation. By leveraging technology, lenders can reduce human errors and the need to analyze the loan against hundreds of applicable underwriting guidelines.
Now is a great opportunity for non-QM lenders to adopt an AUS as part of their tech stack.
Portfolio Underwriter, for example, can be custom-tailored to reflect a user’s underwriting guidelines and generates a detailed underwriting analysis based on user program guidelines, credit policies and criteria. It also presents a branded, in-depth findings report and provides a clear audit trail for CFPB reviews and consistency in credit decisioning.
As the non-QM market expands, implementing an automated underwriting system can help simplify the origination process for lenders, increasing efficiency, reducing compliance risks and improving consistency in decisioning.
To learn more about LoanScorecard’s Portfolio Underwriter, click here.
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