However, the outlook for non-QM for the rest of 2022 is relatively optimistic, according to Acra Lending CEO Keith Lind.
“We are fairly bullish,” Lind said. “You had this backlog of lower-coupon loans that were originated in the first two quarters, where people got caught offsides, and we had a sort of ‘get the pig through the python’ concept. And I think that is coming to fruition.”
Lind said that the market is starting to see less supply of deals in the securitization market and that securitization spreads are tighter.
Lind called inflation the “elephant in the room,” and noted concerns about whether the front end of the rate curve could increase, but said that in his opinion, the biggest risks from a rates perspective are behind us.
Currently, he said, there are concerns about home prices, especially in areas of the country where they may have doubled or tripled.
“We’re keeping our eye on that, but we’re fairly bullish heading into year-end,” Lind said.
Challenges facing non-QM lenders
Still, there is that elephant in the room to address. How could inflation affect lenders who have non-QM loans on their books?
“It depends on what the coupon of those loans is, and how many loans they have,” Lind said. “I always make the comment, ‘We’re in the moving business, not the storage business,’ and we sell loans every two weeks and we have been since the beginning of the year. So, we’ve been able to avoid that problem of getting stuck with loans – not bad loans, just bad prices.”
But he noted that for lenders “stuck” with lower-coupon loans, that could be troublesome.
As for rising rates, Lind said that some lenders may have struggled with rate moves, which could leave them with lower-coupon loans.
“Throughout the first seven months of the year, we had 18 rate moves – 14 up and four down. Our first rate hike was January 3,” he said. “I can’t say that all lenders were as rapid as Acra in taking rates up, but we were following rates. Other people thought they would get more business, possibly, by keeping rates lower, but I think rates went up so fast that if you did do that, then you probably had more lower-coupon loans on your balance sheet and maybe trouble selling them at a profit.”
Lind said liquidity and expenses are two other challenges facing non-QM lenders right now.
“We are hearing some issues about liquidity from some of our competitors, and maybe the people that were buying their loans two or three months ago aren’t showing up today to purchase those loans,” he said.
Acra’s production is down about 25%, according to Lind. The company adjusted accordingly earlier in the year.
Concerns about working with non-QM
Given the challenges facing the non-QM landscape, some lenders and LOs may hesitate to work with non-QM products. Lind said Acra is open to the tough questions about its business from potential partners.
“If there are concerns out there, people should be asking the hard questions that we’re comfortable answering. ‘Are you profitable? What strategic moves is Acra making?’” he said. “I think those are the questions that, if you’re an LO or you have a brokerage shop, and you’re looking to partner with someone, that’s the first question you should be asking.”
While others may have cut programs or shut down entirely, Acra has continued to lend, turning a profit in the first two quarters of 2022 and the first eight months of the year, according to Lind.
“It’s unfortunate that some of our competitors had to shut their doors,” Lind said. “On the positive side, we recently hired the Sprout [Mortgage] West Coast team. We are continuing to strengthen in key areas and are always looking for talented professionals. We want to increase both our loan fundings and workforce across the nation.”
“We’ve added more capital partners to purchase our loans, so we have a bigger subset of people that want to buy Acra loans than we did six months ago. And I think we’re going to continue to add new investors that want to purchase our loans,” he continued. “At the end of the day, that’s going to help our liquidity and improve our pricing.”