While layoffs sweep the mortgage industry, particularly consumer-direct lenders, non-qualified mortgage (non-QM) lenders are going on a hiring spree.

Non-QM lenders Angel Oak Mortgage, Acra Lending and Newfi alone currently have at least 130 openings on jobs listings sites.

According to Evan Kidwell, chief operating officer at Griffin Funding, a consumer-direct lender that launched non-QM operations in November 2020, the company is willing to hire newbie LOs and processors and give them on-the-job training.

In the world of mortgage-financing, there exists a product line defined by what it is not — non-qualified mortgage (non-QM), non-prime, non-agency or an alternative-documentation loan.

In the secondary market, these non-QM loans are in demand this year and are expected to continue propelling the growth of private-label securitizations in the year ahead, according to Dane Smith, president of Versus Mortgage Capital.

“We expect total [private-label] issuance for 2021 to be approximately $25 billion,” said Smith, referring to the non-QM private-label securitization market. “In 2022, we forecast issuance to grow to over $40 billion.”

Through November of this year, Versus has sponsored 10 non-QM private-label securitizations valued at more than $5 billion, according to a review of bond-rating reports,

Even if the non-QM private-label market grows to $40 billion next year, that is still only a fraction of the market’s loan-origination potential. Manish Valecha, head of client solutions at Angel Oak Capital, part of Angel Oak Companies, says the non-QM market “as a percentage of the overall market is about 10% to 12% in a normalized environment” — adding that was the size of the non-QM market in the early 2000s, prior to the global financial crisis.

“That implies a market size [today] somewhere between $175 billion to maybe $200 billion,” he said. “We just see tremendous opportunity.”

Angel Oak, through its affiliates, both originates and securitizes non-QM loans. So far this year, the company has brought seven non-QM private-label deals to market valued at nearly $2.5 billion, according to bond-rating reports.

A datasheet prepared by Kroll Bond Rating Agency that includes most, but not all, private-label deal activity through mid-November of this year shows a total of 68 non-QM securitization deals involving loans pools valued in aggregate at more than $21 billion. That’s up from 54 deals valued at nearly $18 billion for all of 2020 — a year disrupted by the emergence of the pandemic.

The universe of non-QM single-family mortgage products is broad and difficult to define in a few words, but the definition matters because a huge slice of the borrowers in this non-QM category represent the heartbeat of the U.S. economy. Within its sweep are the self-employed as well as entrepreneurs who buy single-family investment properties — and who can’t qualify for a mortgage using traditional documentation, such as payroll income. As a result, they must rely on alternative documentation, including bank statements, assets or, in the case of rental properties, debt-service coverage ratios.

“If you look in the last 15 to 20 years, the self-employed portion of the country has been increasing every year,” said Keith Lind, executive chairman and president of Acra Lending (formerly known as Citadel Servicing). “The pandemic has only accelerated that, with more people self-employed or wanting to be entrepreneurs. That’s a huge tailwind [for the non-QM market.]

That sweet spot includes the gig economy, which represents anywhere between 11% to a third of the U.S. workforce, depending on the source of the analysis.

Lind says Acra and other non-QM lenders are positioned well to tap into that demand and the secondary market created in its wake. He said Acra did one small non-QM loan securitization this year, valued at about $51 million, but next year he said the company is primed to do more deals and is “exploring [its] options in the securitization market.”

Non-QM mortgages also go to a slice of borrowers facing credit challenges — such as a recent bankruptcy or slightly out-of-bounds credit scores. The loans may include interest-only, 40-year terms or other creative financing features often designed to lower monthly payments on the front-end of the mortgage — often with an eye toward refinancing or selling the property in the short-term future.

It’s important to note, however, that non-QM (or non-prime) mortgages are not the same as subprime loans, which were the high-risk, poorly underwritten — often involving minimal or no documentation — mortgages that helped spark the housing-market crash some 15 years ago. Today’s non-QM/non-prime loans are underwritten to much higher credit, income and asset standards and involve a range of buyers beyond individuals with credit dings — and even those loans must meet federal Ability to Repay rules. The pool of nonprime borrowers also includes real estate investors, property flippers, foreign nationals and business owners.

Non-QM mortgages, Lind said, include everything that cannot command a government, or “agency,” guarantee through Fannie Mae, Freddie Mac or via another government-backed loan program offered by agencies such as the Federal Housing Administration or Department of Veterans Affairs. It’s a wide and growing segment of the mortgage-finance market that is expected to grow as rising home prices, changing job dynamics and upward-sloping interest rates push more borrowers outside the agency envelope.

There are some mortgages, however, that fall in a grey area outside the agency space but also do not fit neatly into the non-QM category, such as prime jumbo loans — which otherwise meet agency lending guidelines except for their size. Also in that grey area are certain investment-property and second-home mortgages to individuals (versus to partnerships or corporate entities) that do qualify for agency guarantees — but were excluded from a Fannie Mae and Freddie Mac stamp for much of this year because of volume caps since suspended.

In fact, jumbo-loan securitizations have represented the tip of the spear in the private-label market in 2021, with private-label deal volume at $44 billion through October of this year, according to a report by loan-aggregator MAXEX. The pace of jumbo-loan securitizations in 2021 has been driven, to a large degree, by loan refinancing, however, and rising rates are expected to chill the market in 2022.

“As rates start to rise, the supply of [jumbo] loans will decrease and we will likely see less securitization volume,” the MAXEX report states.

The opposite is the case for the non-QM market, though, given a rising-rate environment, absent sharp spikes and volatility, creates opportunity for that market, both in terms of loan originations and securitizations.

“Think about all the mortgage brokers [this year] that didn’t care about non-QM and are focusing on agency and jumbo products because it is the low-hanging fruit,” Lind said. “Well, guess what? If rates go up a little bit, they will have to find new products to focus on.”

Lind added that a “50- or 75-basis-point move” upward in rates starts to shift the market away from refinancing jumbo and agency loans and toward a greater array of purchase-loan products, such as non-QM.

“I think that’s one of the biggest tailwinds, the fact that you will have more brokers focusing on the [non-QM] product,” Lind said.

Not everything is a tailwind in the market, however. Smith of Verus Mortgage said while he believes the prospects for the non-QM market are quite strong in the year ahead, “we do see the potential for volatility in the face of the Federal Reserve’s tapering [reduction of bond purchases] and changes in interest-rate policy.”

“Despite the potential for increased volatility on the horizon,” he added, “we believe the market is mature enough to digest higher issuance effectively and continue its growth.”

As we look forward to 2022, the non-QM market is predicted to grow substantially.

“There is a bigger consensus of confidence in the product now,” said Keith Lind, executive chairman and president of Acra Lending. “The amount of equity in these loans, the underwriting, the guardrails around ATR have proven that this is a real, sustainable product that investors like.”

Refinance decline

There are a few market factors contributing to this expected growth for the non-QM sector.

Purchase mortgage originations in total are expected to grow 9% to a new record of $1.73 trillion in 2022, according to the Mortgage Bankers Association – non-QM will be part of that, of course.

At the same time, however, the MBA’s outlook for next year included an anticipated 62% decrease in refinance originations, down to $860 billion from $2.26 trillion.

According to Lind, the decline in refinances is, “a tailwind for non-QM.”

“Brokers across the U.S. that were picking up the low-hanging fruit on agency loans, are going to need another product to focus on, and that’s non-QM.” Lind said.

Housing supply shortage

The housing supply constraints on the market also open up a few opportunities for non-QM growth. New construction has been hit hard by supply chain disruptions and materials and labor shortages, and inventory of existing homes is tight.

“The U.S. is short somewhere between 4 and 5 million homes, so the fix and flip market is here to stay,” Lind said. Fix and flip loans offer borrowers the ability to renovate and rehab older homes to make them more appealing to homebuyers once they’re placed back on the market.

Additionally, home prices are up nationwide, with home-price growth reaching a record high earlier this year. And according to the MBA’s Builder Application Survey, the average new home loan size reached over $412,000 in October, a record for the survey. This growth in home prices is expected to spur the GSEs to raise their conforming loan limits.

“With that said, they are not going to raise it enough, so more loans are going to fall into the jumbo market than they previously did,” Lind noted. With jumbo loans, houses that otherwise would have been priced too high for agency loans are made accessible for borrowers who can afford them.

Other opportunities

The wide variety of non-QM products available through Acra Lending and other non-agency lenders mean there are several other chances for growth within the sector.

For example, the number of self-employed people in the workforce is rising, and those borrowers will need to turn to non-QM loans to better fit their circumstances.

Investor-related loans are also seeing an increase, Lind said.

“There’s more people looking to invest in U.S. housing stock than ever before,” Lind said. “They like the asset as a long-term investment. That’s great for non-QM, because 40% of our business is investor properties.”

How Acra Lending can help

As the non-QM market has grown, so has Acra Lending – the company has doubled in size over the last year, Lind said.

The company is poised to help brokers and lenders succeed in 2022 with its flexible variety of non-QM products, including 3-Month Bank Statement, Investor Cash Flow, Jumbo Non-QM, fix and flip, and small balance multi-family loan programs.

In addition to its existing products, Acra plans to launch new programs in 2022, including 1st and 2nd lien HELOC programs.

“Having the full circle of private products, I think we’ll do well in a rates-up environment, especially with such a large broker base across the country that is going to be looking for new products to work on,” Lind said.

It’s no secret that housing is in short supply. According to Realtor.com, the country is a whopping 5.24 million homes short. And total active listings? Those are down 24% over the year.

To make matters worse, some of that inventory is extremely dated. The typical house is now 39 years old — a far cry from the modern, move-in ready property that most homebuyers are looking for.

For these reasons, the fix-and-flip sector is poised for growth. As investors recognize the potential these older properties hold and the inventory and profits they could open up in such a red-hot housing market, demand for older, more distressed properties should increase.

The only problem? Capitalizing on this trend, at least for brokers and lenders, will be difficult.  Traditional lending approaches are time-consuming when it comes to fix-and-flip properties. They come with lots of hassle and overhead costs, and the process just isn’t efficient — for the buyer or for the lender.

Acra Lending is looking to solve these challenges and make fix-and-flip lending simpler and more efficient for borrowers, lenders and brokers. The company has created a new vertical of loans and an entirely new LOS designed just for borrowers looking to purchase a home and renovate it to put back on the market. Through this program, Acra aims to remove many of the financing hurdles typically faced by those in the fix-and-flip sector.

Here are just a few of the challenges Acra’s fix-and-flip program will help overcome:

An expensive and inefficient process

Acra understands the struggles fix-and-flip investors face when seeking financing. In fact, the company even built a team of over two dozen experienced flippers to consult on the matter.

“We have taken the industry knowledge of 25 people who have been doing fix & flips for a long time, and we ripped all the pain points out and discussed them,” said Keith Lind, executive chairman & president at Acra Lending. “We just put our brains together and said, ‘OK, what are the top 20 pain points and how do we eliminate them?’”

The company then built its LOS based on these conversations, removing those hurdles and creating a process that’s easier, more efficient and more affordable on the whole.

“On the lender-broker side, it means cheaper costs to originate, because we’re more efficient,” Lind said. “There are fewer people in operations and less overhead.”

Confusion and a lack of transparency with borrowers

One thing Acra’s team of experienced flippers noted was the lack of transparency in traditional financing — the phone tag and back-and-forth emails that loans typically entailed.

The new fix-and-flip program aims to address this by giving borrowers full visibility into their loan applications, including where their loan is at in the process, what documentation is still outstanding and what’s left on their to-do list.

“They can go on the site, put in their loan number and see exactly where they are in the process,” Lind said. “They’ll see what they need and what has to be done to get the loan processed. It will also show when we’ve sent out communications, just to hold everyone accountable.”

Time-consuming underwriting

Traditional financing is time-consuming when it comes to fix-and-flip purchases. The biggest problem is that the process focuses on the buyer’s financials — not the property or the investor’s experience.

Acra’s fix-and-flip program puts more emphasis on the business side of things, focusing instead on the property’s value before and after renovation, the number of flips the investor has managed and how long they’ve been in business as a fix-and-flipper.

Because of this, there isn’t endless documentation to analyze — no W2s, bank statements or tax returns. “It makes for a much faster underwrite,” Lind said.

Waning agency business

For lenders and brokers, Acra’s new program can also open a new stream of business entirely. It can even help boost profitability as demand for traditional agency loans wanes.

“The agency market is clearly slowing down,” Lind said. “The number of people able to refinance are tapped out, and we’re seeing that in earning numbers.”

If the Federal Reserve begins tapering MBS purchases later on in the year, as it has indicated it might, this could cause interest rates to rise, shrinking agency demand even more.

As Lind explained it, “This is a great new product for brokers to focus on as that more traditional business decreases.”

Competition for home buyers is tougher than ever right now, as tightened housing stock supply continues to plague the housing market.

Acra Lending is doing what it can to help free up inventory. The company specializes in non-QM products, a sector that serves many borrowers who might not fit agency loans. By working with borrowers in unusual circumstances, Acra is helping create opportunities for inventory to open up.

3-month bank statement

For example, look at Acra’s 3-month bank statement loan program, said Keith Lind, executive chairman and president of Acra. For those who may have lost their job during the pandemic or who are self-employed, looking at the last three months of bank statements is, “more useful than looking at the last 12 or 24,” Lind said.

The 3-month bank statement program is ideal for borrowers with nontraditional income streams. Borrowers can qualify with their most recent personal or business account bank statements rather than going through an agency underwrite that requires more documentation.

Acra’s 3-month bank statement requirements are stringent, so no borrower is getting a loan they won’t be able to afford.

Using a 3-month bank statement program, borrowers who would not otherwise qualify due to lost or nontraditional income may be able to buy a new home and place their own on the market.

Jumbo products

In addition to low inventory, the massive competition in the market has led to an increase in home prices. According to data from the Mortgage Bankers Association, the average purchase price had risen to $384,000 as of May.

While that’s still below the $548,250 minimum price tag requiring a jumbo loan, the higher average indicates big increases across the board.

“With home prices increasing, a lot more loans fall out of agency guidelines and will fall into the jumbo prime product center,” Lind said.

Acra’s jumbo prime mortgage solution is designed to provide borrowers with the larger loan amounts needed to purchase a high-value property, with loan amounts up to $3 million.

The lender also offers a jumbo non-QM product, which allows borrowers to qualify with full doc or bank statements for loan amounts up to $4 million.

By providing jumbo loans, lenders like Acra are able to make those higher-priced homes available as an option for home buyers.

Fix’n’flip

The third way in which Acra is poised to help expand on housing inventory is through its upcoming fix n’ flip loan vertical.

Fix n’ flip loans are ideal for investors and developers looking to purchase a home and renovate it. Many fix’n’flippers look at older housing stock that isn’t immediately move-in ready, taking on needed updates and rehab to bring the home up to date with the current market’s living standards.

Once the newly updated home is ready, it can then go right back onto the market, much more appealing for standard home buyers than it might have previously been. Through these loans, developers and investors are able to bring new stock to the market that may have been previously overlooked or passed up.

“The fix’n’flip market should absolutely be beneficial to bring on more inventory,” Lind said. “We’re very excited to enter the fix’n’flip space. Our goal is to provide two loans there – we provide the fix’n’flip loan and then the permanent financing for the next person that’s going to get into that home and want to live there for a long time.”

With tightened housing stock supply, the competition for home buyers is fierce this year. Low rates and increased demand mean prices are soaring on what stock is available – and what’s available isn’t staying on the market for long.

One issue is that among the low inventory, there are even fewer homes that are move-in ready, said Keith Lind, executive chairman and president of Acra Lending.

“We actually have a lower inventory of homes that people really want to live in turnkey,” Lind said. “The average home age in the United States is about 40 years old, so there’s a huge stock of homes that need to be renovated.”

Given the rising price of lumber and other construction costs, renovations may sound impractical. However, that’s not necessarily an issue for homes that are simply being updated, according to Lind.

“New construction is everything – it’s copper, plastic, plumbing, lumber, roofing – but in a rehab, you’re not necessarily doing all that, there’s not a big spend on that,” he said. “From a monetary standpoint, it’s much cheaper to go in and rehab these homes and get them up to date with living standards of today than knocking them down [and building new homes].”

But not everyone has the time and ability to flip a house themselves, especially given the timing gap between purchasing a fixer-upper and updating it enough to move into full-time.

According to Lind, one way for existing housing stock to be expanded and improved upon is through investors or developers using fix’n’flip loans.

A fix’n’flip loan is designed to cover the costs of purchasing a home and renovating it. The loan is transitional, lasting about nine months to a year, with the end goal of putting that house right back on the market.

“Not everyone can afford a brand-new construction home, given where home prices are,” he said. “It’s more affordable to go the route of working with someone who’s selling homes that have been renovated. We think this is a more economical decision for homeowners, a much bigger opportunity than new-build construction in the U.S.”

Given the inventory shortage and the increase of renters turning to homeownership, Lind sees an opportunity for Acra Lending to join the fix’n’flip lender space. The company plans to launch its new vertical this summer, with the goal of lending to developers with proven experience in the rehab space.

Lind says fix’n’flip integrates well with Acra’s proven expertise in non-QM products, particularly its DSCR or investment loan offering. The transitional fix’n’flip loan can lead to a debt service coverage ratio (DSCR) loan, which Lind says is about 25% of Acra’s monthly production.

Acra Lending will be launching its fix’n’flip offering in the coming months – for more information, visit acralending.com.