Despite difficulties in the mortgage market at large, non-QM lenders are seeing growth and opportunity.
“The non-QM demand for loans is very healthy,” Acra Lending CEO Keith Lind said. “We are not seeing a similar volume trajectory as the agency market.”
Lind is projecting that Acra’s non-QM mortgage originations will increase to about $2.6 billion in 2023, an increase from $2.1 billion last year.
But how are non-QM lenders accounting for demand among higher interest rates?
First, Lind said, it is important to note that nearly 50% of non-QM production right now is investor loans.
“There are a lot of very strong tailwinds with investors understanding there is a shortage of somewhere between three and five million homes in the U.S. They would rather invest money in the housing market than in the stock market,” he said. “There is a lot of demand, so that is a positive.”
Another plus for non-QM lending has been the volatility in the banking sector.
“I estimate roughly a third of our competitors are out of business or have exited the market, and that is good for Acra,” Lind said.
Additionally, many banks have tightened their credit boxes, and banks expect to further tighten those lending standards through the rest of the year, according to the Federal Reserve’s quarterly senior loan officer opinion survey. More than a 20% net share of banks reported having tightened standards on non-QM jumbo residential loans (21.6%) and QM jumbo loans (21.4%), per the survey.
This credit tightening presents another opportunity for private lenders, as loans that normally would have gone to regional banks are coming to lenders like Acra.
“We have tightened our credit belt a little bit as well, but I do not think we have tightened as much as the regional banks and I think they have had to tighten for different reasons,” Lind said. “They just do not have the balance sheet that they used to have to dedicate to lending in the non-QM space.”
Challenges for non-QM
Despite these opportunities, the non-QM market still faces its challenges — the No. 1 challenge being profit.
“Given where rates, the securitization market and credit spreads are, it is difficult to originate a loan and sell it for a profit,” Lind said.
Staying profitable — or breaking even — depends on a few factors, including capital, a well-managed balance sheet, liquidity and expense management.
“If you have done all that, you are probably not making a lot of money — and we are not — but you are able to stay in the game,” Lind said. “This is a time in the market where it is somewhat survival mode given what has been going on, and those originators that get through this are going to be the leaders moving forward.”
Acra has been able to make enough loans to cover its expenses due to its increase in market share. The lender funded $242 million of loans in July, its second-biggest month ever.
“Rates have doubled and we are doing as much production as we were when rates were 4.5%,” Lind said. “We are lucky enough to have this volume, which enables us to be at that breakeven / profitable level.”
Lind attributes Acra’s success to its ability to be nimble and take decisive action.
“When rates were going up in January 2022, we were one of the first in our space to make major reductions in expenses, from the standpoint of headcount reduction, marketing expenses, and expenses across the board,” he said. “We increased our liquidity and found more buyers for our loans. Those were the core decisions we made that have helped us manage these difficult times.”
How to take advantage of the current demand
What should loan officers be doing to capitalize on the opportunities in the non-QM market?
Lind believes LOs should be putting in the work: networking, talking to new accounts and reaching out to brokerages.
“You have got to reach out to these big agency brokerage shops that have never done non-QM and maybe were not comfortable doing it,” he said. “You have got to educate them and get them up to speed because there is a real opportunity here for loan officers that have never done non-QM to make a lot of money and to learn, to widen their craft and expertise.”
To learn more about non-QM and working with Acra Lending, visit https://acralending.com/.