Non-Qualified Mortgage Origination Services and Non-QM Securities
A qualified mortgage (QM) is one that meets lending standards established by various federal government agencies. On the other hand, a growing number of mortgage choices involve loans beyond traditional QM definitions — these are referred to as non-qualified mortgages (non-QM). As you will see after reading this article, this important distinction has a direct impact on both a homeowner seeking a new mortgage via loan origination services and an investor reviewing investment alternatives for securitized mortgages.
New Residential Investment Corp. is an example of a real estate investment trust (REIT) that incorporates non-QM securities and origination services in ongoing business and investment decisions. This article will summarize how the company’s portfolio and subsidiaries reflect a blend of both QM and non-QM assets.
Non-QM Origination Services — A New Mortgage Lending Solution
The traditional underwriting process for mortgage loans can be overly rigid at times — this inflexibility can result in denying loan approval for even high-income borrowers. For example, a QM mortgage process has strict guidelines for verifying a borrower’s income. Requirements such as providing several recent pay stubs are standard practice during the qualified mortgage application period. This often prevents several categories of borrowers with non-traditional credit profiles from qualifying — including self-employed individuals, those with substantial assets, applicants with a recent distressed property sale and foreign nationals.
During the past four years, non-QM mortgages have emerged as a practical solution to this growing problem. The non-QM origination process uses different (and more flexible) underwriting guidelines. However, an ability to repay the loan still figures prominently in non-QM approval processes. As noted by Mike Fratantoni of the Mortgage Bankers Association, “Consumers should understand that every loan made today is subject to the ability-to-repay rule; non-QM loans just have a different way to get there.” Qualifying for a non-QM loan includes alternative documentation steps such as providing financial statements rather than W2s.
Based on recent data published by DBRS (a global credit rating agency), loan performance figures for conventional QM and non-QM mortgages are roughly equivalent — while FHA loans are in third place. For loans that are 60 days or more late in payments, the delinquency rates are as follows (as of the second quarter 2018):
- Non-QM Loans = just below 4 percent
- Conventional Loans = 3.45 percent
- FHA Loans = 8.7 percent
NewRez, acquired by New Residential during 2018, illustrates a loan origination company that provides both QM and non-QM origination services. NewRez is qualified for lending activities in 49 states. Non-QM mortgage loan originations increased from $20 million during the first quarter of 2018 (before the acquisition) to $380 million in the fourth quarter of 2018 (several months after the acquisition was completed).
Non-Qualified Mortgage Securities — Growing in Popularity
Securitized mortgages are created when parties such as New Residential combine multiple real estate loans into a marketable security. It is estimated that about 70 percent of residential mortgages are currently securitized. During 2018 NRZ issued mortgage securitizations totaling $3.8 billion. Recent New Residential loan securitization transactions involving non-QM mortgages include $310 million in October 2018 and $294 million in January 2019.
An Increased Mortgage Lending Role for Non-Bank Financial Institutions — Both loan origination and mortgage servicing businesses have changed significantly since the financial crisis that emerged in 2007. As banks have reduced their role in the overall mortgage market, other parties like New Residential have enhanced their role. These investors are gradually reducing the reliance on QM mortgages that must adhere to the restrictive credit criteria imposed by GSEs (government-sponsored enterprises) such as federal housing agencies. Non-bank mortgage servicing companies also routinely take a different approach to handling delinquent loan scenarios — emphasizing loan modifications and workout strategies instead of forced asset sales and foreclosures.
While the use of non-QM mortgages started in 2015, the practice of securitizing them did not immediately show significant activity. This was due in part to the relative lack of sufficient non-QM loan volume as well as some investor confusion about non-qualified mortgages. Both of these factors have now largely disappeared — and non-QM mortgage securitizations are growing in popularity. As reported in September 2018 by Standard and Poor’s, “The non-QM market is the fastest-growing segment of non-agency residential mortgage-backed securities in the U.S.”
About NRZ — President and Board Chairman: Mike Nierenberg
Based on the March 7 NYSE closing price of NRZ ($16.42), the 2018 dividend of $2 per share (paid quarterly) for New Residential represents a yield of 12.2 percent. During a one-year period ending March 7, the trading range for NRZ stock was $13.86 to $18.75. The company operates as a public real estate investment trust and is based in New York.
During his tenure at Bank of America Merrill Lynch, Mike Nierenberg was described as “among the most highly skilled and knowledgeable people in the mortgage business”. He is New Residential’s Board Chairman, President and Chief Executive Officer.