HousingWire recently spoke with Mack Walker, SVP of capital markets at Deephaven Mortgage, about how the year went for the non-QM sector and what’s in store for the industry in 2024.

HousingWire: How did the non-QM sector fare this year among rate increases, slow purchase volumes and the difficulties in the banking sector?

Mack Walker: The non-QM sector is similar to other sectors in the mortgage space that endured headwinds throughout 2023 relative to volume in past years. While we have had our challenges, non-QM has been more insulated than agency. Due to a tightened credit market and other factors, non-QM has been more in demand and the interest among lenders is growing. Our expectation is that volume will be around $30 billion when 2023 comes to a close.

The reasons for the success of non-QM lies partly in the composition of borrowers. Non-QM borrowers such as those who are self-employed and real estate investors are generally less rate sensitive. In fact, a growing focus is the real estate investor population.

In a market with higher rates affordability persists, and this creates a situation where there is greater demand for rentals versus new homebuyer purchases. There is also growing demand for non-QM products from a banking sector that is taking note, presenting new opportunities where some banks see the need to sell loans they would traditionally hold as portfolio products. We also continue to keep our eye on any disruption in the warehouse lending space and see as an area of potential focus headed into 2024.

HW: What are the strengths of the non-QM sector?

MW: Non-QM provides a source of financing solutions that caters towards homeownership of a growing population of underserved borrowers in the United States. According to the U.S. Bureau of Labor Statistics approximately 16 million workers are self-employed. The population of entrepreneurs and gig economy workers is growing and the documentation requirements to qualify for a traditional loan present hurdles for this borrower base.

Deephaven is filling this void not only for self-employed borrowers but other borrower types in the non-QM space. These borrowers include real estate investors as mentioned before with a continued emphasis to provide liquidity through a debt service coverage ratio (DSCR) product that qualifies on the rental cash flow of the subject property. There are currently around 19.9 million rental properties in the U.S. with 85% owned by individual investors and LLCs based on 2021 U.S. Census Data.

HW: How can lenders and brokers learn more about offering non-QM products?

MW: Deephaven has curated an educational series that has grown in esteem and popularity among our partners. In addition, we host a large number of webinars for our partners. Included in our education series is a course on how to source non-QM borrowers. This is an important one as many of our partners need guidance on where to find non-QM borrowers.

Our client development team spends a lot of time at conference forums and in retail branches educating loan officers. Deephaven is the teaching university of lenders! We will educate on exactly how best to cater to these borrowers as each borrower is unique in their own way bringing a different set of circumstances.

The high interest rate environment has created a situation with more brokers wanting training to become experts in non-QM. Deephaven is a pioneer in the space, and we can provide a head start for those ready to deliver non-QM loans. For that group still hesitant about the space, we urge them to give us a call and learn more about non-QM sophisticated borrowers, and these good performing loans. It is crucial to partner with the right lender who focuses on non-QM exclusively and that has been in the space for a long time with subject matter expertise. We will walk you through every step.

HW: Looking ahead to 2024, what’s in store for non-QM?

MW: Demographic trends continue to move away from traditional employment to entrepreneurial self-employment and the gig economy. This is a trend that plays well into the non-QM space. If rates do stay higher for longer, the market will continue to bode well for non-QM. Non-QM borrowers are generally less sensitive to a higher rate environment. We continue to see an increasing demand for non-QM and our continued volume growth supports that.

The bottom line is that looking ahead we see continued growth. If you currently are not offering non-QM, we encourage you to explore and add the product suite in 2024. The key to success with non-QM is to choose a non-QM lending partner wisely. There are a variety of ways to engage in the space – brokering, banking, delegated correspondent, non-delegated correspondent, etc… Deephaven has our finger on the pulse with over a decade in the space. We know how to navigate this ever-changing market and continue to grow in lock step with our partners.

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