As I walked up and down the aisles at the MBA Conference in Atlantic City last week I couldn’t help but notice the sheer number of lenders hawking non-QM products. Stated income, stated assets, no income, foreign national program, no SSN program… the list goes on and on. When did this shift happen? I mean I knew the market was there and I knew that lenders wanted to take advantage of it… especially with the spreads that could be made, but what I did not realize was how quickly our industry reverted to originating the products that essentially tore apart the economy.
Apparently, (and I say that with hope that this next statement is actually true) there are some new rules around these riskier products that were developed to protect the borrower… I don’t know but I feel like I need a shower even after typing that statement. Aren’t these the products we wanted to try and avoid lending on? I mean I wasn’t in the industry pre-2008 so I don’t know what the wild west even looked like, but I do know what the aftermath looked like once most of these loans defaulted and owning a home wasn’t as glamorous as it once was. I remember explaining to borrowers what “underwater” meant and walking them through the foreclosure process. Now… is history going to repeat itself? I don’t know. What I do know is that more and more non-QM loans are being originated and securitized. $1.3bn worth of non-QM products were securitized in the first quarter of 2018… that’s nearly double what was issued in Q1 of 2017. If we use conservative numbers this would mean that close to 30% of the loans originated in 2018 could be non-QM products… and if we use some industry “experts” (if you read the blog you’ll know that I hate this expert tag) predictions we’re looking at $10bn of non-prime… errr I mean non-QM securities issued in 2018.
I don’t want to assume that we’re going to see 2008 all over again… but S&P (Standard and Poors… the firm who possibly inflated the ratings of the subprime MBS’s & payed out $1.4bn in settlement money because of it) is back to issuing ratings on non-QM products and believe the new subprime market has contained the risk. Has it though? I have no idea… but what I do know is that it’s human nature to be greedy and in our industry we’re as greedy as they come. It makes financial sense to pivot your business model when times are tough and begin to look for ways to increase your margins. Non-QM is more lucrative, but at what expense?
Maybe we have it figured out this time… or maybe we haven’t. My hope is that we’ve learned from our mistakes and that history won’t repeat itself, but we still have a lot of Jordan Belfort’s and Gordan Gekko’s running around.
Talk to you soon!
MJ
The opinions expressed in this post are the sole view of the writer and do not reflect the opinion of Princeton Mortgage Corporation.
Photo by Cindy Tang on Unsplash