Non-Qualified Mortgage Securitization Market
The limited issuance of private-label RMBS since the financial crisis has generally consisted of new origination jumbo “prime” mortgage loans. These securities have included loans that meet the “qualified mortgage” (QM) standard with strong credit scores, pristine payment history, and fully documented income and assets. The non-QM market addresses a previously underserved market and reflects the expanding credit policies of many institutions.
What is a Non-Qualified Mortgage Loan?
Since the crisis, standards governing the majority of mortgage loan production have generally followed the restrictive credit criteria implemented by the GSEs. This has prompted some consumers and lenders to seek alternative products that may not meet the “qualified mortgage” requirements or the high-credit-quality standards of the GSEs. These tightened credit standards have restricted home ownership opportunities for certain groups of consumers. These groups include self-employed individuals and borrowers with weaker credit or a recent credit event, such as a foreclosure, short sale, or deed in lieu of foreclosure. While many of these potential borrowers can meet the criteria of the ‘ability-to-repay’ rule and have taken steps to improve their credit standing, they nevertheless are not able to meet the very high credit standards that have emerged since the financial crisis.To meet the demand of these underserved borrowers, a number of lenders have begun to expand their credit parameters. As lenders have sought funding sources for these non-QM originations, a new tier of the PLS market has emerged. While it is difficult to create generic categories that define the origination practices of the various lenders, some high-level similarities can be observed in the following non-QM products and programs established to meet borrower demand:
- Alternative Documentation – the borrower’s income is assessed through sources other than available tax returns, business earnings, or Appendix Q requirements. Many non-QM lenders offer variations of bank statement programs (e.g., 24-month review and 12-month review) to determine a self-employed borrower’s ability to repay through analysis of their monthly cash flow.
- Borrowers with Non-Standard Credit Profile
- Expanded Credit – borrowers with weaker FICO scores, a recent delinquency on a mortgage, a debt-to-income ratio slightly above the qualified mortgage requirements, or higher loan-to-value ratios.
- Prior Credit Event – borrowers with recent foreclosure, bankruptcy, or other loss mitigation disposition that have not met the seasoning requirements established by GSE guidelines.
- Investor Program – financing for investors purchasing 1-4 family rental properties that may not meet GSE guidelines.
- Foreign National Program – financing for borrowers that are not permanent residents or do not have credit history in the United States.
- Non-QM Product Features – financing for products that do not meet qualified mortgage guidelines, such as loans with interest-only or balloon features.