Competitive pressures have opened the door for a new use of warehouse lines of credit: providing mortgage bankers with financing to originate loans that fall outside of the qualified mortgage definition.
Non-QM lending is just the latest new product that warehouse providers, also known as warehouse lenders, are offering in an industry channel that has gone from moribund to highly competitive in just a few years. Warehouse lenders are now letting their mortgage banker partners extend their lines of credit to other originators, and are also offering hospital lines to finance buybacks, servicing-advance lines for working capital and even lines secured by mortgage servicing rights, said Bob Rubin of The Business Loan Connection, a consulting firm based in Southfield, Mich.
As the stricter underwriting standards of the QM rule took effect in January, the most likely source of non-QM funding was thought to be banks originating for their own portfolios. Others believed that a non-QM market couldn't take off without the return of private-label securitizations.
Given the many permutations of lines and sub-lines of credit that warehouse lenders are offering, funding non-QM loans is a logical next step for warehouse providers to build market share. And mortgage bankers including Angel Oak Funding, United Wholesale Mortgage and W.J. Bradley are getting in on the ground floor.
Regulatory and litigation risks could have kept the warehouse channel out of non-QM lending. But with other third-party investors dipping their toes in the non-QM waters mostly with loans made to highly creditworthy borrowers warehouse lenders have a measure of comfort that they will get their money back if they allow mortgage bankers to put non-QM loans on their lines of credit.
Some warehouse providers are letting mortgage bankers carve-out a portion of an existing line of credit to use for non-QM originations. Others are providing facilities specifically for those loans.
"I was very surprised to actually be able to find lenders who were willing to do this," said Michele Perrin, a consultant at Perrin & Associates in North Tustin, Calif.
"Warehouse lenders definitely want to increase their outstandings and so they are looking for the next thing. What's the new flavor of the month?" Perrin said. "That actually seems like what all my conversations were at the Western Secondary [Conference in San Francisco in July] with the warehouse lenders and the mortgage bankers. What's the new flavor of the month? Vanilla is getting old."
Non-QM carve-outs can be as large as 20% of the total warehouse line. There are no extra fees and the haircut and interest rates are the same for non-QM loans placed on the line, said Rubin.
Mortgage bankers want to fund non-QM loans from their warehouse lines, but volume is still low, warehouse lenders tell Rubin, adding that one of the remaining challenges is that providers need assurance that there is a secondary market buyer for the loans.
Angel Oak Funding, which originates primarily in the southeastern U.S., California and Texas, has been aggressively growing its nonagency/non-QM business. The Atlanta-based lender's retail channel originates all products types, while the wholesale channel it launched earlier this year exclusively originates nonagency/non-QM loans.
Angel Oak Funding uses a warehouse line to fund some of its non-QM production. It also relies on its sister company, asset management firm Angel Oak Capital Advisors, to fund and purchase its production, said Tom Hutchens, senior vice president of wholesale sales and marketing.
A mortgage banker with an asset manager or investment banker partner is the safest arrangement from the warehouse lender's point of view because "they are the first line of defense," said Rubin. So long as a loan is written to the investment banker's parameters, it will be a buyer, even if the originator isn't getting the best price for it.
Angel Oak's wholesale unit makes nonprime loans to borrowers affected by recent credit events like borrowers with credit scores above 700, but have items in their credit files prevents them from going the conventional route, Hutchens said.
Multiple investors are buying these non-QM loans, but Angel Oak Capital, which has more than $3.5 billion in assets under management, predominately in nonagency residential mortgage-backed securities, is the primary purchaser. The tie with Angel Oak Capital is why the mortgage banker's warehouse providers are comfortable with providing credit to the mortgage lending business.
"If we were a nonprime wholesaler out on our own on an island, it would be a much more difficult venture," Hutchens explained. "But our relationship with Angel Oak Capital, meaning there is a source for our loans to go to, that is the key ingredient."
Angel Oak Funding is in the process of creating a mini-correspondent channel in response to requests from its mortgage broker clients that have warehouse lines of their own. The Consumer Financial Protection Bureau's guidance on mini-correspondents is not a cause of concern for the company because Angel Oak will be dealing with firms that already have the infrastructure in place to manage a warehouse line, Hutchens said.
Another mortgage banker using a warehouse line to fund non-QM loans is United Wholesale Mortgage, which rolled out a product for borrowers with high credit scores and the ability to repay the debt, but for some reason have fallen outside of the QM box.
UWM's "Big and Easy Plus" is a jumbo program that allows borrowers with a FICO score above 740 to get a mortgage with a loan-to-value ratio of up to 75% and a debt-to-income between 43.01% and 49%.
The company funds Big and Easy Plus loans from its warehouse lines but so far, there has not been a lot of consumer demand for the product, said Mat Ishbia, CEO and president of Troy, Mich.-based UWM. There is no difference in pricing, but UWM's warehouse providers have set a dollar limit for how much of their lines can be used for the loans.
Besides the limitations on how much of the lines of credit can be used for non-QM loans, UWM's warehouse lenders can take comfort in the fact that the originator has at least one takeout investor lined up to purchase its non-QM loans, Ishbia said. UWM is working on rolling out at least two more, and possibly even a third, non-QM product before the end of the year.
W.J. Bradley uses both its warehouse lines and funds raised from private investors to originate non-QM loans, but it's taking a measured approach to its entry into the market.
W.J. Bradley plans for its newly-minted WJB One initiative is to offer a portfolio of specialized first-mortgage programs that provide financing opportunities for prime borrowers who fall outside the QM boundaries.
The Denver-based retail lender's first foray into non-QM lending is a product that provides financing for nonwarrantable condominium projects. But before it could begin offering non-QM loans, W.J. Bradley had to get its business partners to buy into the concept, which meant detailing its plans to its warehouse providers, investors and subservicer.
"Our product cycle in getting non-QM out and into the market was well ahead of theirs," said Howard Michalski, W.J. Bradley's executive managing director of business development. The lender met extensively with the executive teams of its warehouse providers and investors "to education them about our position on QM and non-QM."
The process to fund WJB One mortgages is similar to that of other loans. The company is using existing warehouse partners, but it also has new funding mechanisms to draw on. W.J. Bradley has "created some custom financing structures," (though not "wildly custom," Michalski said) to help fund its production. Ultimately, it will depend on the capital markets appetite for these loans.
W.J. Bradley retains the rights on 85% of its total production, and will retain the servicing rights on all of the WJB One loans. The effort also included bringing in new investors that W.J. Bradley will sell its loans to using what Michalski called "custom takeouts."
"We established some new relationships there, we brought some new entrants into this space to help us" fund the non-QM loans, he said.
Implementing its strategy was really about getting people, even those on W.J. Bradley's own sales force, to understand what the WJB One program is about, with particular emphasis on the ability-to-repay rule's fundamental role in non-QM lending.
Originating non-QM loans will allow W.J. Bradley to tap into the pent-up demand among consumers who have been "orphaned" by tighter underwriting standards over the past 18 months, like the condo market the first WJB One product serves, Michalski said.
But for a non-QM product to work, it needs to fill a void that's in demand from consumers. The same goes for funding sources, too. W.J. Bradley spent a lot of time working on "how to connect Main Street to Wall Street" when it created its non-QM strategy, he said, adding the WJB One portfolio was designed to be updated and improved with new features to respond to market changes, something Michalski declared most excites him about the program.
Bonnie Sinnock contributed to this report.