The abrupt closure of two Non-QM lenders – one that shut down and another that is now under Chapter 11 Bankruptcy protection – may have prompted Flagstar Bank’s warehouse lending division to send out a text message stating that funding advances for Non-QM mortgages will require advance approval.
“Effective immediately – Funding advances for Non-QM loans targeted to the investors indicated below will require advance approval,” read the SMS message. “Haircuts can be changed.”
An official from a mortgage company relayed the message to National Mortgage Professional.
“We have always assessed some Non-QM loans before funding them, and we are just changing this procedure,” Flagstar Bank spokesperson Susan Bergesen explained in an email to National Mortgage Professional. We continue to fund Non-QM loans and have not refused to fund any of our clients’ loans. Non-QM continues to be a major element of our company.” According to an official at another warehouse lender who requested anonymity, Flagstar’s action might put Non-QM lenders under financial strain. The CEO also warned that Non-QM mortgage lenders would not be left high and dry after their loans were bought.
In addition to the Flagstar warning, the CEO stated that Non-QM mortgage lenders are seeing loan compression, which means profitability is declining. “Compressions have decreased to 101 from 104 – or three points – and with all of this overhead you’re trying to maintain, like salesmen and occupancy charges, there’s not enough margin there to support the business model,” he explained.
Flagstar’s SMS message raises concerns about the Non-QM industry’s viability, and there are differing opinions on its state. Many of the issues that Non-QM lenders are facing, he claims, are the result of rising interest rates, which aren’t helping the lenders or their borrowers.
“The increase in interest rates has pushed homebuyers out of qualifying for normal mortgages, and now you’re looking at Non-QM mortgages at approximately 7%, perhaps higher,” he explained. “A 6 percent mortgage could have been OK if you’re a restaurant entrepreneur or a beauty shop owner with a lot of cash coming in, but now you’re looking at a far higher rate.”
“Investors are also seeking higher interest rates as a result of recession worries,” he added. “If we have a recession, investors in these loans are wondering if the companies of these Non-QM borrowers would suffer.”
However, Jack Kahan, KBRA’s head of residential mortgage-backed securities, believes that there will be “significant activity” in the Non-QM business this year when it comes to securitization.
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