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June 12, 2020  

Crisis Pushes Non-QM Shops Into Jumbos

Several mortgage originators are looking at securitization to fund jumbo-loan products they are developing.

In each case, the accounts would adhere to the Consumer Financial Protection Bureau’s “qualified-mortgage” guidelines. But they are coming from companies that are better known for writing non-qualified loans, including Angel Oak Mortgage, New Residential Investment, Reliant Bank and Sprout Mortgage.

Some of the shops would securitize the accounts on their own. Others are more likely to sell them to larger institutions that maintain issuing programs, with sources pointing to Goldman Sachs and Jefferies as potential buyers.

Expectations are that the bond offerings could begin during the fourth quarter, possibly leading to a lasting jump in qualified jumbo-mortgage securitization volume.

That would represent a turnaround from today’s environment. While the market for jumbo-mortgage bonds started this year in a solid growth phase, issuers have largely backed away since the coronavirus pandemic sent the broader financial market into a tailspin.

Indeed, just three new-loan deals totaling $1.2 billion have priced in the sector since widespread stay-at-home orders took effect in early March, compared to 20 transactions for $8.5 billion earlier in the year, according to Asset-Backed Alert’s ABS Database. The slowdown has reflected a number of factors, including reduced liquidity for mortgage products in general.

But non-qualified mortgage originators appear to view their core market as likely to experience a slower recovery over the long term — hence, the move into qualified jumbo loans. Consider that a particularly large number of non-qualified borrowers have entered forbearance during the crisis, prompting banks to cut off warehouse and repurchase financing for many accounts (see article on Page 1). And some key bond buyers have shown a preference for higher-quality collateral, even if it means accepting lower yields in a low-interest-rate environment.

Those who remember the last downturn also are concerned about perceptions of irresponsible lending. “Let’s face it, the non-qualified home-loan space was beginning to push into some danger zones as far as loan quality goes,” one source said. “It was beginning to look like 2007 all over again.”

A few of the potential issuers already have been somewhat active in jumbo mortgages and have moved in the past month or so to expand their activities by tapping new types of borrowers. Others are new to the sector.

Take Sprout, which started this year with plans to launch a securitization program for its non-qualified loans. As conditions soured, warehouse lenders including Nomura demanded repayment, forcing the Irving, Texas, company to sell its receivables at discounts.

Sprout responded on May 20 by offering a jumbo-mortgage product aimed at buyers of properties priced at up to $3 million and those seeking to refinance. The accounts can carry loan-to-value ratios as high as 90% and minimum credit scores of 660, just below the typical cutoff for prime-quality status. Borrowers also must have at least nine months of reserves in their bank accounts.

Sprout’s non-qualified loans typically have gone to self-employed individuals with only a few months of bank statements to prove their incomes. In many cases, their credit scores are below 600.

Angel Oak has completed 14 non-qualified loan securitizations totaling $5 billion since entering the market in 2017. New Residential has completed seven such issues for $2.1 billion since 2018, plus numerous offerings backed by receivables including seasoned jumbo loans, servicer-advance payments and reperforming loans. Reliant has been developing securitization outlets for its non-qualified loans for more than a year but never has issued on its own.