Why are non-QM lenders getting into trouble?

Phil Shoemaker, president of originations at wholesale lender Homepoint, said: “The speed at which rates increased has created material spread risk in the non-QM market, and companies that are highly engaged in non-QM lending are severely exposed. Investors are less interested in buying a higher risk non-QM bond at a 5% coupon when they can buy an agency bond at 5% with materially less risk.”

Kirk Tatom, president of Tatom Lending, said non-QM lenders faced specific issues not common to other lenders. He said: “One of the biggest issues with non-QM is liquidity. Non-QM, just like subprime loans, are meant to be a patch. They’re short-term lenders.

“Here’s where the rub lies. I did a non-QM loan for a lady in October that was buying a house. She got 5% on the interest rate with the intent to refinance out of it as soon as she could show two years of solid tax returns.

“Now she’s thrilled to have 5% and has no intention of getting out of that loan.  Since the vast majority of these loans are held by the bank making the note (serviced in-house), at a certain point all the money dries up when none of the previous loans are getting paid off. If they’re selling those notes to an investor, at a certain point they’ll stop buying them because the money isn’t moving. This directly impacts the dreaded margin call. If the money’s not there, shop gets closed.”

Yury Shraybman, broker at Innovative Mortgage Brokers in Philadelphia, said that in times of market instability, non-QM lenders were usually the first to feel the effects.