November 19, 2024
New to Non-QM? Looking to grow your originations? You won't want to miss this insightful conversation between Evan M. Stone, CEO and Co-Founder of Champions Funding, and Robbie Chrisman of The Chrisman Commentary.
You'll hear how more mortgage professionals like you are expanding their offerings, which means more opportunities for borrowers. Plus, Evan shares his insight on why Non-QM is the place to be in a variety of markets.
Tune in to The Chrisman Commentary now.
Robbie Chrisman
For today's interview, I wanted to welcome to the show Champion Funding's Evan Stone to talk about his view of the current non-QM space and how expanding guidelines are putting more people into homes. He's CEO and co-founder of Champions Funding, and as the former CEO of Pacific Union Financial and owner of Clear Vision Funding. He's repeatedly grown mortgage companies to the ultimate level of success. How would you characterize the current non-QM market, whether that's from an origination volume perspective and investor demand perspective, overall sentiment perspective? What's going on over there?
Evan M. Stone
Yeah, much better today, and frankly throughout 2024 than the previous couple of years, as I'm sure you and anyone listening, we will recall there was a massive interest rate reset that took place starting kind of towards the backend of Q1 in 2022, and that spooked the market, spooked originators, spooked the capital markets, and so I would say things were relatively unhealthy there for almost two years and going to A BS East in 2023,which is in late fall, early winter of 2023, probably reached a trough. Bryan and I, the President of Champions, we were probably the ugliest people at the dance, so to speak. No one interested in speaking with us about our originations. Everyone just wanted to talk about close end seconds and HELOCs and really very little demand in the marketplace for newly originated non-QM. But then you kind of fast forward to where we are today, and I think rates are still a little volatile, but things have settled in.
I don't think there's any great concern that we're going to see another 525 basis point back up overnight. I think you look at the credit performance of the non-QM space in general, and the exhibit that CoreLogic just put out a couple months ago suggests that non-QM in general performs about on par with QM. So really it's just free coupon free spread for the fixed income investors that participates in non QM investing. So I think generally speaking, healthier, probably a little room to run there. And then from an origination standpoint, I think the greatest thing that happened to this kind of nook and cranny of our industry was that interest rate reset where originators had to reload, figure out new ways to fill their pipelines, and perhaps when refinances were coming out of their ears and in 20 and 21 with the agency streamline stuff, they had to look elsewhere and learn a new skillset, anew loan product. And so I think non QM DSCR became much more in focus during2022, 2023. So now we have kind this ecosystem that's much larger of mortgage loan originators that are more familiar, more comfortable with the products. So I think here we are in Q4 of 2024, and I would think that most of us in non-QM are optimistic about where we go from here.
Robbie Chrisman
I know a big part of Champions Funding is finding ways to better support these borrowers. Maybe you can share some of what you're doing with the general industry here, but for folks working in the non QM space. How can they better support borrowers that are out there that fall into their bucket?
Evan M. Stone
When you think about what non-QM really is, it's highly credit worthy borrowers that just don't fit in to the Fannie Freddie box for whatever reason. Generally, it's because that the way that they need to prove income or in certain cases can't prove income at all based on the way that they earn money is not acceptable to Fannie and Freddie. And certainly the studies that we have that we've spent time looking at would strongly suggest that there's really inherent credit biases inside of Fannie and Freddie that are just not helpful to disadvantaged borrowers, underbanked borrowers, underserved borrowers. And so non-QM fills a very, very important need in the marketplace for all sorts of self-employed borrowers. We live in 2024, not 2004, and there's a lot of different ways that people earn money, and those ways need to be considered in the credit underwriting process.
That's what non-QM does. And so I think the best way for lenders to support non-QM borrowers is to be very smart and considerate in the way that we underwrite in the guidelines that we create and the way that we socialize those guide really drives credit performance. So we're not going to ever sacrifice on credit performance, and we're going to be very mindful of that. In order for this business to thrive and succeed, we always have to be mindful of credit performance, but we also want to be mindful of the fact that every situation's different. In the non-QM world, I'm sure others would tell you the same thing. Every loan is a story. Every loan is a unique story. And if you take a Fannie Freddie or a push button get mortgage mindset, it's not going to work. It is highly manual. It requires common sense, and it requires getting your hands dirty and being gritty with the way that you approach that file to see is there a way to approve the borrower responsibly and put them on a path towards home ownership.
And you can't do that every time, but it does take some work. And what I see out of some of our competitors, and I won't name any names, but certainly it feels like some are looking for an excuse to decline the loan. At Champions, what makes us a bit different. And I'm sure other lenders embrace the same mindset is a yes before no trying to figure out a way and really working with that borrower to see, okay, can we put together a credit profile that makes sense? There's not much we can do about the LTV, there's not much we can do about the credit score other than maybe a rapid rescore. But as long as those two things are solid, then we know that's generally what drives credit performance. And then other more soft guidelines, we got to be able to work with the borrower on those. And Champions in particular, we have a mandate to serve underserved borrowers. So we're not looking for excuses to say no. We're always looking for a way to say yes.
Robbie Chrisman
That's a good way to view things. I think from the general public's perspective of they view non-QM as kind of this question mark box, "Hey, what is this?" And so I'll ask you what's going on with the public relations side of non-QM? Is the general public coming to see it less and less as similar to "subprime"? And I'm very sorry to use that word during this interview, but that's kind of a blunt way to put a drastic view of how people view the product.
Evan M. Stone
Yeah, no, that's okay. It's an important question because while I can't speak for the general public, I wouldn't say that I'm proxy for public sentiment. I'm much more concerned about the way that our industry in general and those that might regulate it view a non, and the fact is non-QM couldn't be further from subprime. I mean, when I think of subprime and some of us were around when subprime was alive and well, we're talking about very challenged credit scores, very high LTVs, a lot of issues with credit. That's really not anywhere close to what we're seeing in non-QM. We're talking about FICO scores that in general average in the mid seven hundreds, LTVs that are kind of high sixties, low seventies, really the hallmark of non QM is that generally speaking, we're dealing with a population of either self-employed borrowers, borrowers that have transitioned to different industries.
It's generally an income issue. And as we all very well know, if you're not a W2 borrower, income can be very, very tricky. And Fannie Freddie has a very narrowly defined way that an underwriter should look at income and non-QM just expands that definition. So really the only leg of the credit stool where non-QM is materially different is just the way that income is underwritten. But often times the LTVs and the FICOs for non-QM are at least on par with QM. And then you look at the credit performance and it's commensurate with QM. So some vintages better, some vintages may be a little worse, but on balance about the same. So you would not see that with subprime. Now, I'm not saying FHA is subprime, but if you look at the credit performance of FHA, it is far, far, far worse than non-QM. And I think FHA plays a very important and critical role, especially with first time home buyers and lowdown payment scenarios. But the reality is that all you have to do is look at the facts rather than try and define non-QM with feelings. Let's define it with the facts. And the facts are that non-QM performs very, very well, and it is no big secret or mystery as to why the primary credit characteristics of non QM are incredibly strong.
Robbie Chrisman
Well, let me ask you about products in the non-QM space because it isn't just a one size fits all type of product. Are we seeing any new and innovative products hit the market out there?
Evan M. Stone
Well, when people talk about products, I really think of it more as guidelines. Perhaps one way of thinking about non-QM is that it's really one product, and then there's a lot of different guidelines. Different lenders offered different guidelines. And so one borrower may fit into one lender's box, one non-QM lender's box, but then not another. And so I would probably answer the question is I do believe that there's been some evolution in thinking about how to construct guidelines that are responsible yet offer more opportunities for borrowers to qualify to buy homes. And so yeah, I think probably when you look at where we are today vis-a-vis a couple, few years ago, the thinking has evolved there. But I would also say that the thinking has largely evolved in areas that don't necessarily hurt credit performance. You're not seeing, oh, let's do a hundred percent LTV 580 FICOs like what you saw in 2005.
It's more around the edges. So we're not seeing deterioration in FICO or LTV. It's more, okay, well, for a borrower, potentially a borrower that has a demographic background where disproportionately they don't trust banks, and so they pay for certain things in cash. How important is that institutional verification of rent vis-A-vis maybe a private party VOR where you don't need canceled checks because if you require canceled 12 months of canceled checks, then you're really hurting people that mistrust distrust banks and they don't write checks. So I think there's been more thinking around those sorts of issues where they still have to have a significant down payment. They still need to demonstrate that there is a credit history there that would validate making the loan, but then some of this soft stuff, I think there's been probably more progressive thinking around that.
Robbie Chrisman
And finally, before I let you go, I want to ask about the perspective of the non-QM lender. What's sentiment right now? Do you think it's more optimistic in general than those that play in the conventional space? How would you pay it currently?
Evan M. Stone
Again, because we are a pure non-QM DSCR lender, we don't present offer Fannie Freddie, FHA, VA, prime jumbo. It is just not in our wheelhouse. It would be hard for me to really peg the sentiment of the more traditional lender, but I think all you have to do is look at origination numbers and extrapolate from that, that it hasn't been a fun journey for those lenders the last two and a half years. And I don't know what tricks they have in their toolkit to try to keep on going, but in the non-QM space where you're dealing with potentially a less interest rate sensitive borrower, I mean, the borrower cares about the rate, but what they primarily care about is being able to get into the home, fewer competitors. If you go to bankrate.com or LendingTree, you're not going to find a rate table for non-QM.
Again, every situation's different. There's no real commodity. It's not a commodity. So I do think that if you are a non-QM DSCR lender, the road has been a bit better for that population the last two and a half years. And I would imagine that given we have no idea where interest rates go from here, I know that the traditional mortgage lender has been bailed out so many times, whether it was Brexit, then Covid, where rates had gone up and originations had come down. And so I think a lot of mortgage lenders have been almost trained that, "Hey, there's a life vest coming our way." It's just a matter of time before rates dip. And then where it's good times, again, maybe not this time. And so if you are a non-QM lender, then you're in a space where inherently we know that rates are a little bit higher.
You're not really competing on rate as much as you're competing on your ability to deliver for the borrower. I much prefer that space. I don't like being a commodity. I'd like to think that the solutions we provide are much greater than just the rate that we provide, knowing that the rate is still important. There's a lot of other value that we provide our origination partners and their borrowers. And so yeah, I think that especially in potentially an elevated interest rate environment, that may persist for sometime. I think non-QM is likely a better place to be.
Robbie Chrisman
Very well put, Mr. Stone. I really appreciate all the insights. I think it's a space that should be discussed more and more as it becomes more and more mainstream. So thank you very much.
Evan M. Stone
Of course, Robbie. Yeah, it's good to connect with you
Curious how you can incorporate out-of-the-box solutions that get more creditworthy, yet non-traditional homebuyers and investors, approved? Find out more at Champs TPO.
