The non-agency market, which virtually dried up during the pandemic, is back in a big way. But taking advantage of non-agency opportunities to serve more borrowers can be challenging—and it’s about to get even tougher.
Over the past year, lenders have been originating a lot of investment property loans and were counting on originating more to keep business flowing. But under new rules, many lenders will have to find new capital partners for these loans, which is causing a good deal of confusion and stress—and demand for help.
New Limits in Effect
Thanks to rising home values, the market for investment properties and second homes is on fire. Last month, Standard & Poor’s CoreLogic Case-Shiller national home price index registered a 14.6% annual increase, the most in 30 years.
Until recently, a lot of these loans were being sold to Fannie Mae and Freddie Mac. But truth be told, that’s not what the GSEs were created to do. The GSEs are supposed to supply the housing market with a source of funds for homeownership, not “home rentership.” Investment property and second home financing is inherently riskier than owner-occupied financing, too.
So in April, the FHFA decided to tighten up the GSEs underwriting criteria for these properties. Among the changes is a 7% limit on originators selling these products to the GSEs, which will now be monitoring lenders to make sure they comply with this limit.
What This Means
The GSEs’ action has created a tremendous shift in the origination and securitization of non-owner-occupied loans, as many lenders were well over the 7% cap. In fact, the investment property loans some lenders sold to Fannie Mae represented more than 20% of their agency volume.
There’s a lot of confusion among originators over how to manage this new rule, and how to underwrite loans that are technically agency products but must now be underwritten differently for private securitization. Meeting due diligence requirements is also creating stress around loan turn times, which is causing lenders to raise prices and tighten down payment requirements.
Additionally, this scenario is creating a bit of a liquidity crunch for lenders, as launching or expanding non-agency channels of business is no simple task. To continue growing business by selling investment property and second home loans, most originators are going to need help.
Where to Find Assistance
The most obvious step is to partner with a reliable mortgage outsourcer with the non-agency expertise as well as the staff resources and technology to streamline production so originators can close loans quickly and efficiently for private securitization.
A good partner will have developed specific non-agency products and services, including pre-close and pre-purchase loan reviews, that can help sellers expand non-agency channels and scale efficiently. Typically, such providers will have more than adequate staff and leverage remote workforces domestically to ensure lenders have access to expert underwriters with non-agency expertise when they need them.
A quality outsourcing partner should also have technology capable of anticipating what capital markets need from sellers as well as an underwriting platform designed for any type of loan, including non-agency products. Even better, your provider should have partnerships with entities that can streamline non-agency loan exchanges between buyers and sellers. This is a particular area that is in dire need of innovation, but new exchanges have become available.
No doubt, non-agency loans still represent huge opportunities for lenders to grow business in a shifting market. If your organization needs help taking advantage of them, give us a call at 888-892-1843 or drop us a note at [email protected]. We’re happy to help.