Rock steady: Non-QM done by design, not decline

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Industry headwinds over the past few years serve as tailwinds for the non-QM segment of the market — and originators should be taking advantage of it

TO PUT it mildly, markets have been challenging over the last few years. Originations dropped by 60 percent, to $1.6 trillion from $4.4 trillion, in 2021. Banks faced liquidity issues in 2023, with some of the largest agency and non-agency competitors going under or taking a massive hit. Rates reached 15-year highs that resulted in major margin compression. But for those willing to rethink the standard approach, from great challenge came great opportunity. “All of those headwinds were essentially tailwinds for non-QM,” says Tom Davis, chief sales officer at Deephaven Mortgage. “In the past, non-QM was a fallout kind of deal, where it wouldn’t fit the agency box, so you’d try non-QM. We take a different approach. We do these deals not by decline, but by design.” Originators need product to compete, they need product to differentiate themselves, and they need product to tap into new referral partners, Davis says. He adds that when refinance business sat at 75 percent, it was fine to focus on that segment. But now that the tables have turned and it accounts for only 25 percent of the market, originators need to widen their net. Just like there are agency borrowers in every single town, there are non-QM borrowers in every single town, Davis notes. High-income, high-net-worth, self-employed, credit-event borrowers, real estate investors — there are many reasons why a person may need a non-QM product, and originators “need to take a different approach and find ways to get into the realtor base to access referral sources such as accountants, CPAs, attorneys, real estate investor clubs, and wealth advisors.”

Deephaven Mortgage has been a pioneer and leader in Non-QM since their origin in 2012. Their longevity and strength in the non-QM space has allowed a significant number of borrowers to achieve homeownership who otherwise would not have done under traditional requirements. Deephaven offers a wide array of non-QM loan products that include a true LLC business-purpose lending option. Their non-QM portfolio includes a DSCR cash flow loan, Expanded-Prime, Equity Advantage second mortgage, and Non-Prime solutions for borrowers who miss traditional agency qualifications. Business-purpose lending is available with their DSCR, Expanded-Prime and Non-Prime loans. As experts and educators in the Non-QM sector, Deephaven offers extensive training to all of their mortgage partners. Discover The Deephaven Difference!

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“In the past, non-QM was a fallout kind of deal, where it wouldn’t fit the agency box, so you’d try non-QM. We take a different approach. We do these deals not by decline, but by design”

Tom Davis, Deephaven Mortgage

Deephaven is a pioneer in the space, having arrived on the scene 12 years ago with an agenda to innovate. The company is laser-focused on keeping pace with the market’s range of appetites via their seasoned team of experts, and works with originators all around the country. Last year, Deephaven put out over 1000 webinars — “We’re in the business of educating and driving product awareness in the industry, and I think we do it as well as, if not better than, anybody else out there,” Davis says — including multiple presentations on non-QM. They not only highlight the features and benefits but also dive into how and where to source the loans, as this product requires a grassroots, hands-on approach.

Taking a strategic or advisory approach with clients, Deephaven gets an understanding of their clients’ needs, their target markets, and where they may be under-indexing in production, and then helps develop a plan to go after that business. In no small part because of these efforts, there’s been a steady rise in adoption rates, and non-QM is expected to increase 30 to 40 percent in 2024, year over year.

“There’s a real opportunity here to target these markets if you focus on the product, embrace the product, and become experts within the product,” Davis says. “People in these areas will come to you because you become known for that expertise.” Deephaven also hits the streets to spread the word. Davis, at his fourth conference in ten days, spoke to a fairly large originator who was reluctant to do non-QM until Davis hit him with this stat: in 2023, 26 percent of the purchase market was investor transactions. And then this follow-up question: Is 26 percent of your business investor transactions? “If not, you’re under-indexing the market because your originators don’t know how to leverage these products to tap into new investors and professional investors,” Davis says.

“There’s a real opportunity here to target these markets if you focus on the product, embrace the product, and become experts within the product. . . People in these areas will come to you because you become known for that expertise”

Tom Davis, Deephaven Mortgage

“We rolled it out late last year and it’s now over seven percent of our business after just six months. We expect it to be a big product in 2024.”

Getting the word out

Going where the opportunities are

Getting the word out

Going where the opportunities are

Published April 1, 2024

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“You have conventional products, but do you have an investor loan offering that focuses on one-quarter of the market? If you want your people to originate, they need to be comfortable selling it, and they need a partner who can help structure those deals.” Davis and the originator exchanged information to potentially get Deephaven to come in and do what they do best — educate. “This is the scenario we run into on a daily basis. Originators realize they haven’t been focused on this and want to change that, and when we invest time together to help them grow that business, that’s when the magic happens.”

To put it bluntly, why only serve part of the population when there’s such a massively underserved market? People still need that money, and they will find a broker to help make it happen, Davis stresses. “If originators are watching their volume decrease and they want to expand and grow in a down market, leveraging non-QM allows them to target all borrowers and expand their referral base,” Davis says. He ends with this warning: “Include this product in your offering to help — or don’t, and watch your competitor close.”

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A challenging market

Originations dropped by 60% in 2021

Rates reached 15-year highs

Banks faced liquidity issues in 2023

Refinance business sits at 25% of the market

The rise of non-QM in the US

In 2023, 26% of the purchase market was investor transactions

Non-QM is expected to increase 30–40% in 2024, year over year

There are over 19 million investment properties

There are over 18 million self-employed people, accounting for 30 million businesses

There are close to 40 million foreign national borrowers

Deephaven’s commitment to education and tracking trends sets it apart, and Davis underscores the importance of a knowledgeable and innovative partner who isn’t afraid to give you the straight facts. Davis points again to the material size of the non-QM market in the United States: there are over 18 million self-employed people accounting for 30 million businesses, over 19 million investment properties, close to 40 million foreign national borrowers, and more than 20 million people who are millionaires.

There are more than 20 million millionaires

Deephaven remains very bullish in this area, with a budget that’s increased 30 percent above last year’s, and Davis expects this trend to continue over the next three to five years. Always identifying areas of opportunity, he projects that the second-lien market will expand this year. With the average age of homes edging over 30 years, renovations are likely imminent, and credit card debt and auto loans are sitting at all-time highs of $1.1 trillion and $1.6 trillion respectively. And with 80 percent of borrowers currently on a rate lower than today’s offerings, this could mean many people will turn to a second-lien option to consolidate debt and access the cash they need. Deephaven is already seeing a surge in appetite for this option. “That product took off for us very quickly,” Davis says.

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