What are the opportunities in the non-QM space?

Navigating the Future-Insights on Non-QM Market Opportunities, Loan Distinctions, and Acra’s Mortgage Market Impact Paul Lucas [00:00:05] Hello, everyone and welcome to the latest edition of MPA TV as we go in depth on the Non-QM space with Acra Lending, Non-QM, of course, standing for Non-qualified mortgages, meets the needs of borrowers don’t meet traditional lending requirements. It’s a sector of the market that has exploded in popularity in recent years, but still has a questionable reputation among some misguided borrowers who see it as a new version of the subprime loan. So for brokers operating in the space word, the opportunities lie in 2024. And how can they overcome that misperception? In this edition, we catch up with Jeff Lemieux, Correspondent, Lender and Investor at Acra Lending to find out Jeff, welcome to MPA TV. Jeff Lemieux [00:00:50] Thanks for having me. Paul Lucas [00:00:52] So Jeff talked to us about the non QM space just to get the ball rolling. What makes non QM land loans different from subprime loans? Jeff Lemieux [00:01:01] Non-qualified mortgages are different than traditional mortgages primarily, for two reasons. Number one, they’re often made to entities LLCs. So the borrowing entity isn’t an individual consumer. And that’s because the loans made to investors or for a business purpose, that being that the borrowing entity is leasing that property out for a return. The other big difference is with a traditional lender, they tend to have more restrictive quality, qualifying criteria that often limits small business owners from being able to qualify for a loan based upon Fannie Mae and Freddie Mac’s underwriting criteria. Paul Lucas [00:01:43] Yeah, it’s amazing, isn’t it? I mean, Non-QM perhaps sometimes gets tagged with that, that reputation. But the reality is, it’s a loan that’s very much here to help people and businesses as well, of course, looking at the market across 2023, how would you assess its performance? It’s been a tough one, of course, across the whole of the mortgage space, but particularly tough for Non-QM businesses, would you say? Jeff Lemieux [00:02:06] In 2022, we had a rapid increase in mortgage rates. And what that led to was a situation where fewer borrowers were qualified for loans. So it shrunk the borrowing pool, it shrunk the customer pool, so you had fewer transactions. And that obviously stresses a business if you have fewer opportunities to make revenue. So we’ve done a good job at Acra in particularly 22, under our CEOs leadership, of adjusting to the demand for the loans, and adjusting the business accordingly, while still staying profitable. And it’s a function of continuing to increase the rates, so that you are able to make money on the loans. And then secondarily, managing to reduce your expenses, so that you still maintain your profitability 2023 was an has been maybe the most challenging year because of the rapid increase in rates. So we expect in 2024, that it will be better than what we’ve experienced in the last two years. And that is greatly a function of a belief that the Fed is done increasing interest rates, and as such, will start to move over the next 12 to 18 months, the expectation is more towards a 6% or high 5% kind of interest rate environment. Paul Lucas [00:03:52] Thanks. So it sounds like there’s reasons for optimism going into 2024. What do you see as the opportunities in the market for the year ahead? And indeed, beyond? Jeff Lemieux [00:04:02] Well, I think the biggest opportunity that we see is as rates come down, we’ll be able to grow our production. We’ve had numerous unfortunately competitors go out of business. We don’t We like competition, but there are fewer competitors. So we do believe that we’ll continue to gain market share on our kind of standard Non-QM loan business. In addition, we began last year a bridge lending program. That bridge lending program, commonly referred to as fix and flip is providing financing to property investors who go in make improvements on the home and then sell the home or hold the hold the Home long term for the purpose of renting it out. Paul Lucas [00:04:55] And I know that you’ve gotten to that focus as well in terms of your business purpose loans. Can you just talk to us a little bit about those and how they’re addressing the needs of your clients as well? Jeff Lemieux [00:05:05] Well, the fundamental issue in the United States is that there’s greater demand for single family homes than there is supply. And by providing, particularly for the bridge loan opportunity, you, you’ve got the opportunity to fund our borrowers who then go in and improve a home and make that home available either for rent, or for sale to people who, who really need a home is shelter. One of the interesting facts about the US housing market is that very few apartments are built, built with a third bedroom. And generally, it’s the need for that single family home is that third bedroom as people, you know, have children in families grow. And so we really see what we do as being a real benefit for increasing the housing supply for the typical American family. Paul Lucas [00:06:09] Okay, and then just, you know, while we’re on this subject of Non-QM generally being a little sort of hazed in the shadows, if you want shed some light for our broker audience out there, is there anything that you think within the Non-QM space that they need to have a little bit more education on? Jeff Lemieux [00:06:26] It would certainly the real, there’s an opportunity for them to understand how a bridge loan works, and how that is funded. There’s two, there’s two fundings in the simplest way to explain it. And that’s the initial close. And then there’s the funding of the rehab. work that’s being done. That’s done in stages. So as the as the after the initial close as the borrower is improving the property. They provide to us receipts that the work was completed, we inspect the property to see that the work was completed, and then we fund a draw for them to continue to be able to complete the property in the rehab work. Paul Lucas [00:07:11] Okay. Jeff Lemieux [00:07:11] That’s commonly not understood by brokers. Paul Lucas [00:07:14] Okay, so obviously, some education needed around bridging. But in terms of a general tip for success, what sort of advice would you give brokers who might be watching this for the year ahead? Jeff Lemieux [00:07:28] The opportunity to originate Non-QM loans and understanding the guidelines, and the basis for the credit decision being made, is worth their time to understand it, and to work with lenders such as ourselves, because it does represent an opportunity for them to increase their volume, particularly in light of the fact that if they’ve been a traditional mortgage originator only the number of opportunities for them to refinance existing traditional mortgages, probably isn’t going to be very large for a number of years. Paul Lucas [00:08:09] I think that’s a really good summary. Jeff, It’s been an absolute pleasure to have you with us. Jeff Lemieux [00:08:15] Well, thank you. Paul Lucas [00:08:16] And huge thanks to Jeff and of course to Acra Lending. And if you want more information about Non-QM mortgages, remember to click on the nonprime section of the Mortgage Professional America website. And we of course, will see you next time right here on MPA TV.