![]() That is typically accomplished through whole loan sales or private label securitizations along with hedging - such as the use of third-party forward contracts that allow for bulk loan sales at a future date at a predetermined rate. Non-QM lenders are dealing primarily with purchase loans that require far more intensive underwriting than agency loans and, once funded, must be moved off the balance sheet quickly in many cases to maintain liquidity. So, when rates are rising, and the market is compressing, non-QM becomes a more vogue product,” Yoon added. We’re in an environment where we’re looking to expand and grow, even in the midst of the cycle that we’re in now. “We’re a non-QM platform that happens to have all of our agency tickets, but you know, 85% to 90% of our production is non-QM. “And everyone is more keen to the idea that market volatility and higher rates are here to stay for the remainder of this year, so everyone’s everyone is likely prepped better to handle the circumstances in the event that the rates move rapidly,” he added. Yoon said he does not anticipate that rates will move upward rapidly going forward like they did over the first quarter of the year because the Fed’s aggressive interest-rate policy and other economic headwinds are “already backed into the market now.” “So, we haven’t completely cleared the deck, but we made a pretty good bite into that In Q1.” We saw $2 billion of it last week alone ,” he added. “There is still a lot of that paper out there. “The hope is we can put a whole bunch of 5.5% or 5.25% current rate coupons so we can get back to ,” Toohig said. Still, a good portion of the lower-rate mortgage paper has worked its way through the system and is being replaced by higher-rate mortgage loans. Both agree the industry is not completely out of the woods, given interest rates are still much higher than in 2021 and may inch up further in the months ahead as the Federal Reserve continues to fight inflation by raising its benchmark interest rate and shrinking its portfolio of mortgage-backed securities. The good news, according to both Toohig and Yoon, is that in the second quarter of 2022, so far, the extreme rate volatility has abated. But the kind of the unique piece of it this time was that interest rates have never risen as quickly as they went up in such a short period of time.” “That caused industry layoffs and rightsizing, downsizing, whatever you want to call it. “And when the margins compressed and did so quickly, everyone had to react immediately,” he said. Thomas Yoon, president and CEO of non-QM lender Excelerate Capital, added that the housing industry in late 2021 and early 2022 was at the tail end of a historic refinancing boom. “… It’s exceedingly unusual to see that deep of a discount on fully performing, relatively young loans,” Toohig added. We started to see a pretty precipitous drop down to 90 or 91. “Then came March, and rates kind of kept going, and that caught everyone kind of flatfooted. “And then in February 99 became 96, and that was still a hot trade. ![]() “Loans that before would move at 102 or 103 all of a sudden were on sale at 99 in January, and that was a really hot trade,” said John Toohig, managing director of whole loan trading at Raymond James in Memphis. The same rate-spike dynamics hit non-QM lenders as well, with rates for those loans rising a couple points over the period as well, to the 6% to 7% range. That negatively affected liquidity options in both the loan-trading and securitization markets as higher-rate loans subsequently hit the market. Lenders saw the value of agency loans made at lower rates - in the 3% range - in 2021 and early January 2022 drop precipitously over the course of the first quarter. That bolt-like spike in rates put many mortgage lenders into crisis mode. Interest rates jumped by more than 2 percentage points over the first quarter of 2021.
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