This piece originally appeared in the November 2022 edition of DS News magazine, online now [1].
The views and opinions expressed in this article are those of the author and do not necessarily reflect or represent the views, policy, or position of Planet Management Group.
In the wake of this summer’s non-QM market rate and volatility shocks, nonconforming investors are taking a page from the institutional investor playbook and placing higher values on non-QM portfolios being serviced on reputable, rated servicing platforms. Doing so recognizes the value of maximizing opportunities in the marketplace and minimizing default, especially Early Payment Default (EPD), and other hurdles non-QM investors encounter in a rising rate market and possible recession.
Many of the same high-touch customer tools and tactics highly rated servicers apply in the QM market will solidify the health and value of the non-QM portfolios while ensuring a quality borrower experience. These include professional, integrated borrower onboarding communications, online account management and automated payments, customer service representatives dedicated to first-call issue resolution, and a payment app with a smooth user experience.
Beyond those lie another set of tools and tactics specifically targeted to non-QM portfolios, including unique loan-boarding processes, custom reporting, identification of potential Early Payment Default (EPD), and in-flight process management to ensure timely payments.
Because even a single loan default can create a loss for a lender, choosing an experienced, rated non-QM subservicer can minimize risk and end up saving substantial amounts.
A non-QM servicer that keeps defaults to a minimum and adheres to regulatory requirements may also help investors take advantage of the ability to convert certain non-QM loans to Qualified Mortgages (QMs) after three years of seasoning or could assist investors moving loans into non-QM securitization pools.
Lenders that originate non-QM loans may also find that using a rated servicing platform with a non-QM specialty can increase the value of their loan sales or securitizations. Investors seem to be paying up for non-QM portfolios that have been serviced or interim serviced by a rated, reputable servicing platform. That’s because investors know the platform’s specialization and depth of knowledge in default servicing will help reduce EPD and missed payments—two of the most prevalent reasons for non-QM defaults and pricing hits.
1. Specialization Is Key
Companies approved to subservice government and agency home loans must demonstrate a basic level of competence and pass ongoing compliance audits confirming those abilities.
But non-QM loans aren’t vanilla and competence in subservicing QM home loans doesn’t necessarily translate into competence in subservicing non-QM loans.
The COVID-19 pandemic demonstrated why specialization is essential in nonconforming servicing. Agency subservicers responded to COVID-19 by applying unified changes across conforming portfolios. Non-QM subservicers had to implement rules set by private investors responding differently to borrowers whose finances were upended.
The Planet Management Group asset management team created specialized programs for our non-QM asset holders based on individual borrower circumstances while keeping both investor portfolio strategy and compliance requirements in mind. We could make those adjustments because our asset management expertise and Monetization Engine technology allow investors to shift strategies quickly in response to changing markets.
2. Default Management Through the Life of the Loan
Having targeted technologies and strategies to identify early a newly originated loan’s propensity for default or property issues impeding the ability to rent for asset-based originations is critical to portfolio quality for non-QM portfolios.
As a loan seasons, proper asset management can improve portfolio performance. The application of proactive strategies targeting high-risk borrowers, expanded special forbearance and loan modification options, debtor incentives for pre-foreclosure sales and a sense of speed and flexibility can all reduce losses when applied by expert asset managers and loan counselors.
Keeping delinquencies from occurring, and rapidly addressing those that do happen, increases the likelihood that an investor can take advantage of the CFPB’s Seasoned Non-Qualified Mortgage Rule on converting non-QM loans to QM loans. For applications received on or after March 1, 2021, the rule allowed certain home loans held in portfolio for 36 months to be converted to QM status. To qualify, the home loan must meet certain requirements, including a requirement that the home loan can have no more than two 30-day delinquencies and no 60-day delinquencies at the end of the seasoning period.
3. Targeted Technology and Strategies
Technology within the QM subservicing market is well-established with most servicers using one of a handful of tools. By contrast, the technology employed in non-QM servicing must be far more flexible to accommodate the diverse needs of asset investors.
A solid non-QM servicing platform must be capable of creating custom workflows and unique default waterfalls. In a rapidly shifting market, today’s investors realize that the ability to change strategy for an asset can preserve or even improve projected returns.
Next-level technology provides customized reporting that allows asset owners to model outcomes based on “what if” scenarios. Planet Management Group’s technology stack enables investors to identify and quickly implement strategies to improve results.
4. Experience From Line Managers to Leadership
Maximizing the ongoing value of non-QM assets requires specialized knowledge at the loan and portfolio levels. Everyone from asset managers to leadership must thoroughly understand servicing with a non-QM spin. Having a team experienced with servicing non-QM assets makes the most sense.
Non-QM assets shouldn’t be treated like their QM counterparts, they require a different and diversified approach of creative strategies led by experienced managers to mitigate risk. Effective asset managers also oversee performance on current loans, such as ensuring payments are posted correctly, statements and letters are correct and timely sent, and complaints are handled appropriately.
Strong expertise is also essential to companies intending to scale up and those seeking to minimize risk.
5. Standard of Excellence in Operations
How asset managers operate and manage their portfolios matters. Having an experienced asset manager who operates efficiently is key to non-QM portfolio profitability. Planet’s core servicing group provides operational excellence and strong support for key servicing functions, such as loan boarding, cash management, investor reporting, and default operations. In turn, Planet Management Group provides unique asset monetization engine platform provides lenders and their investors with transparency into performance and superior customer service.
In such a highly competitive and regulated industry, operational quality must also encompass following and upholding complex servicing and compliance standards. Highly rated servicers are constantly reviewed by rating agencies, state, and federal regulators and individual investors. They are closer to understanding and correcting any compliance risks associated with servicing complex products, including non-QM products, which have become more of a focus since the subprime crisis.
Adding non-QM volume to boost overall originations can be a worthwhile goal, especially with the support of a subservicer with in-depth knowledge and experience in managing nonconforming portfolios. It’s important to consider and identify the value and expertise offered by a non-QM servicing platform. Doing so could make a difference in how profitably your assets perform, especially in this shifting market.