Non-QM loans are rising as the gig economy grows

Editor’s note: This interview has been edited for length and clarity

Sarah Wolak: Tom, you told me before we sat down that September was a record month for Deephaven. Can you tell me more?

Tom Davis: We have just completed a record month and this month (October) is on track for a new record. I would say the drivers of non-agency or non-QM lending. So if you just look at the non-agency estimates earlier this year, people were predicting a range of $60 billion to $70 billion in non-QM. We’ve probably reached over $100 billion this year, so a 50% gain from the beginning of the year.

People estimate that securitizations might cost $50 billion; we are already at $58 billion, and we will probably reach $70 billion. So the market is growing. There are a lot of capital investors. I would say second liens have also been a big growth area. So I think second liens from the first half of the year to date have reached about $125 billion, including closed-end seconds and traditional HELOCs.

RTL will reach $35 billion; our sister company, Anchor loansdoes RTL. So just in these three products alone, you’re looking at a market of $350 to $400 billion in new mortgage lending, and then you throw in jumbo, it’s about 20% of total mortgage production.

SW: How can loan officers benefit from this?

TD: So if you’re a loan officer today, you need access to these products because if you don’t, you’re at a competitive disadvantage. It’s difficult to recruit and retain talent if you don’t have these products. And the reality is that there are 18 million self-employed people in the United States representing, let’s just say, 31 million businesses. There are 19 million investment properties in the United States accounting for 49.5 million doors.

There are more self-employed people than veterans. So all these lenders that have a veterans program should have a solution for the self-employed. And they should have a solution for investors. So far, about 28% to 30% of purchase transactions are investor transactions – almost a third of the market. So if you’re a loan officer and don’t have a full suite of investor solutions, you’re probably not maximizing opportunities in the investor space.

SW: You mentioned that second liens have been a big success factor for Deephaven this year.

TD: We have a full suite of second liens – I see second liens as a generational opportunity because equity is at an all-time high of $35 trillion. Consumer debt is at an all-time high, whether it’s credit cards, auto loans, buy now, pay later, and student loans.

The average age of a home in the United States is 40 to 50 years old, so we are dealing with an aging housing stock. Anyone who owns a home, 85% of them have a rate under 5%. A lot of these people have rates of two, three and four, right? They cannot afford to move to a bigger house because of the higher note rate in the sixes and the higher taxes and insurance.

So what happens is that people stay in their homes longer because they can’t afford to trade anything. Some of them plan to live in their homes forever. They rehabilitate their home to current market standards. More than 50% of the second liens that are done are renovation deals, where people borrow money to renovate their property, kitchen, maybe bathrooms, floors, roof, pool, ADUs, whatever. The other piece is debt consolidation.

People are also tapping into their home equity to finance their businesses and buy more investment properties. The investors who have real estate investments, if they have a loan for it and the interest rate is low, and that real estate has cash flowing in, then they will not refinance from a low interest rate. What we see is them taking out $100,000 in cash and buying two more investment properties.

SW: I guess this also explains the makeup of HELOCs?

TD: Yes, to build on that demand, we have some product expansions that are right around the corner here in November, in the HELOC space, and in the near term.

SW: What was the driving force behind the successful September, other than home values ​​being at record highs and inflation and debt consolidation opportunities playing a role?

TD: I think rates would have to drop substantially to make second liens irrelevant. And when I say materially, about 150 basis points lower, because then it might make sense to refinance the first with the second. But that’s all a financial equation, and a loan officer must help a borrower make that decision if they want to refinance.

It’s a great opportunity for the loan officer to pick up the phone and say, “Hey, we made you a loan four years ago, you hit a home run with the 2.5% rate.” And then you might say, “By the way, congratulations on your equality. You have €150,000 in equity. How is life? Are you looking for children? Or have you had children? Or do you want to renovate your home? Have you thought about renovating your house?’ These conversations allow the loan officer to understand where their financial goals lie, congratulate them on the equity and low interest rates, and then take a more financial advisor approach.

If the loan officer does not offer the second lien, do you know who is offering the second lien? The manager who purchased the first lien. So not only did the loan officer lose the borrower on the second lien transaction, but when it comes time to pay out the refi, if it makes sense to consolidate both loans, that borrower goes with the servicer.

SW: How does Deephaven prevent loss from happening?

TD: The space will continue to grow. We are already predicting that the non-QM market will be approximately $100-$150 billion next year. So for the initiators we work with, we are their investor and we provide a lot of training. We train a lot. We also do a lot of presenting on behalf of our clients to the referral sources.

But for second liens, we build out a marketing playbook for our clients where we give them a tool with maybe 15 pieces of collateral so that if they have a marketing team, or if they don’t have a marketing team, they can just take our content and use it in their marketing to their previous clients. Because while a loan officer can pick up the phone – I highly recommend picking up the phone, by the way – the marketing is also important.