8.12.26 Non Agency Production; Angel Oak’s Tom Hutchens on Non QM; Technology and Information Intersection

Robbie ChrismanWelcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include the ramp up of non-agency and equity lending, technology, information, and the capital markets. My interview with Angel Oak, Tom Hutchins, on the latest from the non-QM space. There, take a listen to a little preview. When you talk about products or your broker partners, what is moving the needle in the non-QM space? Are there new products that are doing things or are maybe a different way of asking that would be what are brokers expecting from a non-QM partner where you can really deliver?Tom HutchinsReliability and certainty. We focus a lot on certainty. And frankly, that's not the industry standard in the non-QM space. So we want to tell a broker early on in the process, yes, this is this is a deal and we can close it for you. Or probably more importantly, no, this isn't a deal and no, we can't close this loan for you. We don't want to wait. Some people in this space want feel like just getting loans in the door is their goal. But our goal is to get loans closed and funded easily, quickly, efficiently for our broker partners. And and I, you know, I think a lot of people think that way, but their their procedures and their processes don't support that. We hear every day from our brokers that have been doing business with us for you know a number of years that they've tried maybe working with some other lenders and the experience, it's just different. And that's that's really what we hang our hat on is that uh we are that that reliable partner. Our account executives are extremely seasoned. I think our average tenure now with Angel Oak is over seven years. And you know, a lot's happened in the last seven years. So that's kind of a sign of how we operate.Robbie ChrismanThanks to this week's podcast sponsor, Optimal Blue. Did you know Optimal Blue's profitability center unifies pricing, hedge performance, pipeline activity, profitability, and market intelligence into one personalized dashboard, giving mortgage lenders faster, more complete insights to make better capital markets decisions. To learn more, visit OptimalBlue.com. One of the panels during this year's California MBA Western Secondary focused on the ramp up of non-agency and equity lending. Why has it increased as a portion of the overall residential origination pie? It's attributed to a changing economy and changing borrowers along with record equity. And in the high percentage of borrowers who have first-liened mortgage rates below 5%, aka the lock-in effect. There's consumer pressure, high debt, equity extraction, 40% of owners who don't have a mortgage. So owners are levering. From Freddie and Fannie's perspective, the agencies don't have an answer from any of these borrowers or scenarios. Any lenders refusing to adapt to these demographics do so at your own peril. We'll have more on that in a second during today's interview. But turning to the capital markets, an efficient market means that a buyer and seller have the same information. Think of disclosures used in home buying. The recent announcement that President Trump's company would be selling information ahead of the release to the public turns some heads. Mortgage banking remains a business vallocating capital against an unknowable future. Mortgage finance periodically mistakes new tools for new economies. Every cycle introduces technologies that appear capable of reshaping the competitive landscape, and for a time many do. Yet the industry's most persistent source of value creation or sources value creation haven't really changed. Secondary markets reward institutions for interpreting uncertainty more efficiently. Investors have lacked clarity as opposed to lacking data, and every mortgage-backed security is ultimately a collection of assumptions, bell power, or behavior, prepayment incentives, housing markets, labor conditions, and interest rates. The challenge has been determining which risks matter, which risks are mispriced, and which risks remain hidden until market conditions change. Technological progress may improve analysis, but it does not eliminate uncertainty. When everyone has access to similar models, similar data sets, similar computational power, competitive advantages shifts elsewhere toward governance, discipline, and decision making under ambiguity. The institutions that consistently outperform across cycles are the ones that maintain conviction when consensus is wrong, preserve liquidity when markets become stressed, and avoid confusing precision with foresight. How are you evolving your understanding of the difference between information and insight? For today's interview, I wanted to welcome back to the show Angel Oak's Tom Hutchins to talk about the latest from the non-QM space. He's president at Angel Oak Mortgage Solutions and has more than 25 years of experience in leading sales for a wholesale and correspondent lending platform and has proven successful in expanding a lending footprint nationwide. You are, for all intents and purposes, my non-QM correspondent on this podcast.Tom HutchinsHappy to be that.Robbie ChrismanIt's been a little while, and so let's get a state of the industry here. And as we uh wind toward, or I guess we're in the middle of the third quarter here. State of the non-QM.Tom HutchinsThe mortgage industry is just still struggling to kind of really grow, like we all had planned this year uh to be kind of a hyper growth year, honestly. We've had some things happen uh geopolitically that have hurt the industry and hurt real estate just as a whole, uh, with inflation and oil. You know, we we know all the reasons why. But the state of the industry, I'd say, is is really in a great position. Like we we've seen just over the last couple of years, so many new first-time non-QM originators uh that have learned that, hey, this these loans aren't that hard. And wow, there's lots of borrowers in my market that I have never even thought about reaching out to that I can now reach out to. So we're we're seeing the that kind of a transformation of non-QM being a more of a afterthought. Well, if I can't get it done this way, then maybe I can go to non-QM, which is, you know, traditionally the the non-agency volume, well, you know, I'm talking pre-financial crisis, that's really what it was. It was a fallout if they did someone's credit or whatever, but now it's not a credit play. It's really just their their situation, their they're being self-employed, their income, the fact that they own a lot of investment properties and tax returns and all that get super complicated. That has really filled a void in the market. That we believe this 12 years ago when we started this effort 13 years ago, that there's an opportunity. There's always non-agency borrowers. Fannie, Freddie, FHA are never gonna be the right loan for everyone. Certainly the majority of the people, yes, but not everyone.Robbie ChrismanI like your outlook because some people would say, gosh, there's all these new upstarts in my field. They're taken away from me. Versus you're going the if the entire pie gets bigger, we're you know, it's it's a good thing. That's yes. Inherent advantages you like having being the long-standing member of the non-QM society, uh Professor Amerita. Yeah, as Angel Oak, you know, advantage that Angel Oak enjoys having been in the space for so long.Tom HutchinsWell, we've worked really hard to build awareness of the industry, and it it honestly helps us. Uh, you know, yes, there's lots of competitors, but we we are very confident that our experience and our processes and everything that we do is as good as it gets. So we're comfortable with that. You know, it's okay that we used to have there used to be three or four of us doing non-QM. Now there's, I don't even know the number. I hear new names on a weekly basis, but that's fine. I'm okay with that. I'm okay that uh Angel Oak is known as kind of the original non-QM lender. We were doing non-QM loans before non-QM or QM was even a designation. So uh, you know that that that's fine. Uh we we all we always have had a target on our back, and we and we do today. So that that that's good. We feel good about the people that we have, our products, our processes, that we we do a great job for our broker partners.Robbie ChrismanHow does the non-QM space need to evolve from here? Or where do where do you see it evolving to continue to push things forward?Tom HutchinsTypically we we think in terms of products, but I don't think that it's I still don't think I think the products are very well positioned. There's good loans, they prove, you know, that we have a proven track record of performance, which has been the number one priority for us since we started this, because we knew following the great financial crisis, if all of a sudden we started originating bad loans that didn't perform, the lights would be turned out early. Especially in 2013, you know, that was so close to the financial crisis. We we heard a lot of people saying, oh, this is just subprime 2.0. And I don't know if you were in the business at subprime 1.0, Robbie, but we battled that. And and we said, no, listen, these these guidelines are solid. We have skin in the game because we're securitizing these loans ourselves. Uh some of the Dodd-Frank regulations require us to actually own pieces of the bonds that we issue. So the formulas were put together properly to build this successfully. So I started with saying it's products or we tend to think of products. And I don't think that. I think there's just still, this is still an untapped market. There are so many borrowers. You know, you think about how many more people are self-employed now over the last six years. You know, COVID created a lot of a lot of self-employed borrowers because companies said, hey, you know, why don't we just contract with you instead of employ you? And we we don't need office space for people anymore because they can work remote. And there's just reason after reason why this non-agency borrower base continues to grow.Robbie ChrismanAre there still misconceptions about non-QM out there, either from from borrowers or companies that are on the fence and skeptical? Anything worth dispelling here in 2026?Tom HutchinsThere's always a misconception that they're difficult loans to close because they're not agency. You know, the uh originators and processors on the agency side, they're just used to hitting a button and getting an approval and and what they have to to provide to close the loan. So non-QM is a little bit more manual than that, but the misconception is that they're hard loans to close. But you know, we we've done, and the industry has done a really nice job of getting technologies in places where the process is bulky. The easiest example, Robbie, is calculating income from bank statements. When we started this many, many years ago, we had to do it manually. We were reading PDFs of bank statements and uh on an Excel sheet, you know, adding up all the deposits and taking out the deposits we couldn't use. And it was a long, tedious process. Uh, but now we have automation and we can get income calculated within minutes, and that's that's the income that we're gonna use for the loan. There's no surprises, and and that goes a long way. So I think that's again, the misconception would be wow, I I want to do non-QM, but I I don't know anything about it, and it's probably too hard for me to learn. And so I'm just I'm not gonna do it. But again, that's what's really changed in the last couple of years. So many first-time originators have dipped their toes in the water and realized, hey, uh, the water's warm. This is this is nice. Yeah.Robbie ChrismanWhen we think about bank statement, loans, DSCR, closed end seconds, asset qualifier. Like, where are you seeing the most expansion? Where what products are seeing the most growth currently?Tom HutchinsOur bank statement HELOCs have been a real pit for us and for the market because we still haven't gotten out of the period where people are locked into these super low first lien rates, and they've seen equity in their properties grow tremendously since COVID, but they don't want to get rid of that 4% rate. And they already have a non-QM, a bank statement loan, but now they can tap into that with a HELOC or a closed-end second. And that and that's I mean, that's a new product. Yeah, that's a new product over the last 24 months. So that that that's where we've seen growth. And I think we're gonna continue to see that until first lien rates really kind of find their footing at a little lower level where it makes more sense to refinance into a first lien and tap into that equity. But right now, the numbers still are better. Generally, use a closed-end second or a HELOC.Robbie ChrismanThoughts on volumes for the year? I think I saw at the beginning, you know, when Redwood Trust did their first securitization, there was something they had predicted about $80, $85 billion in securitizations this year. Overall origination volume in the non-QM space between $150 and $200 billion. What are we tracking for this year?Tom HutchinsI I think those numbers are actually still pretty accurate, Robbie. Yeah, it's it's again, the more the business has been tough. The business hasn't really hit a growth spurt, but non-QM continues to grow because of all the things that we've just talked about. More and more people are tapping into that that market. And and the difference now is that most originators they they don't they see non-QM as almost a lead-in product. It's something that they can talk about uh with the referral partners. Hey, you know, it's something new. It's something new to talk about versus, hey, uh, you know, I hope they can fit fit into Fannie Mae, or it's just because the real estate agents they keep themselves educated on what kind of loans are out there. And so when they hear about something new, certainly they know self-employed borrowers that have nice houses and have talked to them about wanting to move, but thinking that there was no financing available. So it's a great talking point, even to open doors for originators.Robbie ChrismanWhat have we seen in terms of rate movement with more demand in the secondary markets? Just how much has that allowed the kind of the lid to come down?Tom HutchinsWell, the credit spreads have definitely uh tightened over the the years. So uh that that speaks to demand, it speaks to performance, which I already mentioned. You know, those when people see that these are good loans and there is just a lot of capital, people investors love US real estate. They just do. It's a very secure investment, uh, relatively safe investment. And at the loan to values and the credit profile of these borrowers, it's it's very safe. So as those credit spreads continue to shrink, the the rates go down as well. Now, what we need though are the the treasuries to come down. That that's what's really been kind of keeping the rates elevated. So as soon as those treasuries where are we on top of agency rates roughly with some of these? Um I I I would say so non-QM is primarily based on the two-year treasury versus the 10-year. It's a little bit higher than than normal, but I'd say the spread is anywhere from 100 basis points to 150 basis points in that range for for the consumer.Robbie ChrismanTom, always a pleasure. Let me be the first to wish you happy birthday.Tom HutchinsThank you, Robbie. Hopefully, we'll do this again soon. Uh uh, look forward to it. Thanks so much.Robbie ChrismanIn terms of bond prices and thus interest rates, it was a quiet day yesterday as investors largely stayed on the sidelines ahead of today's July Consumer Price Index Report, which is the key data point for recalibrating the odds of a September rate hike. The Treasury's strong $58 billion three-year note auction did not move the market as investors awaited a clearer inflation signal before making a larger move. CrossCountry Mortgage, the nation's largest distributed retail mortgage lender, priced its upsized offering of $750 million aggregate principal amount of 7.3 quarters percent senior notes due 2031. Today's economic calendar kicked off with mortgage applications from MBA, which rose 3.6% last week as a modest decline in mortgage rates, helped by a brief drop in oil prices on hopes for progress in the Iran conflict, encouraged both purchase and refinance activity. Refinance applications increased 5% week over week, but remained 22% below last year, while purchase applications rose 3%, but were still 1% lower year over year. We've also received July CPI, which was up 0.1% as expected after a prior reading of negative 0.4%, up 3.4% year over year, well above the Fed target. Of course, CPI was up 0.2%, also about as expected, after a prior reading of flat, it was up 2.5% year over year. Later today brings weekly crude oil inventories, Treasury's budget, and a treasury auction of $42 billion of 10-year treasury notes. We begin Wednesday with agency MBS prices slightly better than Tuesday's close, the two-year yielding 4.20, and the 10-year yielding 4.66 after closing yesterday at 4.68%. Let's wrap up with the joke and some housekeeping. An attorney arrived home late after a very tough day trying to get a stay of execution. His last-minute plea for clemency to the governor had failed, and he was feeling worn out and depressed. As soon as he walked through the door at home, his wife started on him about what time of night to be getting home is this? Where have you been? Dinner's cold and I'm not reheating it. And on and on and on. Too shattered to play his usual role in this familiar ritual, he poured himself a shot of whiskey and headed off for a long hot soak in the bathtub, pursued by the predictable sarcastic remarks as he dragged himself up the stairs. While he was in the bath, the phone rang. The wife answered and was told that her husband's client had been granted a stay of execution after all. He wouldn't be hanged tonight. Finally, realizing what a terrible day he must have had, she decided to go upstairs and give him the good news. As she opened the bathroom door, she was greeted by the side of her husband, bent over naked, drying his legs and feet. Apparently the client's name was James Wright. They're not hanging right tonight, she said. He rolled around and screamed, For the love of God, woman, don't you ever stop. Thanks again to Optimal Blue for sponsoring this week's podcasts. Optimal Blue's Profitability Center unifies pricing, hedge performance, pipeline activity, profitability, and market intelligence into one personalized dashboard, giving mortgage lenders faster, more complete insights to make better capital markets decisions. To learn more, visit OptimalBlue.com.