Non-Prime Mortgages Gain Steam Going Into 2016
Non-prime mortgage origination volumes have been relatively minimal over the last few years, with less than $1 billion originated in 2015. However, recent events lend favorably to the outlook for 2016. It has taken a while for this segment of the mortgage market to ramp up again, as lenders work to adopt a non-QM lending process that fits with new regulations in the industry, but it appears that a major hurdle has been cleared: securitization.
The second half of 2015 saw the first non-prime securitizations since before the housing crisis, with a handful of deals hitting the market (including Angel Oak’s $150 million deal in mid-December). Though we are still nowhere close to volumes seen before the housing crisis, the securitization of non-prime loans is a sign that momentum is heading in the right direction. The reemergence of these deals demonstrates that Wall Street, private equity and the non-prime mortgage market are back at the table together again and paints a positive outlook for mortgage liquidity.
There is ample demand on both sides of the equation for these loans. About a third of all Americans have FICO scores lower than 650 and millions of potential borrowers are locked out of agency lending channels because of QM restrictions. The sub-prime borrowers of years past haven’t disappeared, they simply cannot secure lending through traditional agency channels. The success of 2015’s securitizations in the non-prime space speaks to just how strong investor demand is for higher-yielding mortgage bonds. Angel Oak’s deal and others in the market were oversubscribed by investors, painting a positive picture for demand of future securitizations.