[00:00:00] Fergal McAlinden: Hello again and thanks for joining us on another edition of MPA TV. I’m Fergal McAlinden, editor here at Mortgage Professional America and today we’re talking about the rise and rise of America’s non-QM sector. It may once have been seen as something of a niche in mortgage lending, but non-QM options have become an increasingly viable solution for borrowers and brokers in the US in recent years. The prominence of the sector is only expected to continue growing and today we’re delving into some of the reasons behind its rising popularity. With me today to discuss everything non-QM from Oak Tree Funding, I’m very pleased to welcome Kristopher Martin, Co-Chief Executive Officer, and Aaron Wengert, Capital Markets Analyst. Kristopher and Aaron, it’s great to have you both today. How are things?
[00:00:40] Kristopher Martin: Great. Thanks for having us on. I appreciate it.
[00:00:43] Fergal McAlinden: Yeah, it’s great to have you both with us and really looking forward to talking a little bit about non-QM today. I mean, as I mentioned, it’s been such an important part of the US mortgage market over the past few years. But we constantly see that its importance is expanding, more borrowers, brokers are using it. So, tell me first of all about how you viewed that sector’s evolution over the past few years, and maybe some of the main factors as well behind why it’s becoming so popular in the mainstream.
[00:01:09] Kristopher Martin: Yeah, so Oaktree Funding, you know, we’ve been in business since 1989. So, we’ve seen, in my professional career prior to Oaktree, we’ve seen the ebbs and flows of not only the conforming mortgage markets, in general and government loans and those types of things, but from the rise and fall of subprime. I think that a lot of people had gotten confused with non-QM being synonymous with subprime. They’re two completely different types of loan programs. While they share similarities that they’re privately securitized, they’re not the same. In 2014, after the Frank Dodd Act was released, we actually started doing non-QM loans. We’ve been doing non-QM loans as long as I think anybody in the market’s been doing them. I think Citadel was the only maybe entry before that, and they’re now something else. So, we’ve definitely seen a significant increase. Our volume went from being 10% non-QM when we first started off, and we’re almost virtually 100% non-QM now. The non-QM space, just if you look in the last, since 2015, was 0% of overall total mortgage market. To now, I think it’s going to be somewhere between 10%, 10.5% they’re estimating by the end of this year, which I think is very impressive. I mean, if you consider the trillions of dollars that are being funded in purchases or refinances and things like that on an annual basis, that’s been quite a significant increase in the space. We’ve been very excited to be a large part of the growth. We’ve been part of several in private securitizations that have been done, and we’re super excited to see what the next 10 years bring us. It’s been a crazy ride, certainly the last 10 years.
[00:03:00] Fergal McAlinden: Okay. And it’s interesting as well, whenever we talk about that growth, it couldn’t have happened if trends stayed the same in the space and if borrowers all have the same profile. I always hear about the changing borrower profile that’s happening in non-QM. I’m wondering what type of changes you’ve seen when it comes to the type of borrowers that you’re servicing?
[00:03:22] Kristopher Martin: To start, and I’ll let Aaron speak to it more because he gets a lot more in the details on those types of things. But I mean, there’s just been an increase. First of all, to kind of go back a little bit, prior to 2014, there was not an outlet for self-employed borrowers. They’re just froze out of the market or they’re doing hard money loans because the way that a lot of self-employed borrowers prepare their income, it doesn’t show enough for them to qualify for traditional types of lending. So, the alternative documentation types have been huge to propel a lot of those folks forward.
[00:03:51] Aaron Wengert: Yeah. And it’s kind of neat to see that self-employed borrowers, I mean, that group has been steadily growing. You know, then with COVID, it peaked and then it kind of settled in a little bit. But it’s remaining steady, 5 to 6 percent roughly of all borrowers are self-employed. And something really cool as well is over the past three years or so, there’s been 21 million applications to the Small Business Administration to start new businesses. And the beautiful part is, guess what? Those people are going to be buying homes, they’re going to be refinancing homes, taking cash out, doing all sorts of stuff. And so, the opportunity for non-QM is absolutely there. And like Chris mentioned before, it’s only going to keep growing. So that’s a really cool thing to see.
[00:04:39] Fergal McAlinden: It is for sure. And I’m interested as well to hear about, amidst those changing perceptions, are things changing when it comes to secondary markets as well? Are views of non-QM shifting there?
[00:04:49] Aaron Wengert: Oh, for sure. Yeah, absolutely. And I have the opportunity in the capital markets side to have a lot of conversations with big time investors, names that you would recognize. And they are coming to us to say, hey, we want to purchase the production that you deliver. How do we do that together? And those are really cool calls to be on. And when we talk about our borrowers, I mean, these are great borrowers. I mean, FICO over 740, DTI in the mid-30s. And if you’re doing investment properties with DSCR, we’re talking 1.2 or higher is the weighted average that we see. And so, these investors are looking to broaden their portfolios and how do they capitalize on the rising non-QM market. So that’s really fun to see.
[00:05:33] Kristopher Martin: And when he talks about some of the big name investors, there’s a lot of insurance companies in the space and that either are buying directly or they’re buying through different intermediaries because they have these, especially when treasury rates were higher, right? So, treasury rates are higher, that means their annuity payments have to be higher. So, if their annuity payments are higher, that’s a liability for them. So, they need these assets to offset these liabilities. So, they need the yield. And this is a safer way to get access to that yield. Some of the insurance companies, they’re not allowed to buy anything sub AAA bonds, but they can hold mortgage assets. So, there’s different ways that they get around. There are certain regulations, and they need to have that yield coming in. You’re not going to get that yield off of a AAA bond, but you’re going to certainly get that yield owning the entire asset.
[00:06:24] Fergal McAlinden: It’s really interesting that Aaron mentioned, you know, capitalizing on the opportunities that are there in non-QM. And I know that a lot of our viewers and our readers are mortgage brokers and they’re, you know, an increasing number are obviously using non-QM at the moment. Some are trying to get into it. Some may be taking their first steps. What type of opportunities, guys, do you think is there for brokers in non-QM now and looking ahead?
[00:06:48] Kristopher Martin: Well, obviously, as we mentioned already, bank statement lending, self-employed borrowers, that’s going to be a huge part of the space going forward. Not only can we qualify somebody with 12 or 24 months bank statements, we can use asset depletion. So, if they’ve got money in the bank, but they don’t have a way of like really documenting their income super well, but they have cash available. We have asset depletion, asset utilization, which is we’re not even calculating a debt to income ratio. We’re just doing a basic calculation on the assets they have versus the liabilities that they have. It’s outstanding. And then obviously for property investors, it’s huge because we have DSCR loans, meaning that they can qualify just on the subject property income versus their own borrower’s income. Granted, they have to have reserves and things like that, but there’s so many opportunities. I used to draw an example for folks that if they’re trying to find a way to, loan officers are trying to find a way to get more real estate business. What’s the best way to get a realtor to give you business? Well, it’s to give them business. Hey, here’s a kind of property. I’ve got a borrower that’s done investment properties before. So, you find a property that pencils, you find a borrower that might be interested in it. They’ve got the cash to put down, take those folks to the real estate agent and say, hey, you should go put an offer in on this property. That’s a great way for that real estate agent to build good rapport with you and then bring you back possibly more deals. And by the way, real estate agents are the number one property investors because they have access to all the listings as they first come out. So if you want to get more investment properties done, go be friends with real estate agents. They’ll bring you more deals. So there’s a lot of opportunity there. Just right there. Not only that, Aaron is on our team, specializes in our second liens. I’ll let him talk a bit about our second liens and our HELOCs, but there’s a lot of opportunity.
[00:08:26] Aaron Wengert: Yeah, the second liens and the HELOCs, we’ve seen just a dramatic increase in that production. And the really neat thing is when we look at the secondary market, investors are widening their credit boxes. They’re increasing their loan amounts that they’re willing to lend on. And they’re also really evolving the documentation times that we qualify with, or that the borrowers can qualify with. So, adding things like 1099, profit and loss statements, even on investment properties, some do DSCR. And so, there’s really a lot of opportunity on the second lean side. And we’ve seen that really boom here at Oak Tree last year, but especially this year.
[00:09:05] Kristopher Martin: Yeah. So, there’s lots of products they have access to now.
[00:09:10] Fergal McAlinden: Interesting. Okay. The HELOC is one that’s obviously been a massive trend so far this year. I was going to ask if there’s anything else that, any other trends that you’ve been noticing guys this year that you think brokers need to tap into or the mortgage base as a whole?
[00:09:24] Aaron Wengert: Yeah. I think another big one that we’ve seen lately, right? Everyone likes to get an Airbnb or go use a Vrbo instead of a hotel. Well, people own those properties. And so, investors have realized that they need to accommodate short-term rental properties. And several years ago, I think that was a little bit unheard of that it was more, hey, you need to have long-term leases, you need to have tenants, people that are going to be there for a year or more. Well, a huge shift that we’ve seen recently is that people are realizing, hey, short-term rent is here to stay. Those investment properties are really getting snatched up. And so that’s a huge, huge trend. Also bridge loans. Chris and I were actually talking just a little bit ago about this phenomenon that’s happening right now, which is buy before you sell. And that’s kind of a weird thing if you think about that. Buy before you sell. But a huge increase in people purchasing a new property, leveraging a bridge loan. And when that property sells, okay. So those are some huge trends that we’ve started to see.
[00:10:30] Kristopher Martin: Yep. And we do… We offer that product as well. It’s really unique. When somebody goes and puts an offer on a house, they haven’t quite sold their old house yet. As long as they keep that property listed and they obviously intend to sell it, we’ll provide bridge financing for them. And there’s no payments on that loan, which is fantastic because that means that they don’t have to qualify for a new payment on the new loan. And then once that property sells, as Aaron mentioned, then it’s all good. it’s done and over with. So, there’s going to be… So continuously, we’re going to continue to grow more niche products. As we see interest rates go down, we expect volumes to increase. There’s going to be more homeownership interest in buying new homes. Home values haven’t gone down in price, and we don’t see there going to be much pressure putting downward pressure on the home buying process right now. We just expect for volume to continue to increase over the next couple of years. So, there’s definitely opportunity.
[00:11:25] Fergal McAlinden: For sure. I was going to ask you about prospects looking ahead. I mean, it’s been such an eventful year for the mortgage space in 2025, but we’re nearing the end of the year, hard as it is to believe. You mentioned lower interest rates down the line, home price is probably going to stay steady. So presumably this is all pointing to a pretty good outlook for non-QM.
[00:11:43] Kristopher Martin: I think so. I mean, we have here at Oaktree, I mean, we’ve been doing non-QM like I mentioned already since 2014. And when we saw volumes really take off and increase, believe it or not, was when the rates were at an all-time low for everybody else. So, you know, rates are low, rates are good for everybody. And obviously, as rates go up, ironically enough, rates are still pretty good for non-QM because there’s a borrowing niche that’s there that’s always eager and always needs cash. And so brokers that really understand and learn how to be in this space and go after brokers that have that need, they’re going to be invaluable to their real estate partners and obviously to their own existing book of business because they’re going to have unique loan solutions that are going to be able to tap in and help out those borrowers today and tomorrow. So, I mean, we don’t see this slowing down at all. And the big thing, the big difference that I want to draw to, and I used to joke around, I’m not really joking, the statement I would make is if you’ve been doing anything for the last 10 years, right, that’s probably a career, right? So, a lot of loan officers that got into the space, let’s say five or six years ago, never got into non-Keyoma. Well, what’s the DU? You know, there was a lot of just automated approval. They kind of look at credit, look at income. Well, let’s put it in there and see what we get. And not in QM, you know, you have to look at the income. You got to see how many trade lines they have. There’s a little bit more in depth. You actually have to, you know, the underwriting is not automated. It’s manual. And because of that, it allows for a lot more loan exceptions, which we do a tremendous amount of loan exceptions. Aaron mentioned how tight our credit is that we actually get loans done through, but we do a lot of exceptions on our lending. So, there’s a lot of opportunity for people to not only just get a loan in, but if they have a problem with a loan and it doesn’t fit a box, they can do that too. So, I mean, if you’re just getting into the space, you definitely need to learn on QM. If you’ve been in the space for 10 years, you definitely need to learn on QM because it’s a big segment of your business. And it’s a loan or two that you could be closing on a monthly basis that you wouldn’t otherwise be closing. So, I mean, it’s a great space to be in.
[00:13:51] Aaron Wengert: Yeah. And I would just echo that and say, it’s another tool in your toolkit, right? And a huge part of this, like Chris mentioned, right? The 2025 estimate is that non-QM will be more than 10% of the total mortgage market. I don’t think anyone foresaw that several years ago. And so, don’t leave money on the table, right? Make sure you understand non-QM, make sure you understand what products are available and make that a core part of your strategy, not an afterthought. Because if it’s an afterthought, then… there won’t be time. But if it’s a core part of what you do and what you offer and what you talk about, I think people are going to be surprised how many borrowers come to them and say, hey, I didn’t realize you did that. So, great opportunity.
[00:14:35] Fergal McAlinden: Oh, you know, my last question was just about maybe a closing message for brokers, either those who are looking to get into non-QM or maybe those who are taking the first steps in the space. You’ve given a really comprehensive answer there, but I’m wondering if you have anything else that you want to add, any message for brokers before we wrap things up?
[00:14:52] Kristopher Martin: Listen, first of all, you got to check out Oak Tree. We do lots of great things. We have got an incredible team. Our average salespeople, turnover. Very, very low. There’s a reason for that. We are a great business. We’re a great place to work. Our team has been together for a long time and our operations group, everybody here wants to get loans done. Something about Oak Tree specifically, our underwriters aren’t allowed to turn loans down. They have to take it to their underwriting manager and their underwriting manager has to put up the chain of command if they’re going to turn a loan down. So, everybody here is incentivized to get loans done, to make loans happen, to find ways to make loans work. And because of that, we feel like we’re a great partner to work with. Non-QM broadly, certainly as Aaron mentioned, you’re leaving money on the table if you’re not doing it. If you’re not doing it, somebody else is. So, you better learn it because somebody else will be taking that extra business. And with our average loan size over half a million dollars and growing, that includes second liens. You have to know that as a loan officer, you generally paid on a percentage of your deal. So, you’re just leaving money on the table at that point.
[00:16:01] Aaron Wengert: Yeah. And I would just echo everything Chris said and also take advantage, right? It’s the market’s increasing. Be a part of that. Don’t wait till later. Start today. And one of the really neat things that we do here at Oak Tree is we never stand still. We are always innovating. What new programs can we offer for you as brokers to attract more borrowers? And so, one of the amazing things at Oak Tree is, and Chris knows this because we manage all the programs, is we got new stuff coming up all the time. So, check out Oak Tree Funding. We’ve got a program for most of your borrowers, if not all of your borrowers, and we’re excited to do business.
[00:16:43] Fergal McAlinden: All right. Well, that is just about all we have time for on today’s edition of MPA TV. My thanks once again to Kristopher Martin and Aaron Wengert from Oak Tree Funding for joining us. Thanks to you for watching, and we’ll see you next time.
