Navigating the Non-QM Landscape | Market Updates | July 28, 2025

Jeff (: 00:16

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm Jeff McCarty, Vice President of Product Management at Optimal Blue. As you may notice, Jim's not here today, but joining me are Vimy Vasudeva, Managing Director at Optimal Blue, and Alex Hebner, our Resident Economic Guru. We'll also have a special guest today, Mike Vogues, Head of Corporate Strategy here at Optimal Blue.

Mike is going to lead us through the current dynamics of the non-QM market. Let's dive into today's episode.

Welcome Alex and Vimy.

Jeff (: 00:49

All right. So we've a lot to get through this week. We've got a super busy week on the economic calendar. Some people are calling it, you know, one of the busiest weeks in the past few years. We've got the fed meeting on Wednesday, of course. then we have employment numbers coming out Friday. plenty of other things, going on throughout the week with all the tariff talk. then second half of the podcast, we'll bring on Mike Vogue, as we mentioned, he spent the past several months, you know, talking a lot about looking through the non QM market.

figuring out what's going on, doing a lot of research, understanding what products are out there. So Mike's going to come on and do kind of a non QM one on one, one on one for us and really unpack that market from the ground up so that we can understand that a little bit better. really looking forward to that. But, but first, you know, let's, let's dig in as we always do with, with Alex what's going on in the markets. got the OBMMI still at 6.78 10 year.

of midday today, Monday is 4.41. So, you know, still in a super tight range overall, not a ton of volatility in rates the past couple of weeks.

Alex, let's probably start off with what's happened recently in the markets. I think the EU trade deal is probably a good place to start,

Alex Hebner (: 02:03

Yeah, I'd agree. think the EU trade deal that we got over the weekend, there were some rumors floating around late last week in the markets that they were close on a deal for the EU. Probably the from the past week or so, we were really light on data last week. So really just looking for developments in that geopolitical arena that that's going to move the market. looking at the EU trade deal, going to be paying a 15 % tariff on most all goods. There's certain carve outs 0 % on

aeronautical parts and chemicals and some agriculture and higher tariffs still, I think around 50 % for steel and aluminum, but 15 the vast majority of goods. then spirits, which is a big sticking point for a lot of ⁓ the Europeans is actually still undecided. that's still to come on what that's going to. Yeah. Yeah. No, or your wine or your vodka, whatever it may be, wherever it's coming from.

Jeff (: 02:49

Don't tax my cognac.

Yes.

Alex Hebner (: 02:56

inside the EU.

Vimi Vasudeva (: 02:56

And if that's not your

thing, Alex, where do we stand with luxury goods, which is a little bit more where my focus is on.

Jeff (: 03:01

Ha ha.

Alex Hebner (: 03:02

I believe

those are going to fall under the 15%. So it's going be a little bit more for that Louis Vuitton bag.

Vimi Vasudeva (: 03:09

Noted.

Jeff (: 03:10

Yeah, I saw something that with those still much higher tariffs on steel and aluminum, even with the 15 tariff on EU autos, it still could be cheaper for those EU autos autos built in the US because steel and tariffs are still so expensive.

Alex Hebner (: 03:29

German manufacturers were saying that this could be a big pain point, but you got to keep in mind that if a certain number of components inside the United States and then make the vehicle inside the United States, which there are VW plants in America already, they could get away from tariffs in that regard. when you're looking at the labor situation in the auto market in Germany, that's looking like a pretty, pretty bleak outlook there.

know, while we're talking about trade, China is still the big outlier. we had that trade framework from the beginning of June. that doesn't seem to have stuck too well. they're meeting again this week in Sweden. There's not a lot of details on this yet. seems to be expected by the market that there will be an additional 90 day pause. They'll come away with, you know, quote unquote, feedback.

then they're, gearing towards an eventual summit between Trump and she where they'll, they'll sign a big trade deal. but, really no movement on that front so far. ⁓ I just expect a 90 day pause again. as we head towards that August 1st deadline on Friday.

Vimi Vasudeva (: 04:26

sounds like Friday's going to be a very big day with respect to the deadline as well as the non-farm payroll report number. Any thoughts on that, Alex?

Alex Hebner (: 04:35

Yeah, I think in regards to labor in the U S Friday is going to be a big one with the U S non-farm report expecting 102,000. Slightly down month and then just keeping an eye on those initial jobless claims each week as well, as I've been noting each initial jobless claims looking the expectations around 2 21. If we see north of, two 30 approaching two 50, again, that's going to be a sign that the layer market is under.

pressure, the last few releases have been pretty strong after we got the weaker readings in June.

Jeff (: 05:07

Okay, so the other big thing in the news last week, favorite topic is the ⁓ the pal Trump drama and their visit to the new Federal Reserve buildings. It's probably a good segue to talk about the know, the Fed announcement on Wednesday, anything we care to comment on from the from the visit last week?

Alex Hebner (: 05:25

Yeah, it seemed to just be a rehashing of the issues that Trump has raised with Powell and that Powell has demurred on or said, I'm doing my job to the best of my ability and how it's historically been conducted. would say more so than anything, almost felt like there were memes and jokes that came out of They looked a little goofy in their hard hats in the construction Trump tried to get Powell with a gotcha. He pulled out

bill essentially for costs of these renovations had been. And Powell gave it a squint and immediately ID'd the line item that he's like, oh, this building that's on here, this was completed a couple of years ago. Why is this on here? seem to be inflating your numbers. it really just seemed to be a continuation of their public spat. Trump administration's under a little bit of pressure right now, Trump non-economic factors, i.e. the Epstein

it really just seems to be a continuation of that public drama to kind of steer away from other things. ⁓ I wouldn't say there were really any developments that came out of it.

Vimi Vasudeva (: 06:25

No developments other than the memes, as you noted. In fact, I was prepared for this segment with my son's hard hat. I was hoping that the rest of you would also be sporting hard hats, just on theme with last.

Alex Hebner (: 06:37

I searched around for one, I couldn't

find one before the call.

Jeff (: 06:41

No hard hats, no pieces of paper in no side eyes, we're directing at each other. So a little bit more civil exchange perhaps I think tying it back though, know, I've been obviously watching Pulte's tweets a lot recently, right? Tying it back to housing, Pulte is, Bill Pulte is.

sort of been at of the administration in terms of the call for lower rates, pretty aggressive calling for lower rates and pals firing. did have a, after the visit, he had a much more benign tweet than he had the previous part past couple of weeks. maybe his rhetoric is dying down a little as well after that visit.

Alex Hebner (: 07:27

Yeah, I agree. I think one of the bigger takeaways with Pulte this week was he was tweeting that there's been this kind of open question mark in regards to the agencies exiting conservatorship. And he seemed to kind slam the door shut on that idea, which I think a lot of people in the industry were expecting. We had a call with Kevin Jackson a couple of months ago now and just how it didn't really make sense for the federal government to throw all this money away essentially by releasing these agencies from conservatorship.

seeing Fannie Mae, Freddie Mac stock price retreat on that news. it was getting bit up a little bit just on the expectation that they could be released ⁓ those profits could be seen in a, in a public arena.

Jeff (: 08:04

And again, they've got to see that that is not a path to lower rates either, which is one of their main So what else should we be looking forward to in the announcement, the Fed announcement this week? Pretty much assuming there's not going to be a rate drop, right? But what should we be looking at besides that?

Alex Hebner (: 08:20

there will be FOMC decision and presser on Wednesday. I don't expect anything from it. As you just said, uh, Jeff, uh, in regards to rate cuts, uh, maybe, maybe there'll be some curve balls in the, uh, press conference. I'll be sure to watch but I, won't really hold my breath on any sort of rate cut, for the rest of the week though. tomorrow, Tuesday, we have consumer confidence. Um, it's expected to rise, I'd assume on just us seeing more and more trade deals getting done.

Both consumer and business outlook, would expect to improve with these trade deals getting done. because, you know, they're going to make things necessarily cheaper, but I think the ⁓ confidence that having a deal done and the question marks evaporate when these deals get done good for consumer and business confidence. So that's expected to be a little bit higher on Tuesday. we'll get some ADP employment numbers. Again, I'd give more credence to the initial jobless claims on Thursday in addition to the...

non-farm numbers on Friday. Q2 GDP is on Wednesday as well. That one's expected to spring back from the really weak reading we saw in to 2.3%, which would leave us for the first half with around 1 % GDP growth. So well below what we're expecting. as we talked in depth several months ago, ⁓ Q1 GDP readings can be quite weak. Aside from that,

Finally, on Thursday, the PCE inflation metrics. So it comes a day after the FOMC decision, but that inflation metric, the PCE number is what the Fed looks to mostly for further inflation reading. So if we see that pop, would expect it to really kill any expectations for that rate cut in September.

Jeff (: 09:50

A lot going on. Yeah. Yeah. ⁓

Vimi Vasudeva (: 09:50

Wow, sounds like we'll have a lot to talk

Alex Hebner (: 09:52

No.

Vimi Vasudeva (: 09:53

about on next Monday's podcast.

Alex Hebner (: 09:56

Yes, I agree.

Jeff (: 09:56

I do think

one thing interesting tied up in all that is looking dissenting opinions. We expect Waller, at least Waller, to dissent on Wednesday. Waller, for a variety of reasons, right? Do we think Waller's gunning for the new job? Or I think there's a lot of substance in Waller's comments about rates are being called for looking.

If you look at the, especially the employment data one way and seeing that start to weaken, trying to get ahead of that weakening employment data. so based on Waller's comments, any other dissenting opinions and some of the employment data coming out this week, that could provide a roadmap when and how the Fed lowers rates.

Well, good stuff as always. Thank you, Alex. Thanks for your insights. yeah, as Vimy said, plenty to talk about next week and looking forward to that.

Alex Hebner (: 10:51

Yes,

looking forward to dissecting the numbers.

Jeff (: 10:54

All right. So as promised, we're going to get into ⁓ some non QM discussion and to do that, we're going to welcome in Mike Vogue, long overdue first visit to the podcast. first of many, I'm sure. Mike is, ⁓ the head of corporate strategy here at optimal blue.

And in that role, Mike's responsible for our three to five year vision of the company, our data business, our partner business and and a so Mike's out there in the industry a lot, talking to a lot of different folks hearing about what's coming up. And obviously non QM is kind of the hot topic of the industry right now. So Mike, thanks for coming on.

Mike (: 11:29

Thanks for having me, Jeff. I've been patiently waiting my invite to the podcast, so really happy to be here.

Jeff (: 11:35

Yeah, excited to have you.

Vimi Vasudeva (: 11:37

Well, it's especially exciting because Mike is also a co-host of the other podcasts that Optimal Blue presents. long overdue and...

Mike (: 11:43

It's the crossover.

Jeff (: 11:44

Crossover we've all been waiting for, I'm sure.

Vimi Vasudeva (: 11:46

Great. Well, Mike, we're excited to talk to you about Non-QM today. Six weeks ago, we actually hosted a podcast with a segment entirely dedicated to Non-QM. Given that at that time, there were several industry conferences that Optimal Blue was attending, and the hot topic was Non-QM.

And we know that you have had your entire summer dedicated to this hot been certainly doing a lot of research and together some ideas and plans around pricing and hedging non QM. And so your, your visit on this podcast is very timely. And so I'm curious to hear from you. What do you think, what do you think has driven this in the non QM market recently?

Mike (: 12:29

Appreciate it. mean, and I would actually contend my obsession with this topic goes back a little bit further I contend it started at the structured finance conference in Las of this year been going to that conference the last two or three years mostly from the standpoint of hey We have a lot of interesting data products that that clientele might find interesting As I was there every every investor or other tech provider that we talked to

was just a buzz with everything non QM and in the non agency loan in general. And so in plenty of conversations that I had, folks were like, you're in the agency space, you're not in the non agency space or unsure if like you're fit to work with us. And I would educate them that we had a lot of information on these loans, but it was not like something that I've ever seen before where folks were like, hey, don't talk to me about this, talk to me about that.

And so that kind of sparked a of a mission in me to kind of come back to the company and try and think about ways that we can strategize more to help folks think of us more than just an loan shop. think it actually takes a, it will take some time to take a step back and actually think about what a non QM loan is. Like it's kind of funny, like not many other spots in the world or in the industry you refer to something by what it's not. So it's like an interesting

a branding perspective.

Jeff (: 13:48

Yeah, I think that's a great place to dig a little bit deeper now because we are just throwing around this kind of generic term non QM and sometimes people, think people don't know what it means. Sometimes maybe they think it means just strictly non agency, but that's not what we mean either, right? ⁓ There's a lot of nuances to non QM once you get into that type of product. So let's start with just what is non QM by itself?

Mike (: 14:13

Yeah, that's a great point, Jeff. And I'm going to start by talking about a QM loan first and then come back around to non QM. So like after the financial crisis, Dodd-Frank came about and they set a condition in Dodd-Frank ⁓ of quantifying loans as a qualified mortgage or not. And if you qualify, if you were a qualified mortgage, that effectively meant you had the backing of the U.S. government, right? Like you're going to get a guarantee fee from Fannie or Freddie or

FHA or VA your USDA and it basically came down to two conditions people will come back come back at me and say there's so much more but there's I can make the argument that it all comes back to two things it comes back to debt associated with the borrower actually QM mortgages you have to be below a 43 DTI and then it comes down to how you actually someone's income so it's not a

A hard fast rule that you can't be a W-2 employee and get a QM mortgage, but greatly, greatly, greatly increases your chance of being approved for a QM mortgage if you have a W-2 that corroborates that you could pay for the mortgage that you're about to get approved for. So take the inverse of that, non-QM loan basically means you have a slightly unique kind of like debt story, which we could talk about probably in a couple of examples coming up here.

then also you have a different way of kind of verifying your income. It's not as simple as hey, here's my here's my w-2 and improve me. need some type of alternative documentation to prove that you could actually afford the mortgage You're about to get approved for

Vimi Vasudeva (: 15:53

so Mike, do you believe that this has really come about in the last several years strictly because of the surge in the gig economy or are there other factors?

Mike (: 16:02

I think that's a part of it. think the ⁓ surge in what I would call non-traditional work definitely plays a component part here. would also say that I think that we've seen some entrepreneurial increase as well. Like, the gig economy might lead you to become an entrepreneur. And one of the most common non-QM loans is loan or a debt service coverage ratio loan. And that's a really interesting one.

because it actually kind of forks you off of the income of a particular borrower and actually looks at the rental income spun off from a property, right? So like, I'll get into a little bit more specifics in a second, but think about all the upticks and things like Airbnbs, right? You probably see people on Instagram who have three or four different Airbnbs and they're kind of working on that as a side gig or their primetime gig. And if you think about,

you know what that means is once you get to a certain point of scale, like you could operate this for a profit and they should invest in you like any other business, but it's not the same as getting a W-2 income verified mortgage. And when folks talk about what a DSCR is, it's basically, you know, the income spun off by ⁓ a property like that investment property or a rental property and divided by your mortgage payments.

So for example, if you think you're gonna make $115,000 on a mortgage payment on an annual basis and your mortgage payment on an annual basis is $100,000, well, your debt to service coverage ratio is 1.15. So that means that you're not, know, anything under 100 is probably, you're probably in a bad spot there, but this gives folks that who are starting to maybe take that spin into more of an entrepreneurial bent from an ownership perspective, it gives them that avenue to that.

Jeff (: 17:53

That's a really good example, of pretty crystal clear, this unique type of income stream, unique type of debt. You had one other example of kind of the two main non QM types of loans out there, right? The other one being bank statement loans.

Mike (: 18:06

Yeah, and I think it goes hand in in love with that entrepreneurial point from earlier. If you're a again, non traditional non W2 based employee, and you've maybe you've sold a business, maybe you just have a lot of money in the bank, right? Maybe you're in a cash intensive business, you have enough assets to actually cover the mortgage. Again, that W2 is it's it's not saying that you can't get a QM mortgage if you're going with W2, but it greatly increases your chances if you can.

So some folks might go the other route of saying, hey, I have 12 or 24 months of bank statements that show I have the assets to approve me for the mortgage that you want to give me. So it kind goes to that alternative angle of income verification. And really, the only difference for non-QM is that it's a debt and then the income verification piece. then just to build on that, and another non-agency loan, do you think of like jumbo loans?

And that's basically just anything above agency conforming high bound limit.

Vimi Vasudeva (: 19:09

a really helpful explanation, Mike. So you mentioned in an example that a borrower could qualify for both QM and non-QM and the non-QM of course would be easier, but I feel like this is a good segue into us talking about what are the disadvantages of a non-QM. In other words, how is it priced?

Mike (: 19:28

Yeah, it's, and this is where things get really, really in the QM world, every QM loan is eligible to be delivered into what they call a to be announced mortgage backed security. It's almost like a generic vanilla backed security that's going to settle three to six months in the future. And it's a very deep liquid market. It's largest fixed income market in the world.

And the non QM space doesn't have that same thing. So there's not a backstop. There's not a security that these non QM loans can be delivered into. that actually makes it very minimal from a risk perspective for lenders to create these loans that hold them for a period of months without having that backstop there. And in the QM world, you might have investors that are doing slightly different things, but like that.

that grounding point is what's going on in the to be announced mortgage backed security market. So you can look at pricing day over day and you're like, okay, it moves in line with the TBA market in most cases. The non QM world's not that. we can talk about more specifics there in a second, but it's just, that's the main difference is that there's no deep liquid secondary market just yet in that product.

Jeff (: 20:44

reiterate that all the time in our hedging 101s the agency market is, this TBA market is one of the, if we had one of the seven wonders of the financial markets, TBAs would probably be up there on the seven worlds, because it provides so much liquidity to the agency QM And we just don't have that in other types of products, particularly non-QM.

Vimi Vasudeva (: 21:06

Yeah, it's not like someone can log into a trade web or Bloomberg and see exactly how these things should be priced. It's much more complex than that.

Mike (: 21:06

Exactly, right.

Yeah, and that also, I mean, if there's not this deep liquid secondary market, then you have to deal with a fair amount of risk from the lender perspective. Right. And a lot of these lenders at minimum have to hold this loan until it's underwritten. Right. And then in this space, the investors who are looking for these loans typically want size to, they're way less likely to buy a single loan like there is in the agency world. So in most cases, these lenders who are originally in this paper might have to

waits like up to 50 million from a UPB perspective before they can even sell it to an end investor. And so that adds additional months of interest rate risk that you have to kind of manage during that period of time, which makes it a difficult task.

Jeff (: 21:56

So maybe you can break down just a couple of simple examples about how some of these products are being priced today.

Mike (: 22:03

Yeah, absolutely. And I think it's, and before I do that, I do want to kind of just give you a little state of the union too on like what we see from a data perspective. like, for example, you go back to beginning of QM loans for about 4 % of what we see on a daily basis. And like, another point I want to make is that like conforming loans at that time were about 51, 52%. You fast forward to today, that number is about 9 % on the non QM side.

Conforming loans are about 43 44 percent So you've seen this this shift where the production is starting to get there VA ⁓ loans for example or about 10 % of our of our production so it's starting to nip at the heels of that like of that fourth place from a percentage of Where we see production today, you then you conforming 15-year loans are only 2 % production Which makes sense because of higher rates by just to kind of set the stage there

And then from a hedging perspective, because you don't have TBAs to ground yourself to or in a pricing perspective, you see a lot of folks move towards a model based upon blended spot on the treasury curve or the SOFR curve. And so what that effectively means is you're saying, hey, I'll pick the five-year SOFR rate. I'll use that as my discount rate in a DCF. And they're probably adding a fairly large spread on top of that as well.

So you're probably getting somewhere in that 8 to 10 % discount range and you're using that as a component part of the valuation process. And so it challenges lenders to say, okay, well, if they're grounding themselves to some other type of model or some other type of fixed income rate, well, what do I use to hedge then? If I'm so used to hedging with TVAs, can I still do that today? a little bit out on that, but there are other securities that folks can use to hedge that risk.

Vimi Vasudeva (: 23:53

So can you talk through some of the potential hedging strategies and what those securities are?

Mike (: 23:58

Yeah, absolutely. if you're doing something, if you knew that the investor that you were delivering these loans to were using a treasury-based model, well, then you could trade treasury futures, treasury future options, things like that. If you knew that they were going to be based off a silver-based model, are things such as the era swap future out there you could use to get silver exposure. I would actually counsel folks is, well, I think

A lot of folks in industry might be using that type of methodology from a standpoint of ease right now. haven't really seen anything disrupt this space right now, so it's easy to say, I'll pick the five-year SOFR or the five-year treasury, because generally mortgages are around five or six years, and I'll use that as my grounding point here. But there are other components to think about here. These loans have a ton of credit risk in comparison to a SOFR swap or a treasury future.

until we're further notified the US has never defaulted on their debt. And even on TBAs, like you have the guarantee of the US government behind that as well. A non-qualified mortgage, I may have blew point earlier, is there is no G-fee, right? There is no Uncle Sam's not coming to help you. to be very comfortable with the credit risk that you're taking on as a

Now, plenty of folks are doing this and doing it very well, but it's just, you have to think about it in comparison to other points. So could you use some combo of fixed income instruments? You definitely can. that might help you with the directionality of rates. But when you start to layer on things like prepayment penalties, when you start to layer on things like this credit risk that you're short effectively, there's not necessarily a slam dunk instrument for that right now.

Jeff (: 25:39

Yeah, minor detail, like you said, that we blew past at the beginning. TBAs certainly provide kind of the baseline pricing to understand, but also TBAs ultimately those mortgage backed securities guaranteed by the federal government provides that the credit for default, for prepayment.

those different things go into TVAs as well. So those are really the two main components to think about as you move into a non-agency, any type of non-agency but non-QM in particular here.

great Mike. And so, you know, as we kind of put that together, you you start thinking about, you know, if you're a lender and you're starting to think about generically, how do I price? How do I hedge those products? You know, you have to start having a bunch of different things in your tool belt that you don't need.

Mike (: 26:44

Yeah, I mean, that one on that nail on the passive hedging is over when you're in this space. And, we've, we've, we've started a dip our toe in this area as well. And one of the things that this market lacks is daily observable volume. So in, you know, current like agency world, you see the TBA market every day, folks who are originators are selling loans every day.

You get a ton of feedback over where things are trading this world not as much so you have where You can observe things locked in a product and pricing engine like optimal blue there's not necessarily this like active flow market from a mandatory perspective being sold every day You sometimes see things from like Standard & Poor's or Fitch or folks like that who put out details about securitizations and that's

What I referenced earlier when folks have to get to 50 to 100 mil size and then they actually create their own security. It's very similar to if you created your own mortgage backed security agency security, but you don't have the G fee, right? You don't have that credit component protect. Oh, you have a credit component where you typically don't have it in that world. And so.

That part of the world isn't really, there's not really a ton of accessible data in that spot to see where these things are trading and few and far between, You might get a couple a week if you're lucky. So what we've started looking at is the lock volume that we see in our PPE. we cover approximately 40 % of the volume out there that space. And then if we've got 10 % of that volume, give or take in that non-QM space, I think that's...

that might be the most deep and liquid observable data set out there. And so what we've started to do is take that data and then use our existing expertise in the capital markets world, doing discounted cashflow analysis, in different Monte Carlo simulations for rates, and basically benchmarking to the observed prices that we see in the PPE to help us solve for that discount rate or that yield that folks are searching for in terms of pricing this stuff.

Like all things once you have a model you could shock it 50 different ways and you can start coming up with those risk metrics And once you have those risk metrics, then you can make decisions on hey Do I hedge with TBAs do I hedge with this other security over there? And you can kind of treat it like almost any other asset that you would see from a normal like and hedging perspective But you have to be able to go back to that observable data set in that model, which I think is really important

Vimi Vasudeva (: 29:17

That's super important. And so Mike, that leads me to wonder, that you mentioned earlier that there are so many different types of non QM, it's not just one bucket. You even made the point about products with prepayment penalties and those would certainly behave differently than those without. So are we tracking the various products and coming up with different discount rates and generating cash flows based on that

Mike (: 29:41

Yeah, we're doing our best right now given the sample size. So one of the things to kind of hammer home here is non QM is not ubiquitous. There are very different types of loans that make up that category. So we talked about DSCR, we talked about bank statements, but there's things in there like non-mortable condos. things in there like self-employed borrowers, right? International buyers as well, right? make up

this bucket of non QM and they all have different kind of prepayment profiles based upon that. And then also based upon each individual lender or investors guidelines. The guidelines here are again, not ubiquitous. You might have two products with two investors that kind of that sound similar, but their guidelines make it that they're not

point on the agency side that we probably blew past was the fungibility, right? Like you could take an agency eligible loan and sell it to 20 different people there is ever an issue with it. Whereas within this non QM space, because of the lack of the backdrop of or like that standard backdrop, you could get into a spot where there is risk associated with, I thought I delivered to investor X and nope, now I re-read investor wise guidelines with a

with a magnifying glass and I can't send the investor why and you're stuck with the loan. it's a fair, especially for folks who are not bulking to securitization size and it's like a flow standpoint, it could put you in quite a pickle there.

Vimi Vasudeva (: 31:14

Sounds like it.

Jeff (: 31:15

Yeah,

that's a great overview, Mike. I think that really sets the stage. One, that it is not just flip a switch, turn on a non-QM program that you can hedge and easily sell in bulk to the market. But two, you are really leading us to the forefront of being able to understand the market better. I really appreciate all the work you've been doing. It's helped us understand it better, but also helps us.

then determined if there is a more fungible market out there that we can with in the industry.

Mike (: 31:42

Yeah, it's certainly a little bit of a chicken or an right of the, maybe it's a chicken or the egg, there's more profit margin on these loans typically. then that brings, there's also increased risk, right? Associated with these loans as well. And then you think of some of the things that are happening in the industry where there is an appetite for these loans because of that increased yield on these loans. So you think of, and we've heard,

Anecdotically, different REITs, insurance funds, either buying mortgage companies or buying large pieces of mortgage companies to try and get them exposure to this asset sooner in the process. never know if this is just some portfolio manager trend of the year or if it's something here to stay. And I think as we see maybe a more standard kind

Correspondent slash investor kind of maybe like stand themselves up as a non QM buyer I think that will kind of be like the next domino to fall terms of getting more market adoption like maybe like an standard agency, you know investor kind of moving into this space next to it and you know bidding on loans on a daily basis From a mandatory perspective. That's kind of the next you know domino the fall if that happened I think you would see You know a fairly large like pickup in the space

right now it's just the lack of observations, it's the lack of consistency, the lack of timing that I think is kind of holding this piece of the industry from really taking off.

Vimi Vasudeva (: 33:10

All right, Mike, I know that we're probably running out of time here, but I would be remiss if I didn't ask you this next question. So earlier on, you had used the word subprime crisis as you talked about the CFPB and the introduction of regulations. Do you see the need or do you anticipate the need for the regulations?

Mike (: 33:28

know what? I don't think so. I think we've learned the lessons on the origination front the last crisis. I think you can even make the argument that we maybe have over-regulated pieces of that part of the market right now. not seeing the same type of IO-only, weird arm products. I think we're probably a little bit lucky that the yield curve was so inverted for a long time that

We don't have a lot of these teaser periods that are running out right now. I think generally, if you look at the state of homeowners, US housing stock is a value to approximately $48 trillion. $35 trillion of that is equity in homes. So like the American borrower, I think is just on a much different like financial footing. And then also I think our industry has changed for the better in that spot. So I don't think so, but like with any of these industries that have parts of them that

don't have like a standard operating procedure, is there like a percentage chance that something goes wrong? Yeah, probably. But I think it's like minimal compared to some of the other things that are out there right now.

Jeff (: 34:33

Yeah, I completely agree with that. get a lot of, as you start talking about these products, you get a lot of, here we go again, right? But I feel like we're going into this with eyes wide open much more. And there's always going to be, anytime you're lending this amount of money, there's always going to be credit risk to a borrower. you do, not every borrower is the same. So you do have to have some unique products to cover different types of borrowers. And I think this that void.

doesn't seem like we're going too overboard at this point.

Mike (: 35:01

No, I think it's kind of just shifting based upon how we see the US economy shifting, right? You're seeing more gig work, you're seeing more entrepreneurialism, some small businesses. I think this product is kind of that gap.

Vimi Vasudeva (: 35:13

Yeah, I've never heard the word side hustle as much as I have over the last 18 months or so. Everyone's talking about their side hustle.

Jeff (: 35:20

that don't make it onto a W2. I a variation. All right, any other final thoughts on the topic?

Mike (: 35:23

It all comes back to income verification.

just think that all lenders need to be considering this. It could be your strategy to not partake in it, but it does seem to be one of the areas of growth out there in the industry. And the folks that we have seen that have been successful are at least putting a lot of time and effort into considering moving into this space. So everybody has to have a plan, even if their plan has to do nothing.

Vimi Vasudeva (: 35:51

Very much agreed. Yeah, thank you so much for taking the time to join us today, Mike.

Jeff (: 35:51

Well said.

Mike (: 35:56

No, super appreciate it. Thanks guys.

Jeff (: 35:57

Thanks mate.

Jeff (: 35:59

That's it for today.

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