Unlike the Mortgage Market in General, the Alternative Lending Sector Is Having a Very Good Year

Pete Pannes

Pannes, Chief Business Officer

In Samuel Beckett’s famous play—Waiting for Godot—the two characters, and the audience, spend the performance waiting for and speculating when the main character will arrive, only to be disappointed again and again. Sound familiar? It should because our industry has been in this same loop, since late 2022: First waiting for the Fed to stop raising rates and now trying to guess when the Fed will follow through on its promise to cut rates. A promise that was once again pushed further down the road at the Fed’s April meeting.

While the Fed’s indecision has subdued traditional first mortgage volume, the relatively stable current interest rate environment has the opposite effect on alternative mortgage products. The demand for closed-end seconds (CES), home equity lines of credit (HELOCs), non-QM and prime jumbos is currently extremely strong and growing. This demand, in turn, has revived the private-label securitization market and significantly increased review volumes for larger players, like Clayton, within the third-party review (TPR) space.

As we near the midway point in 2024, here is what we are seeing in the market:

  • The investor demand for home equity products, particularly CESs (but also HELOCs), is, as Ralph Armenta, Senior Vice President of Enterprise Sales at Computershare, puts it, “insatiable.”
  • Unlike the tepid demand for conventional mortgages, non-QM and jumbo prime originations continue to be strong, and the current trajectory could lead to the 2024 market growing by two times by the end of the year.
  • Private label security issuance was up 22% year over year in Q1, to $20 billion, according to KBRA, which is now projecting that overall issuance could top $67 billion in 2024.

Stable We Can Work With

Generally speaking, non-traditional products tend to be less interest rate sensitive than conventional first mortgages. A self-employed borrower usually expects to pay a higher rate, and most hadn’t been the recipients of ultra-low refinances during the boom years of 2020-21.

Homeowners with historically low first mortgages are getting comfortable using home equity products if they need to tap their equity, as they can keep their coveted low rate first mortgage and remain refi eligible to consolidate in the future if rates come down again.

In a rising rate environment, we know that the asset value falls. Stable rates lead to some increased comfort for securitizers pricing deals. It has also brought new originators into the market. For example, several large independent mortgage banks, like PennyMac, Rocket, UWM and LoanDepot, have begun originating and selling home equity products, particularly CES. The fixed nature and stable interest payments tend to make it more suitable for securitization.

Four large CES deals came to market in 2023. Through the first quarter of this year, there have already been six. For HELOCs, three significant deals have come to market already in 2024.

Non-QM securitization began gaining traction in the second half of 2023, and approximately 73 rated deals were done last year. So far, nearly 30 deals have come to market this year.

Outpacing an ‘Up’ Market

Alternative products have been the bright spot in an otherwise flat or down mortgage market, and within this healthy market sector, Clayton is outperforming much of its competition. Our track record and our focus on customer service is driving new client reviews. Even before the latest uptick in home equity loans and securitizations, Clayton had reviewed more than $1 billion in home equity deals.

Also, our business development team spent much of late 2022 and early 2023 lining up new clients and reinforcing relationships with existing ones to be ready when the market stabilized, and the alternative product pipeline reopened. Today, we are consistently reviewing a wide array of products, including MSR transfer pools, CES, HELOCs, non-prime jumbo and non-QM. We are also reviewing relatively new asset classes, like Home Equity Investment (HEI) and residential transition loans (RTL), which include fix-and-flip and bridge loans.

So far this year, we have increased our Clayton staff by 30%, adding credit and compliance underwriters to meet our anticipated production needs. While the overall market continues to wait for the Fed, the alternative market and Clayton are moving forward. Onward!

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