Non-agency RMBS / non-QM / investor-purpose
Non-QM lending
status: draft
Non-QM lending
Non-QM loans are mortgages that don’t meet the Consumer Financial Protection Bureau’s Qualified Mortgage definition. These loans lack the ATR (ability-to-repay) safe harbor, which means higher litigation risk for originators but also higher yields for investors willing to take that risk.
Documentation types
Bank statement loans
Borrower income verified through 12-24 months of personal or business bank statements rather than W-2s or tax returns. This is the largest non-QM category.
Target market: Self-employed borrowers whose tax returns understate true income. Business owners often maximize deductions, showing low taxable income despite strong cash flow.
| Program Feature | Conservative | Standard | Aggressive |
|---|---|---|---|
| Statement months | 24 months | 12-24 months | 12 months |
| Statement type | Personal only | Personal or business | Business only |
| Expense factor (business) | 50%+ | 50% | 20-35% |
| Max LTV | 75% | 80% | 85% |
| Min FICO | 700 | 680 | 660 |
Expense factor is critical. When using business bank statements, the lender must estimate what percentage of deposits represents actual income versus pass-through or expenses. A 50% expense factor means only half of deposits count as income. Programs using lower expense factors (20-35%) are overstating income.
What capital providers scrutinize:
- Consistency of deposits: Are deposits regular and predictable, or are there large one-time deposits inflating the income picture?
- Business type alignment: Does the expense factor match the business type? A consultant should have a lower expense factor than a retailer.
- Trailing vs leading trends: Is income stable, growing, or declining over the statement period?
Asset depletion / asset qualifier
Borrower qualifies based on liquid assets divided over loan term to impute monthly income. No employment or income verification required.
Target market: High-net-worth individuals with irregular income, retirees living off investments, trust fund beneficiaries.
| Asset Type | Typical Haircut | Notes |
|---|---|---|
| Cash / checking | 0% | Full value |
| Stocks / bonds | 0-10% | Volatility haircut |
| Retirement (401k, IRA) | 30-40% | Early withdrawal penalty |
| Real estate equity | Not eligible | Not liquid |
| Cryptocurrency | 50%+ or excluded | High volatility |
Depletion methodology:
- Standard: Total qualifying assets / 360 months = imputed monthly income
- Conservative: Total qualifying assets / 240 months = higher imputed income requirement
- Some programs require assets to cover the full loan amount after down payment
Common threshold: $500K+ liquid assets for most programs.
Foreign national
Non-US citizens without Social Security numbers purchasing US property. Typically investment properties or vacation homes, though some programs allow primary residence.
Requirements:
- Passport and valid visa (if applicable)
- Larger down payments: 25-35% typical
- Higher rates: 100-200 bps above comparable domestic borrowers
- US bank account (some programs require established US banking relationship)
- Two years of credit history from home country (alternative credit)
What makes foreign national lending challenging:
- No US credit history to assess payment behavior
- Currency risk if income is in foreign currency
- Legal complexity in foreclosure if borrower returns to home country
- FIRPTA withholding on sale (15% of gross proceeds)
Interest-only
Principal payments deferred for an initial period (typically 5-10 years). Borrower pays only interest, then loan converts to fully amortizing.
Target market: Prime borrowers seeking lower initial payments, borrowers expecting income growth, borrowers planning to sell or refinance before I/O period ends.
| I/O Period | Payment Shock | Typical LTV | Credit Tier |
|---|---|---|---|
| 5 years | High | 75% | Prime only |
| 10 years | Lower | 70% | Super-prime |
| 15 years | Moderate | 65% | Super-prime |
Regulatory scrutiny: Interest-only lending was heavily criticized post-2008 crisis for negative amortization risk. Most programs now limit I/O to prime borrowers with substantial equity.
Recent credit event
Borrowers with foreclosure, bankruptcy, or short sale within 2-4 years but demonstrable recovery. Also called “credit repair” or “second chance” programs.
Seasoning requirements:
| Event | Agency Requirement | Non-QM Minimum |
|---|---|---|
| Bankruptcy (Ch 7) | 4 years | 1-2 years |
| Bankruptcy (Ch 13) | 2 years from discharge | 1 year from discharge |
| Foreclosure | 7 years | 1-2 years |
| Short sale | 4 years | 1-2 years |
| Deed-in-lieu | 4 years | 1-2 years |
What investors require: Clear explanation of the event (medical, divorce, job loss), evidence of recovery (re-established credit, stable employment), and compensating factors (lower LTV, higher reserves).
status: draft
Performance benchmarks by documentation type
| Metric | Bank Statement | Asset Depletion | Foreign National | I/O (Prime) |
|---|---|---|---|---|
| CDR (annualized) | 2.0-4.0% | 1.5-3.0% | 2.5-5.0% | 1.0-2.5% |
| 60+ DPD | 3.0-6.0% | 2.5-5.0% | 4.0-7.0% | 2.0-4.0% |
| CPR (annualized) | 15-30% | 20-35% | 12-25% | 20-40% |
| Loss Severity | 20-30% | 20-28% | 25-35% | 18-28% |
Why bank statement performs similarly to full doc: Self-employed borrowers often have stronger payment incentive (personal guarantee, business reputation) and more financial sophistication than W-2 employees. The documentation difference reflects tax optimization, not creditworthiness.
Why foreign national has higher delinquency: Communication challenges, less attachment to US credit history, and currency fluctuation can all contribute. However, lower LTVs typically offset with acceptable loss severities.
status: draft
ATR and litigation risk
The Qualified Mortgage rule provides a legal safe harbor for compliant loans. If a loan is QM, the borrower cannot successfully sue claiming the lender failed to verify ability to repay.
Non-QM means no safe harbor. Every non-QM loan carries litigation risk. This translates to:
- Higher required yields (litigation risk premium)
- Stricter rep and warranty requirements
- More detailed documentation retention
- Life-of-loan reps in most transactions
Higher-priced mortgage loans (HPML)
Non-QM loans often trigger HPML thresholds (APR more than 1.5% above APOR for first liens). HPML status requires:
- Escrow accounts for taxes and insurance
- Additional disclosures to borrower
- Appraiser independence requirements
- Written appraisal provided to borrower
Rep and warranty framework
Life of loan vs sunset:
- Pre-crisis: Many reps expired at 24-36 months
- Post-crisis: Life of loan reps are standard for most investors
- Negotiated middle ground: Reps sunset for performing loans (never 60+ DPD) after 36-60 months
Key rep categories:
- Compliance: Loan complies with applicable laws (TILA, RESPA, state law)
- Origination: Loan originated in accordance with stated guidelines
- Documentation: Loan file is complete and accurate
- Title: Valid first lien position, title insurance in place
- Fraud: No known fraud in origination
Rep and warranty insurance: Available from specialty insurers for some originators. Covers loss from rep breaches. Premium: 10-25 bps of principal. Useful for smaller originators without balance sheet to absorb repurchases.
status: draft
Red flags by documentation type
Bank statement red flags
- Unrealistic expense factors: Using 20% expense factor for all self-employed borrowers regardless of business type overstates income
- Inconsistent deposit patterns: Large one-time deposits before qualification, then reverting to lower run-rate
- Business statement misuse: Using business statements for borrowers who could qualify with personal statements (hiding expenses)
- Insufficient statement months: 12-month programs without compensating factors
Asset depletion red flags
- Illiquid assets counted: Retirement accounts without penalty adjustment, real estate equity, restricted stock
- Concentrated positions: Single stock positions can decline rapidly
- Asset verification timing: Assets verified 90+ days before close may have changed materially
- Insufficient reserves post-closing: Assets depleted for down payment with minimal cushion
Foreign national red flags
- No US banking relationship: Difficulty servicing loan and communicating with borrower
- Unstable visa status: Risk of return to home country
- Currency mismatch: Income in volatile currency without hedging
- Investment property concentration: Portfolio of US properties by single foreign borrower
Credit event red flags
- Insufficient seasoning: Less than 12 months from discharge/completion
- Pattern of events: Multiple credit events suggest systemic issues, not one-time circumstances
- No recovery evidence: No re-established credit, no reserves, continued financial stress
- Same circumstances: Event was caused by factors that still exist (unstable employment, medical ongoing)
status: draft
Pricing and execution
Warehouse economics
| Product | Advance Rate | Pricing | Dwell Time |
|---|---|---|---|
| Bank Statement (prime) | 85-90% | SOFR + 175-250 bps | 90-120 days |
| Bank Statement (expanded) | 78-85% | SOFR + 225-300 bps | 90-120 days |
| Asset Depletion | 78-88% | SOFR + 200-300 bps | 90-120 days |
| Foreign National | 75-85% | SOFR + 250-350 bps | 120-180 days |
| I/O (prime) | 85-92% | SOFR + 175-250 bps | 90-120 days |
Illustrative pricing. See pricing disclaimer.
Term securitization enhancement levels
| Product | AAA Enhancement | AA Enhancement | A Enhancement |
|---|---|---|---|
| Bank Statement (prime) | 14-18% | 10-14% | 7-10% |
| Bank Statement (expanded) | 18-24% | 14-18% | 10-14% |
| Asset Depletion | 16-20% | 12-16% | 8-12% |
| Foreign National | 20-26% | 16-20% | 12-16% |
| I/O (prime) | 12-16% | 8-12% | 6-10% |
Foreign national commands higher enhancement due to servicing complexity and enforcement risk.
status: draft
Related topics
- DSCR investor loans — investor-purpose loans underwritten on property cash flow
- Prime jumbo — high-balance full-documentation loans
- Diligence guide — loan file review and compliance verification
- Deal structures — warehouse and securitization terms