Over the past few years, I’ve occasionally shared insights from the secondary market—specifically what institutional buyers are actually paying for different types of loan assets. Recently I had another conversation with a broker I work with who operates at significant scale. His firm regularly sells pools of loans into the institutional market, including:
- Scratch-and-dent loans
- Non-QM loans
- Occasionally pools of seller finance loans
The data he shared reinforced something I’ve been seeing more and more in the market, which is that there is strong institutional demand for non-traditional mortgages.
If you’re not familiar with Non-QM loans (non-qualified mortgages), they serve borrowers who don’t fit the traditional lending box. These are often:
- Self-employed borrowers
- Borrowers using bank statement income
- ITIN borrowers
- Borrowers with other non-traditional underwriting factors
In other words, these borrowers look very similar to the profiles we often see in seller financing.
Over the past 18 months, Non-QM programs from wholesale lenders have expanded dramatically. These products are filling the same gap in the market that seller finance loans have historically served.
What’s particularly interesting is what these loans are selling for in the secondary market. In some cases, well-originated non-traditional loans are trading for 100% to 103% of the unpaid principal balance. When I asked my broker friend why the pricing is so high for these loans his responses was “there isn’t enough product available to meet demand“.
Of course, pricing varies depending on several factors. But the three characteristcs that have the strongest impact on loan value are:
- Loan-to-value (LTV)
- Buyers want to see borrowers have more skin in the game and have more room to recover if the loan defaults.
- Borrower credit quality
- Reasonable credit profiles and documented ability to repay.
- Compliance
- The loans that trade at the highest prices are often acquired by smaller banks. These institutions require loans originated with proper TRID disclosures, compliance with Dodd-Frank, and compliance with the SAFE Act, along with a documented underwriting process.
At some point all investors need to be able to recapitalize in order to continue scaling. When a seller finance loan is structured properly from the beginning, it becomes a much more valuable asset. High-quality loans give investors flexibility. Instead of simply holding the note long-term, you have options to recapitalize the asset. That could include selling the loan at a premium, using the loan as collateral for financing, selling partials, or selling participations that represent portions of the payment stream.
We are helping investors originate seller finance loans that meet compliance standards and follow a process that makes them stronger assets over time.
This is one of the main focuses at Call The Underwriter. By getting the underwriting, documentation, and compliance right at the start, investors end up with loans that are not only safer but also far more valuable if they ever decide to recapitalize.
If you are interested in selling loans, I’m happy to point you in the right direction. Please note we’re not looking to get involved in the broker business and be in the middle of loan sale transactions. Our focus is helping investors create better loans and then helping you understand the options available to recapitalize those assets.