Murphy: The self-employed market has been a big driver for non-qualified mortgages (non-QM). There are about 57 million workers now in the gig economy—that's 36% to 40% of people driving at least part of their income from a separate source. How has this impacted the non-QM market and what do you expect going forward?
Hutchens: The small business owner has been a huge piece of non-QM since we started this almost seven years ago in 2013. We didn't start with a bank statement product, but we quickly added one based on the demand from the market and finding out which borrowers had been locked out of the market due to the financial crisis.
This product has been more than 50% of the non-QM production since non-QM really came to be. We don't see that letting up. It’s just so much easier to be a part of the gig economy now than it was just five or 10 years ago, so we see that as a growing piece of the market and a big part of non-QM programs.
Murphy: Has the length been changing on the bank statement programs?
Hutchens: Right now, the world hasn’t gotten through this pandemic yet. So, we had moved to a 12-month banking statement program, but we just felt like with the current environment, it made sense to make it 24 months. However, the most important part for us is what's happened in the last 90 days. We all know self-employed people—and a lot of small business owners have been hit hard when a state or city comes in and shuts business down. Are they recovered or on their way to recovery?
Murphy: Has the way you're looking at credit risk in general changed?
Hutchens: It's definitely had to tighten up a little bit. When the economy was clicking, you could loosen up the credit because a good economy is your backdrop. But, when the economy is in its current state, you can't really rely on that, so you really have to tighten the credit box.
We've lowered some loan-to-values that are available and increased the credit required to even get to loan values. I believe these are all short-term scenarios because one thing we proved—and the reason that we had the growth—is that we can originate good loans outside of agency.
This crisis is not a credit issue like it was in 2008 and 2009, it is a virus issue. That's the big difference this time around. We have tightened up, but I strongly believe that's temporary.
Murphy: Is there a sweet spot right now for credit scores?
Hutchens: Well, I'd say the investor appetite is not great for anything under 680 today. We've got a couple of things that you can do under 680. But, with our bank statement product, the average FICO credit score is about 740. That’s not actually much different than before COVID.
Murphy: Aside from the bank statement product, what other products do you have?
Hutchens: Another big one is what we call our investor cash flow, which is an investment program DSCR (Debt Service Coverage Ratio) where borrowers are qualifying not on their personal income, but on the cash flow of their investment properties. Borrowers are truly qualifying on that property that we're securing. It’s about the ability of that property to cover the mortgage—it’s not a fix and flip.
Murphy: Do you have programs based on other income? What if I had a lot of money or my source of income is from my investments?
Hutchens:There’s asset qualification programs. We did them pre-COVID-19, and recently brought it back. We look at the borrower’s assets, not their income to make a credit decision. We also have a full doc program—it’s really a jumbo product because the jumbo market is pretty tight. A borrower can’t secure jumbo financing if they have even a really small glitch, so there’s an opportunity for us to fill that void. Whatever falls out of the tight agency guidelines, that’s where we’re looking to add value. So, we’re really more than just non-QM… we’re non-agency.
Murphy: What's the most important criteria for getting approval… is there something the underwriters are more focused on now more so than others?
Hutchens: We look at it a lot of different ways. We're looking at payment shock. Ours is a very holistic view. We're looking at the overall scenario. Do they have a lot of residual income? Are they used to making that type of payment?
Murphy: You could call it common sense underwriting.
Hutchens: That's what we brought back. Post-crisis, there was no common sense. For us, common sense is really the name of the game for us. We used some tools to aid underwriting, but final decisions are made by trained underwriters.
Murphy: Do you feel that being focused on only the non-QM space gives you an advantage?
Hutchens: It has served us well. We started in 2013 and all we've ever done is non-QM. Agency doesn't require as much underwriting decision-making because the computer makes the decision. In our world, the underwriter makes the decision. And having the expertise in this space has helped differentiate us from others.
Murphy: Back in July, you did a securitization,$530 million right? It's one of the few I've heard of in the non-QM space. How do you see securitizations going?
Hutchens: To do these in this environment just underscores our expertise. The proof is in our performance of the loans and our entire process during the last seven years. It has really given us a lot of credibility. We have made good decisions on good loans for years and years. For these securitizations to go out with pre-pandemic loans, pre-COVID-19 loans is verification that we're doing things the right way.
Murphy: There have been predictions that as people get less secure with taking on risk, it might be harder to get people to buy into the lower traches of the securitizations and thus make it harder to put those kinds of deals together. How have you been bucking that trend?
Hutchens: Again, the proof is in the pudding. Our investors are not simply believing a story. We told the story for a couple of years until we started issuing securitization in late 2015. So, those early investors definitely showed a certain amount of trust in us. But, now people can see the performance that we've produced from 2015 to 2019, and say, ‘these guys did what they said they were going to do—these loans are performing.”
Murphy: I guess the flip side of that is people are chasing yield these days.
Hutchens: Yes, of course. If we were offering these at 3% rates in the market, that probably wouldn't have quite as much interest. Yield matters.
Murphy: The landscape has changed a lot over the last six months—people have stopped lending while others are unable to start lending. How do you see things playing out?
Hutchens: The world is not out of the storm yet as we've seen a lot of carnage. But, I can only speak to Angel Oak. What we’ve seen happen is that our structure can weather the storm.
Murphy: We've seen some carnage, but we're also seeing a larger number of non-QM borrowers for the future being shaped. Some expect there will be a bigger market with fewer players, meaning there is going to be a lot more market share up for grabs. What do you think?
Hutchens: We have said that non-QM is a 300 billion to 500 billion a year market. That hasn't changed. Maybe it's been pushed out a little further and won't happen in 2021, but it's still there. We think that our market share is going to be higher than it was going to be pre-pandemic.
Murphy: How do you see the oncoming of the millennials into the prime house buying age affecting your business?
Hutchens: It's great for our business because the millennials are probably the most comfortable in the gig economy. They have a different mindset. They’re not all about working for a single company, putting in 40 hours and getting a W2, and taking two weeks of vacation. That may not be the millennial mindset. I think they have a more entrepreneurial mentality, which is what the non-QM borrower is.
Murphy: What do you think the future holds for non-QM?
Hutchens: I think the future is extremely bright. The one thing that I don't know is the speed at which it comes back, but I know for sure it's going to. The need and the demand is going to continue to be there. Nothing has changed from our perspective—we're still going to originate good performing loans, and the investors are going to be willing to invest in good performing loans.
