With non-QM market holding steady in current market turmoil, investors are finding strong yields and lower risk in that space
At a time when the conventional mortgage market is facing market volatility, the non-QM space continues to take big steps forward and thanks to the steady growth in the space, some investors are finding good value in investing in those types of loans.
Alex Smith (pictured top), senior vice president and regional sales manager at Acra Lending, has observed the continued strength of the non-agency loan sector attracting new, large investors.
“It’s interesting because I’ve watched on the open market a number of very large asset managers, generally tied to insurance companies,” he told Mortgage Professional America. “They have a terrifying amount of capital. They have so much money, and they’re looking for this concept of yield. They also want safe investments. They don’t want to be chasing risky stuff.”
These companies are attracted to these loans due to their strong rates of return, without taking chances on riskier investments, Smith said.
“These insurance companies, these asset managers, are more and more looking at non-QM loans and seeing their performance is better than FHA loans, which surprises some people,” he said. “The interest rates are higher than conventional loans. So, if I have a product that is essentially as safe as conventional loans, but with a higher yield, why would I not be interested in that?”
More investment means better rates
Investors aren’t looking to scoop up every non-QM mortgage on the market. Because of the wide range of borrowers who benefit from these loan programs, Smith notes investors will be choosy about which of these loans end up in their portfolio.
“There are investors entering this space, but they are being caution with what they’re accepting,” he said. “A good example is that on non-QM loans, we allow things like bankruptcies within the last two to three years. Those type of investors don’t want to touch those. In their mind, that’s still a more subprime loan.”
Smith notes that investors are interested in the non-QM mortgages from borrowers with stronger credit and income profiles.
“Borrowers with a 700 FICO score, but they need to qualify using bank statements instead of traditional tax returns, otherwise it’s a perfectly good deal,” he said. “They’ve got great credit, they’ve got good LTV, they’ve got a good DTI, everything is great. The insurance companies are saying, ‘Hey, that’s a really good loan, and I’m willing to pay top dollar for that loan.”
Because these good loans are drawing more interest from these investment companies, the competition for these mortgages is forcing rates down for well-qualified borrowers, at a time when market conditions are keeping rates elevated on conventional mortgage loans.
Melissa Cohn of William Raveis Mortgage says mortgage buyers are in limbo as tariffs and rate uncertainty cloud the market. With Fed cuts likely delayed, the second half of 2025 may fall short of expectationshttps://t.co/rLNYRvwp5F
— Mortgage Professional America Magazine (@MPAMagazineUS) May 8, 2025
“That’s the part that is interesting,” Smith said. “You’re seeing for the very good borrowers, rates are moving downward because there are investors entering the space. Meanwhile, the tougher borrowers, the 600 or 620 credit scores, the recent bankruptcies, those rates have been moving upward, because there’s less investors interested in those.
“it’s been interesting to watch the market kind of create this left versus right sort of dichotomy of one side getting better, one side getting worse.”
A lot of new entrants in the non-QM space
Acra Lending is coming off a record month, with $432 million funded in April. It’s another sign that the non-QM space continues to roll along, even with market volatility.
“It’s not that when conventional goes bad, non-QM goes up,” Smith said. “It’s more that, when conventional goes bad, non-QM stays steady.”
Smith notes that a lot of the reason for that is brokers and loan officers, who might normally pass on non-QM loans, turning to those loans when the conventional pipeline slows down.
“Loan officers, when they’re slower conventional, they take the challenging files,” he said. “The ones with the bankruptcy a year or two ago. The files that would normally be more work, they’re now willing to work on those. There is a lot of turmoil, but because we don’t deliver to Fannie Mae or Freddie Mac, we’re one level more insulated from that turmoil.”
With the increased volume in the non-QM space comes a rise in new non-QM lenders. Smith notes that many of these lenders are new, having emerged over the past couple of years, and some include former employees of non-QM lenders who saw their companies close down in recent years.
“They haven’t been battle tested yet,” he said. “They haven’t survived the 2022 rate rise or the 2020 COVID liquidity issues. A lot of people who have started these new companies were at other companies that maybe didn’t survive. In 2021 and 2022, we saw a lot of non-QM lenders close their doors outright.”
Smith also notes that some of those lenders were unable to keep the promises made to borrowers during the rate increases of the post-pandemic market.
“There were lenders who just said, ‘I’m sorry we can’t honor these locks anymore, because these rates rose too fast. We literally can’t keep our doors open if we honor these locks,’” he said. “Acra honored every single lock. There wasn’t a single lock that we broke. I think it says something that we’ve always done what’s right by our employees and by our broker partners.
“For the lenders coming into the space, the more competition, the merrier. I look forward to beating everybody.”
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