In the 16 years following the peak of the Global Financial Crisis, the structured products industry has undergone a significant transformation. What was once a market dominated by large banks has now evolved to include new players, with insurers seeking long-term debt investments forming new relationships with managers specializing in origination, securitization, and sale of mortgage-backed securities. This shift has sparked increased interest in alternative assets for yield, particularly in the non-qualified mortgage securitization space.
Non-QM loans cater primarily to entrepreneurs and self-employed individuals who lack the necessary documentation to qualify for conventional mortgages offered by Freddie and Fannie. These loans are appealing due to their strong credit quality, low loan-to-value ratios, and stable origination volumes. The upcoming year is expected to witness a surge in new players entering this market.
Traditionally, life insurance companies steered clear of investing in residential mortgages. However, the influence of private equity investors has led cash-rich insurance companies to look towards private debt assets that offer higher premiums due to their illiquidity. With traditional banks scaling back private lending activities, insurance companies have seized the opportunity to become major private debt investors. While only a small portion of this investment has been directed towards real estate debt, a significant portion has been allocated to non-QM loans.
The growth of non-QM loans has incentivized insurance companies to shift their allocation towards this asset class. Regulatory frameworks created post-GFC have provided reassurance to investors, leading to significant growth in entrepreneurial activity in the non-QM space. Non-QM market share has been steadily increasing, with minimal losses due to delinquency thanks to stringent underwriting standards and strong borrower profiles.
As insurance companies and banks take note of the potential in the non-QM space, we may see a resurgence of banks entering this market. Deregulation efforts and looser regulatory requirements could pave the way for increased bank participation in non-QM loans, leading to a stronger market in the upcoming years.
Overall, the outlook for the non-QM market in 2025 appears promising, with both insurance companies and banks expected to increase their involvement in this space. This anticipated surge in investor activity suggests a robust year ahead for the non-QM market.
Victor Kuznetsov is the founder of Imperial Fund Asset Management.
This article does not necessarily reflect the views of HousingWire’s editorial department and its owners.
To contact the editor responsible for this article: [email protected].
Related