Mortgage-Backed Securities: An Alternative Investment That Yields Positive Returns to Your Portfolio and the Economy
Non-QM loans provide funding for those with non-traditional sources of income or financial situations such as self-employed individuals with irregular income from several sources or foreign investors without U.S. credit who may not qualify for a loan, but have a high level of income, substantial assets and ability to pay.
Since the 2008 financial crisis, non-QM loans have been categorized as “too risky.” But, not every homebuyer falls into the standard mortgage lending box, nor does it say anything about their ability to pay.
The main reason for non-QM loans being categorized as “too risky” is because a large number of subprime loans were given out before the 2008 financial crisis and many of those loans went into foreclosure. Non-QM loans, however, are not subprime loans – they are loans which have gone through manual underwriting and a qualitative determination of the borrower’s ability to pay. What every consumer and investor should educate themselves on is that every loan made out today is subject to the ability-to-pay rule and much stricter underwriting procedures than those in 2008. The only difference between a non-QM loan and a standard mortgage is that non-QM loans have a different way of getting there.
According to DBRS, a Toronto-based global credit rating agency, the top three non-QM borrower profiles are: (1) self-employed borrowers who have multiple income streams and therefore rely on bank statements instead of the standard W-2s; (2) real estate investors who generate income from the homes they buy and (3) foreign investors without U.S. credit.
This demographic of people can not only repay their debt but more often than not, they can also stimulate additional growth in the economy. In other words, if you don’t allow these borrowers to enter the market in the U.S., then what does that do to the real estate market in South Florida and our economy?
Risk is Even Lower in the South Florida Non-QM Market
South Florida has always been a highly desirable place to visit, but more recently its become one of the most sought-after places to not only live but also invest into. Unlike other parts of the world, the real estate market in South Florida is significantly different from other parts of the country and much of what is being written about the risks associated with non-QM loans or real estate does not apply to mortages in South Florida. For starters, unemployment does not have the same impact on South Florida’s ability to pay mortgages because a good portion of the people who live here are not part of the job market (retired) or they do not fit the conventional QM loan model and instead are part of the main three non-QM profiles to begin with: (1) self-employed borrowers who have multiple income streams and therefore rely on bank statements instead of the standard W-2s; (2) real estate investors who generate income from the homes they buy and (3) foreign investors without U.S. credit.
A large part of the real estate profile in South Florida are second homeowners and foreign investors whose income is diversified and global. A good portion of these residents operate large corporations that make up the S&P 500, which ultimately operate under vastly different circumstances than the nation’s small businesses. Not only do they operate globally and beyond regular business hours, but a significant percentage of their revenue also comes from abroad. This makes them highly resilient and extremely profitable. This also lowers the risk of default on any of their mortgages. Should a crisis strike in the U.S., this demographic of people are more likely to sell their second or third homes in Italy before their primary residences in South Florida, making the non-QM loan market, once again, less risky – especially in South Florida.
Positive Effects of High-Earning CEO’s and Corporations Making a Move to South Florida
The trend for more high-income earners and corporations making their home in South Florida can be traced back to the tax reform that New York state saw in January 2018 which massively changed the way residential properties were taxed across the five New York boroughs. As it became increasingly more expensive to live in New York, California and Oregon, homeowners shifted their investments into South Florida.
Since March of 2019, many CEO’s and hedge fund managers from high paying tax states moved to South Florida and as this happened, many of the top Florida private schools incurred waitlists at some of the top elite private schools in the nation. This influx of high earners prompted the openings of new private schools, which in part has made South Florida even more appealing, desirable, and attractive than it already was.
Many large and international companies have also shifted or expanded their offices to South Florida as well. Seeing the benefits that South Florida can provide – both from a residential and economic standpoint – makes for attributes that is unlike any other state in the U.S.
Better schools and more job opportunities are not the only benefits that become available to locals when shifts like this happen. South Florida is not just a growing global economic powerhouse for the S&P 500, small businesses can benefit and participate in international trade as well.
This is due to the access they get by being a short drive away from four major cargo ports. This, coupled with South Florida’s business-friendly legislature, a favorable tax climate, a large diverse market, geographic location, and weather is why many people are choosing to call South Florida their home. Undervalued on a global scale, South Florida is no longer just a tourist destination, it is a great investment for real estate and business.
What is Good for Your Investment Portfolio Can Also Be Good for the Economy
While New York for example, who’s economy has property taxes as the city’s largest revenue stream, Florida’s overall GDP is primarily in agriculture. Although this may not seem that important, when a crisis such as COVID-19 strikes, the government is able to continue to fund the services and programs that maintain the well-being and health of its residents, which makes for a stable economic and safe environment for everyone.
Having this diverse stream of income allows for further benefits when living and doing business here and is also a reason why when considering diversifying your portfolio of investments, the non-QM market is less and less of a risk.
Of course, the complexity of the mortgage lending market, especially the non-QM loans market and evaluation criteria requires experts to anticipate market trends and rigorously evaluate certain types of assets at any given point of time. It is true that mortgage-backed securities are only as good as the loans behind them. The same can be said of the success of a firm being determined by the intellectual capital behind it.
The problem with many investment banks today is that many of them – when facing a crisis – jump to sudden opportunities and move away from their basic function, the foundation of which is to accurately assess risk. When this happens, mistakes are made, problems such as loss of profits or fraud arise and ultimately one bank’s action can create a loss of confidence that spreads throughout an entire asset class to a completely irrational degree.
When decisions become based on incorrect information or lack thereof, such as that non-QM loans are too great of a risk when in reality they are not – this is when you need the right partner and expert to navigate.
Imperial Fund has a disciplined and strong risk management approach with more than 100 years of combined mortgage and investments experience including trading, capital markets, structured finance, assets, liabilities and risk management. Their demonstrated ability to evaluate and select assets that are optimal at any given point in the cycle, is what has brought a successful track record of stable yield for its investors.
The firm’s partnership with AD Mortgage, a leading South Florida mortgage lender and servicer of conventional and non-QM loans makes for an even stronger team.
AD Mortgage’s high standards of underwriting and risk management has not only originated a significantly lower than market average share of problem loans but also brought institutional investors and large investment banks back as repeat investors on the secondary market, time and time again.
Together, Imperial Fund and AD Mortgage are a powerhouse in the alternative investments industry.
Notes is a collection of articles, analysis, in-depth research and thinking from our firm, published with the purpose of transmitting information, of all kinds, to protect our clients.