What is the future of DSCR??

Question

DSCR / rental / hybrid / even conventional lenders who have an opinion: Where is DSCR heading?

Context: The DSCR space is largely controlled by 10-12 institutionally backed lenders. There's hundreds of other lenders who are small in size and table fund or maybe even fund into origination and there cash reserves are funded by LPs, Family Offices or High Net Worth Individuals ... but the 10-12 with institutional sponsors have seen tremendous growth since 2016.

If this trend continues, will the DSCR product become more standardized? What if Better or Rocket jump into the space? They have the platform to really wipe some of the small guys out. And not because of their tech (Kiavi really showed us that fintech won't win you every deal) but because of their infrastructure and access to data + cheap capital. Can margins even get thinner than they are right now?

Will GSEs ever step in? Obviously this all assumes no serious uptick in default / delinquencies.

Robin Simon · Answer

I don't think we are headed toward consolidation or domination by big / well-capitalized players, in fact the opposite seems to be playing out.  The ones who got crushed the most this past year (https://www.housingwire.com/ar...) (https://www.housingwire.com/ar...) were the big shops that were too busy building up massive pools and throwing money at scaling to notice the rapid transformation of the market and vertical rates - the smaller nimble shops with smaller balance sheets that were constantly in the secondary market were able to pivot much quicker.

For the same reason that Zillow, OpenDoor failed, at the end of the day residential housing is still an local market and an "exception-based" business, lots of factors make it easier for leaner shops to compete.

I also think when it comes to attracting talent, its hard to get people who are used to agency (QM) loans to expand and do DSCR - its a lot more work!  It takes a much better talent / more determined originator to find deals and make them work, rather than answer phones and plug into the rules.  It would in my view be very hard to run a shop that dominates with QM and DSCR.  These QM firms have also made heavy investments in technology that frankly doesn't integrate well with a DSCR underwrite which is better underwritten like a CRE loan in my opinion, not worth this massive tech overhaul for the bigger players in my view.

Also - highly doubt GSEs will step in, conventional is still an option for investment properties, they are far more likely just to loosen uw or expand limits than create a true DSCR product competitor

Chris Mason · Answer

UWM, the largest purchase lender in the country, and one of the few lenders to post an increase in profits of late, used by a huge % of mortgage brokers, is already in the DSCR space.

They attributed virtually none of their uptick in profits to DSCR. They may keep it around as a gift to independent mortgage brokers, but that's all it'll be.

DSCR is not the cavalry coming to save the day, it's not a knight in shining armor, I strongly suggest that everyone pray to a different God (but, again, hey, go ahead and close the DSCR loans that people call you to ask for, may as well enjoy it while it lasts, I've noticed the uptick in phone calls from this niche too & have been closing them myself [dodged the bullet when Sprout pulled the plug, didn't have any active loans with them -- knock on wood I can keep dodging it, but when all the non-QM/DSCR lenders are posting cooked books to trick idiots on Wall Street into thinking they're not pets dot com, it'll take some luck too]).

Chris Mason · Answer

At the individual consumer/investor and loan officer level, everyone is trying to run to DSCR as the solution to a problem.

Loan officers are running to DSCR to make up for lost refinance volume.

Consumers/REI are finding themselves needing to run to DSCR because of this:

Regular Fannie type loans got a lot harder to get in April 2020, and started getting even harder when rates started to tick up.

So loan officers and consumers/investors want DSCR, but we're seeing the financial institutions back away from exotic mortgages.

Sprout Mortgage was a major non-qm/DSCR lender. They stopped doing business --> "Sprout mortgaeg is 2nd non-QM lender to implode in as many weeks." https://www.inman.com/2022/07/...

Angel Oak is another major non-qm/DSCR lender, they're in trouble for mis-representing their profitability to investors, presumably because the real numbers are trash (this news is from 1 week ago). https://www.nationalmortgagene...

Non-QM/DSCR is a house of cards. Everyone is a genius in a bull market, but that bull market is over, my friends. The tide is going out and we will see who is naked, all that jazz. There isn't systemic nationwide risk the way there presently is for student loans and car loans, simply because they are such a small part of the actual closed loan market share (they have a HUGE "people talking about these loans on the intertubes" market share, but a VERY SMALL share of actually closed business).

I see a few of my fellow loan officers in this thread, which means there's 30x as many out there that aren't posting. To all y'all, from one colleague to another, I strongly suggest picking a different tree to bark up, to grow. Sure, we can all offer DSCR, may as well, but don't put yourself in a position where you are reliant on them, their continued availability, their continued pretty good (compared to HML) rates, or any of that. Wall Street is going to figure out these things are stupid, pull back their dollars (think dot com bust, when investors realized that "people talking about a thing" and "actual profitability" are NOT, in fact, the same thing), and poof there goes DSCR, before you know it you have to squint to tell DSCR rates/fees from HML, and at that point why not just save the hassle and get a HML?

Zach Wain · Answer

@Riaz - great question, I have been thinking about this a lot.  I think it all depends on the appetite of the secondary market.  I am not dialed in enough with the secondary space, specifically with DSCR loan bundles.  But you have peaked my interests further and I am going to investigate.  There is a lot at play in the secondary markets.  To me, the institutional investors are the wild card.  If they have a ton of cash and want to keep competitive, they can.

Most big players like Rocket and UWM service their loans, but they still sell the loan to FNMA or to their jumbo investor and they usually maintain servicing rights.  That is my understanding at least.  So the big players will still need a secondary market outlet for their loans.

Just my 2 cents, but I can not imagine FNMA or FHMLC will ever get into the DSCR space.  It opens up too much risk and would bring back subprime memories.

I am curious of other peoples thoughts...

What is the future of DSCR??

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