ANGEL OAK MORTGAGE SOLUTIONS. Now is the time LENDERS LOOKING TO GROW THEIR BUSINESS MUST IMMEDIATELY TURN TO NON-QM. AngelOakMS.

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1 is the time LENDERS LOOKING TO GROW THEIR BUSINESS MUST IMMEDIATELY TURN TO NON-QM

2 is the time LENDERS LOOKING TO GROW THEIR BUSINESS MUST IMMEDIATELY TURN TO NON-QM Lenders who are not using non-qm products to grow their business today are missing an extraordinary opportunity. The non-qm lending market has the potential to be a $100 billion annual market; however, its current size is less than $3 billion. As the non-qm market grows, many lenders are realizing that non-qm products are essential to the future growth of their business. This paper explains why mortgage lenders must act now if they are going to benefit from this rapidly expanding market. Rising rates have already led to a decline in refinance originations. To maintain current loan volume, lenders must identify, establish and build new revenue streams now. As refinance activity decreases, competition for agency mortgages will only increase; lenders will cannibalize each other as they look to expand their agency loan volume. Lenders who don t embrace non-qm lending now may be left behind. The growth of non-qm lending has already begun. The question is whether your firm will participate in that growth. AVOID FUTURE HEADWINDS BY ADOPTING NON-QM TODAY Many lenders recongnize that today s changing macroeconomic environment requires a new business model. Due to the time required to build new referral sources and relationships, those proactively developing a new revenue stream have the best chance for growth. When not if rates rise Since President Trump was elected, bond prices have fallen significantly, sending rates higher. The sustained secular global growth witnessed over the last 18 months only reinforces the Federal Reserves desire to raise rates multiple times in Federal Reserve observers no longer debate if the FOMC will raise rates. Rather the conversation is centered on how fast they raise rates. Refinancing activity has slowed to a crawl because the math no longer makes sense for borrowers. With mortgage rates reversing their 34-year downward trend from the highs of the early 1980s, lenders relying on refinances for growth must find new ways to replace that volume. Rates are already rising. It is only a matter of time until refinance volume falls off a cliff the refi cliff. Once we reach the refi cliff, lenders who failed to adjust their business models will lose volume fast. Figure 1 10-YEAR TREASURY CONSTANT MATURITY RATE Thirty years of falling rates come to an end, signaling the refi cliff.

3 Agency isn t enough The decline of the refinance market also means increased competition for agency mortgages. As lenders across the country rush to increase their purchase market volume to counteract the downturn in refinance volume, competition for A-grade paper will drastically increase. Thus, any future growth of the purchase market will be negated by increased competition among lenders. Ultimately, lenders may see the purchase market pie grow, but end up with a smaller slice. Figure NO PATH FOR GROWTH Mortgage Originations: Billions of dollars in originations EXPAND THE BOX In today s lending environment, growth requires products that allow lenders to reach new customers. Instead of limiting their business to an increasingly competitive agency market, smart lenders have already started growing their business with non-qm products. Lenders who have not started marketing to non-qm borrowers and building referral sources are already falling behind. As refinance activity declines and competition for agency loans continues to increase, lenders must act now if they plan to grow their pipeline through non-qm programs. Non-QM Subprime Some lenders express concern that non-qm loans are the same as the subprime loans of 2006 that led to the housing crisis. But the facts tell a different story. Take, for example, the average credit score of subprime borrowers, which in 2006 was 580. Today for non-prime, it s 680. In 2006, mortgages were issued without any documentation of the borrower s income. Today, all income must be documented (see figure 3). And, while credit standards have risen dramatically following the housing crisis, the quantity of non-prime borrowing has plummeted. In fact, subprime volume in 2006 was roughly 40% of all purchase volume. In 2016, non-prime was 0.3% of the total purchase volume. Year Purchase Mortgage Bankers Association. (October, 17, 2017) Chart of the Week - Mortgage Originations: Available from As refinance volume has plunged, competition for QM loans has increased. Refi

4 Figure 4 THE NON-PRIME MORTGAGE MARKET: THEN AND NOW Credit Score Annual Volume Volume 580 Average credit score 690 Average credit score Volume: Over $600 billion Volume: $32 billion and growing Down Payment Oversight and Regulation $ 0% $ 10% No money down Minimum of 10-20% down Limited oversight and regulation Tighter regulation and ATR requirements. Proof of Income Income was undocumented Income must be documented There is a stark difference between the non-prime product that was rampant prior to the financial crisis and today s new issue, non-prime or non-qualified mortgages. Today, there are significant improvements in underlying credit conditions and heightened regulatory control and scrutiny. Angel Oak Mortgage Solutions offers non-agency and specialized mortgage solutions for brokers throughout the country, providing consumers with unique flexibility when applying for home loans Angel Oak Mortgage Solutions LLC NMLS # Corporate Office: 2 Lakeside Commons, 980 Hammond Drive Suite 850, Atlanta, GA angeloakms.com More than a back-up plan Some lenders view non-qm products as a last resort, offering them only to clients who cannot qualify for an agency loan. This mindset misses the bigger opportunity the opportunity to reach new clients. Lenders who use non-qm as a last resort might close a few extra loans, but they are not growing the pool of potential clients, and therefore are missing a huge opportunity to grow their business. Who needs non-qm options? The simple answer is creditworthy borrowers who don t fit into the tight underwriting standards of today s agency loans. Examples of non-qm borrowers include the successful self-employed business owner, the millennial who lacks a long credit history and families who declared bankruptcy or faced foreclosure in the past but are now responsible borrowers. Self-employed individuals may have a great career bouncing between several jobs in the gig economy. But, what they don t have is a W-2 to demonstrate their ability to repay. All too often, creditworthy borrowers who can t document their income through W-2 documents are unable to obtain an agency mortgage. While all borrowers must document their income, non-qm loans allow for alternative methods of documenting a borrower s ability to repay.

5 Figure 4 AGENCY VS. NON-AGENCY 3000 Billions of dollars in RMBS issuance Year Non-Agency Agency Securities Industry and Financial Markets Association. (2018) US Mortgage-Related Issuance and Outstanding. Available from Non-agency issuance is rebounding, but significant opportunity for additional growth exists. Many young people who have enough in savings to place a substantial down payment on a home also face a paradox: The fact that they have avoided amassing large amounts of debt in order to save money also means that they do not have a long repayment history, and thus have lower average credit scores. Others may have previously struggled during the tough economic climate, but have since recovered and are now in a position to once again purchase a home. Yet, past blemishes like a bankruptcy or a foreclosure can prevent these individuals from obtaining an agency loan. Without non-qm, these borrowers may have to wait five to seven years before they would qualify for agency loan. The bottom line is that there are millions of people in these or similar situations looking to purchase a home. Angel Oak Mortgage Solutions can help lenders identify these borrowers and start closing new loans right away. We believe loan officers should act as consultants to the borrower, helping them to find the best loan for their needs. Lenders who do not have access to the full range of products available cannot be true borrower consultants. A PARTNER FOR GROWTH There is good news for lenders who recognize the growth opportunity that non-qm lending provides: Non-QM loans are just as easy to close as QM loans, and lenders can set up a non-qm program in a short period of time. Lenders ready to grow their business can turn to Angel Oak Mortgage Solutions for all their non-qm needs. More than just mortgages Angel Oak Mortgage Solutions is more than just a non-qm mortgage lender; it is a partner for growth with the experience and mortgage industry expertise to offer unparalleled service. When lenders call Angel Oak Mortgage Solutions, they re connected to dedicated account executives who help them through the simple process of setting up a robust non-qm lending program. In a matter of days, lenders are ready serve non-qm borrowers and close more loans.

6 What you get Lenders who partner with Angel Oak Mortgage Solutions receive marketing support to identify potential non-qm borrowers and referral sources, training to ensure they know how to take a borrower from application to closing and a dedicated account executive who is always there to answer questions. Lenders also receive the training they need to confidently offer non-qm products and programs. Angel Oak Mortgage Solutions offers loan officer training programs to teach loan officers about all available non-qm programs, as well as how to sell them to borrowers and referral sources. Angel Oak Mortgage Solutions also offers Quick Quote (available at angeloakms.com/quickquote), an easy-to-use tool that makes prequalification simple. Loan officers simply plug in a few pieces of information FICO scores, loan amounts and LTV and they can get pricing for potential loans, submit prequalifications and begin the loan-approval process. With tools like these, the process of closing a non-qm loan can be just as easy as closing an agency loan. What s more, lenders can be confident that Angel Oak Mortgage Solutions is a dependable, reputable originator. Every loan it originates undergoes a comprehensive underwriting process. Even investors have taken notice, as evidenced by the large demand for Angel Oak s three securitizations, the most recent of which was rated by Fitch and DBRS. START TODAY is the time to incorporate non-qm products into your business, and Angel Oak Mortgage Solutions is the best partner to access the non-qm market. Many lenders have already implemented non-qm programs to grow their business in this new mortgage-lending environment. As the refinance market continues to shrink while rates rise, competition for agency loans will continue to increase. Lenders who do not find new revenue streams will lay off staff or close down operations. The agency mortgage market alone simply cannot support the current number of lenders. If rates rise faster than expected, the weakest lenders will fold first. Luckily, non-qm represents a huge growth opportunity for lenders. It has the potential to develop into a $100 billion annual market. As the non-qm space grows, lenders taking a proactive approach to developing non-qm know-how and building their pipeline today have the best chance of cashing in. Call Angel Oak Mortgage Solutions today to begin growing your lending operations with non-qm. Ready to get started? Download the Broker Package at angeloakms.com/brokerpackage. Call (855) , info@angeloakms.com or visit angeloakms.com. Angel Oak Mortgage Solutions LLC NMLS # , Corporate office, 980 Hammond Drive, Suite 850, Atlanta, GA, This communication is sent only by Angel Oak Mortgage Solutions LLC and is not intended to imply that any of our loan products will be offered by or in conjunction with HUD, FHA, VA, the U.S. government or any federal, state or local governmental body. This is a business-to-business communication and is intended for licensed mortgage professionals only and is not intended to be distributed to the consumer or the general public. Each application is reviewed independently for approval and not all applicants will qualify for the program. Angel Oak Mortgage Solutions LLC is an Equal Opportunity Lender and does not discriminate against individuals on the basis of race, gender, color, religion, national origin, age, disability, other classifications protected under Fair Housing Act of 1968.