The Rise of Non-QM Lending & The Role of Institutional Investors

As the traditional mortgage landscape continues to evolve under pressure from rate volatility, shifting borrower demographics and macroeconomic uncertainty, one sector is emerging with growing strength: non-qualified mortgage (non-QM) lending. Once seen as a niche, non-QM has moved steadily into the mainstream-and institutional investors are taking notice.

A Growing Slice of the Origination Market

In 2024, non-QM lending represented approximately 5% of all originations. This year, that figure is expected to more than double, reaching 10-15% of the market. The driver? A rapidly diversifying borrower base that includes self-employed individuals, gig workers and real estate investors, who often fall outside of standard agency underwriting guidelines.

While non-QM products may have varying underwriting guidelines, it is critical to note that these are not subprime loans. In fact, the sector focuses squarely on the borrower's ability to repay, with underwriting standards designed to responsibly accommodate unique income situations. For example, bank statement loans, a core product in this segment, now account for 30-40% of non-QM originations, with average borrower FICOs of 737+ and conservative loan-to-value (LTVs) ratios in the 60s. These aren't risky loans. They're high-credit-quality mortgages for non-traditional borrowers with verifiable cash flow-just not in the W-2 format.

The robust underwriting standards are largely due to the rise of AI-assisted underwriting, particularly in analyzing bank statements and self-employed cash flow, which has accelerated non-QM processing and improved loan quality. Lenders are also applying data analytics to fair lending compliance, ensuring that loan exceptions are fairly administered and transparent-an essential component as the product becomes more mainstream

With loan performance consistently strong and loss mitigation rates under 3 basis points, non-QM loans have demonstrated resilience and risk-adjusted yield potential that appeal to today's capital providers.

Second Liens and DSCR Loans: The Market's Next Frontier

Perhaps the most notable shift this year is the explosive growth in second lien lending-now the fastest-growing space in non-agency origination. With home equity at historic highs and most homeowners locked into mortgage rates under 5%, borrowers are increasingly turning to second liens, HELOCs and investor cash-out refinancings to tap into liquidity.

Institutional capital is increasingly flowing into Debt Service Coverage Ratio (DSCR) loans-also known as Business Purpose Loans (BPLs)-which rely on property cash flow rather than personal income to qualify. These are non-owner occupied, often 30-year fixed-rate loans not subject to TRID and, in some cases, exempt from state licensing. For investors, they offer attractive yields with embedded structural protections-if properly underwritten.

Liquidity and the Importance of Institutional Investors

From a liquidity standpoint, the non-QM space is now deeper and more diverse than ever. Insurance companies, pension funds, private debt funds and forward buyers have all entered the market, seeking diversified exposure and higher-yielding, short-duration assets.

However, unlike agency pools, spread risk in non-QM is difficult to hedge-a critical point for newer entrants. The recommendation from industry veterans is to avoid bulking loans for later delivery; instead, aggregate loans on a flow basis to manage spread risk and optimize capital deployment.

Takeaways for Institutional Investors

The primary market is signaling that non-QM lending has moved from "nice to have" to "need to have." Mortgage originators that embrace the segment are seeing gains in market share, LO retention and borrower satisfaction.

For institutional investors seeking non-correlated exposure, strong risk-adjusted returns and defensible collateral, non-QM products-particularly bank statement loans, second liens and DSCRs-are a space to watch.

Final Thoughts

Non-QM lending represents a powerful intersection of borrower need and investor opportunity. As more primary originators build infrastructure to scale and hedge risk effectively, and as more borrowers seek alternatives to agency credit, non-QM will only grow in relevance. For investors, the time to engage with this market-through forward purchases, warehouse financing or securitization-is now.

Contact us to learn more about SS&C can help streamline your non-QM lending operations.

The data cited in the article came from the Mortgage Bankers Association webinar, "The Current State of Non-Agency Lending," which took place on July 15, 2025.