The mortgage market might still be sluggish, but for originators willing to look beyond the traditional, there’s real momentum building in the non-QM space. Tom Davis, Chief Sales Officer at Deephaven, is helping lead that charge — working with sales teams across the country to grow not just volume, but trust. In this conversation, Davis breaks down the surge in demand for second liens, DSCR loans, and alternative income documentation — and why originators who lean in now are setting themselves up for long-term success.
HousingWire: The current market presents a unique window of opportunity — especially for borrowers who fall outside traditional lending guidelines. From your perspective, what (big picture) conditions are driving demand for closed-end second loans, home equity loans and HELOCs right now?
Tom Davis: There are a number of conditions driving demand for second mortgages. For one, a significant population of homeowners refinanced years ago and now have low interest rates of 3% to 5%. They want to keep that rate intact and have made the decision not to move. Instead, these people are renovating or making improvements by tapping into their equity. A second mortgage makes the most sense to protect that first low-interest rate mortgage.
Homes across the U.S are aging. Homeowners are cashing out to renovate as mentioned, but real estate investors are purchasing older homes to rehab and sell or rent out. Real estate investors can obtain a DSCR second mortgage for cash out to purchase and/or renovate new or existing properties.
Another reason is that there is an issue with high debt balances. Homeowners are cashing out to help with high balance credit cards, auto notes and other debts to pay off or consolidate. Consumer credit card debt stands at an estimated $1.6 trillion and auto debt at $1.1 trillion. A closed end second mortgage can bring relief and a way to achieve financial goals. Borrowers can turn a typically illiquid asset into cash they need.
HW: I know that Deephaven is seeing a significant uptake in DSCR second loans and alternative income documentation like P&L-only and bank statements. What makes these borrowers underserved, traditionally, and how can originators do a better job of spotting them in their pipeline?
TD: Real estate investors and self-employed borrowers can be considered underserved if they can’t qualify for a traditional loan using their W-2s. Many real estate investors choose not to go with a full doc loan simply to avoid the delays that can come with complicated documentation. They want an easy loan that doesn’t require income or employment documentation such as a DSCR loan that qualifies on the cash flow of the subject property.
In today’s market, real estate investors don’t want to touch that first low interest lien. They can get cash out using our DSCR second and keep that first lien intact. There are 19 million investment properties in the U.S currently. Originators should reach out to any real estate investor who purchased a property 2-3 years ago and ask them if they can help them obtain cash for a new purchase or any improvements to their existing homes in their portfolio.
There are 17 million self-employed people in the U.S. today according to the U.S. Census Bureau. In addition, there are around 50 million gig economy workers based on a report from Upwork. For many of these people traditional full doc loans might not work because they can’t use tax returns for qualification. Alternative documentation is a solution for these challenged borrowers.
Originators should talk to Realtors, CPAs, tax preparers, lawyers or other referral partners and let them know they can help real estate investors and self-employed borrowers with their real estate goals. Many Realtors are real estate investors and could use their help with a DSCR solution. A really great way to source these borrowers is to partner with Deephaven and learn how to find and market to this large population of people who will become repeat clients.
HW: For LOs who’ve never originated a non-QM second or home equity/HELOC, how steep is the learning curve? Does Deephaven support them from the first conversation with a borrower through closing?
TD: Originating a non-QM second is identical to originating a first lien second. Sometimes it can be easier since a full appraisal is not needed and we can use an automated valuation model (AVM). For those who have never originated a non-QM loan period, we will train you. A large number of our originator partners learned to do a non-QM loan just by closing their first one. Once they see how easy it is, they send their scenarios to us on a continuous basis to find out what we can offer to get it closed quickly.
A HELOC is a very simple process. The application is completed and submitted online within 5-10 minutes. Approval and access to funds is very quick.
Our customer service is top-notch. We walk our clients through the process from start to finish so they succeed.
HW: With purchase originations still slower and rates higher than everyone would like, how long do you think this window for non-QM second-lien products will remain open? Are there specific signs LOs should watch for that might indicate another shift?
TD: Second lien originations expect to be a major growth product and sector of the market for the next 3-5 years. Once again, the majority of homeowners have rates in the 3%-5% range. Originators need to adapt to this market and offer an alternative second lien program. It provides a great opportunity to stay connected with a buyer to provide a solution for future refinances or cash out transactions. In today’s market, this is where you’re going to keep your pipeline full.
HW: Real estate investors often hit a wall with traditional financing — especially when it comes to second liens. Are you addressing that investor segment with products like DSCR seconds, and what’s the demand like from that side of the market?
TD: Yes. As mentioned earlier there is a sizable amount of investment properties in the US. We are providing a solution by offering a full doc option as well as a DSCR option. Similar to consumers, investors have lower rates on their investment properties and it does not make financial sense to lose that low first rate. They can leverage their home equity in their investments to rehab or purchase new properties to grow their portfolio. Deephaven is very bullish about this space due to the demand in the market.
HW: What’s the risk for originators who sit out this phase of the market? In your view, what’s the real cost of not offering these products right now?
TD: The cost is you are opening a door for other originators, your competitors, to solve problems and close loans that you could be closing. Second loan products provide a solution for a number of challenges whether it is to make renovations, fund tuition, or reign in overwhelming debt. Join in or miss out on one of the largest opportunities for growth in the mortgage space today.
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