Originations - both conventional and private -have been increasing annually since 2019, peaking in 2022. Current levels remain higher than those in previous years, and projections suggest even more originations in 2024 than in 2023. We are still above levels reached in the years leading up to 2022 and are likely to see more originations in 2024 than in 2023. May 2024 is the high watermark for both private lending and residential originations year-to-date.
Although we already know the movement in total originations, what do we know about the composition of these specific loan products? Understanding not only the volume but also the composition of business purpose loans is crucial for both lenders and investors as they navigate the dynamic landscape of real estate investment.
TERMINOLOGY
To set the stage, it's important to clarify what constitutes a business purpose loan. For this article, a business purpose loan is defined as any mortgage transaction in which the borrower is a business entity and the lender is a private lender or non-QM lender.
These loans are further divided into two types based on maturity terms: DSCR loans and RTL loans, each with distinct characteristics. A DSCR loan is defined as a mortgage with a maturity term of at least 25 years. An RTL loan is defined as a mortgage with a maturity term of two years or less.
The scope of the data in this article is specifically limited to private lending and non-QM business purpose loans and includes data for the first three quarters of 2024 due to the completeness of public record reporting at the time of this article.
PRODUCT TRENDS AND DIFFERENCES
Examining loan product trends reveals strategic differences among lenders; some opt for diversification, while others specialize. It's important to understand that not all private lenders offer both RTL and DSCR loans.
Some choose to broker DSCR loans to larger private or non-QM lenders. As we dig deeper into loan product trends, it becomes evident that lender strategies and offerings vary significantly. Outside of the top 100 lenders, just 15% of private lenders originated a DSCR loan through the first three quarters of 2024. Since DSCR loans look and feel more like conventional residential loans, there are more capital market players on the secondary market for this product.
As illustrated in Figure 1, RTL loans continue to dominate the market. However, during the last four years, DSCR loans have steadily gained a larger market share. This increase has come mostly from non-QM lenders, as non-QM lending for DSCR business purpose loans has increased every year since 2020. The number of DSCR loans in 2023 was more than double that of 2021, and the total number of DSCR loans through the first three quarters of 2024 is already more than the total of 2023.
Figure 2 provides a breakdown that illustrates both the increase of unique non-QM lenders offering DSCR-type loans, along with the corresponding increase in loan counts.
CONVENTIONAL LENDING ENTRANTS
Alongside the growth of private and non QM lending, there is a notable trend of increasing participation by traditional, conventional lenders in the business purpose loan market. Forecasa has identified several conventional lenders like United Wholesale Mortgage (UWM) and Guaranteed Rate that have started to originate business purpose DSCR loans. For example, UWM has had fewer than 700 business purpose loans in each of the last two years. Through the end of Oct 2024, UWM has originated nearly 2,400 business purpose loans (see Fig. 3). Forecasa expects this trend to continue through the remainder of 2024 and into 2025 because this shift allows conventional lenders to offset declining residential refinance activity by tapping into the demand for alternative financing options.
GE0GRAPHICAL VARIANCES IN LOAN ACTIVITY
Another key factor is the geographic segmentation of private lending markets: Borrower needs, lender availability, and product preferences can vary significantly from one region to another.
The U.S. Census Bureau categorizes the country into four primary geographic regions, each comprising specific states. This standardized breakdown enables consistent data analysis across federal and state datasets, facilitating easier comparisons of economic, demographic, and lending trends.
Among both private lenders and non QM lenders, the Midwest region saw the largest growth in DSCR loans. Since 2021, the total number of DSCR loans there has more than doubled (+131%). Meanwhile, the West region was the only region to see an overall decrease in originations (-18%), but solely within the private lender category. Private lenders and non-QM lenders moved in completely different directions in the
West: Private lending DSCR originations decreased by 46% while non-QM lending originations increased by 44% since 2021.
The largest non-QM lenders offering DSCR loans include LoanStream Mortgage, Amwest Funding Corp, and A and D Mortgage. Premier Mortgage Associates has been the fastest growing in this segment, producing more than six times the number of DSCR loans from 2023 through the first three quarters of 2024.
IMPLICATIONS OF RISING INTEREST RATES
Interest rates, which began to rise in 2021, also appear to have significantly influenced the shift in product mix. With an expectation of rates continuing to climb, an increased number of borrowers were motivated to lock themselves into a fixed rate loan. This preference aligns with the growing proportion of DSCR loans in the overall loan count, offering insights into borrower strategies in response to market conditions. However, while RTL loans make up less of the business purpose loans by count of units than before, they present a larger share of the total origination volume due to larger loan sizes (see Fig. 4). Through the first three quarters of 2024, the average RTL loan amount was about $521,000 by comparison, the average DSCR loan was about $315,000 (see Fig. 5).
In summary, the business-purpose lending market is clearly evolving, with private lenders and non-QM lenders implementing customized strategies to address borrower needs. RTL continues to be the leading product overall, but DSCR loans have gained market share and experienced notable growth in specific regions.
We anticipate that private lenders will look into offering DSCR loans as a way to enhance client retention and foster borrower loyalty. To remain competitive with non-QM lenders and the traditional conventional lenders, Forecasa expects to start offering more business purpose loans to make up for the lack of residential refinancing activity.
By Michael Fogliano and Sean Morgan
Private Lender, The Official Magazine of AAPL
Winter 2025, p. 6-10
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