Excel-erating the positive

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Excelerate Capital is fast-tracking non-traditional mortgage lending, enabling more property buyers to achieve their dreams

When Michael Thompson and Thomas Yoon set out to create a best-in-class customer experience for underserved mortgage borrowers and a working environment designed to attract and nourish the industry’s best talent, the world was a very different place.

In the 2010s, as the financial world began to recover from the Great Recession, options for non-traditional borrowers looking to finance a home or property purchase were slim to none.

After the subprime crisis, mortgage loans that conformed with the stipulations of the applicable regulatory agency (such as the FHA, for one) were viewed as the only loans worth pursuing.

Conventional mortgages tied to strict agency documentation and qualification standards, known as agency loans, were the only option. Borrowers with special circumstances, such as owning their own business, being a real estate investor, or being a retiree, were left out in the cold.

With a half-century of expertise between them, Thompson and Yoon saw a glimmer of sunshine in that freeze-out: non-qualified (non-QM) mortgage loans. At Excelerate Capital’s founding in 2014, there were plenty of borrowers with solid payback histories that were failing to meet agency loan requirements — and there was no way to service them. QM loans weren’t just the key to a new stream of borrowers, they were a missing piece of infrastructure that could go a long way to stabilize the mortgage industry.

“Typically, non-QMs loans are the opposite of subprime loans of yesteryear,” Yoon said. Non-QMs are largely geared toward the self-employed, many of whom are high-net-worth borrowers with great cash flow that their tax write-offs may obscure. “Their true income is not being properly disclosed on the tax return; they have tons of money and liquidity, but their tax return doesn’t state that, and they can’t qualify for financing unless they put down a substantial down payment. Non-QM is filling that void.”

Unlike agency loans, non-QM loans are more hands-on and collaborative. Agency loans are underwritten to an automated underwriting engine and the resulting conditions are checked by the underwriter. Automation speeds up the process but may have limitations that exclude non-traditional borrowers. A more manual process enables underwriters to make practical decisions that consider extenuating circumstances. “If we know that someone went through a financially difficult moment in time but that’s not reflective of their true credit score and true ability to repay debt, we figure out ways to make the deal work within the guidelines,” Yoon said.

If you’re tempted to equate non-QM loans to the subprime loans of yesteryear, consider these differentiators: The actual average FICO score for a non-QM borrower is north of 700. The average down payment is over 25%, and the average loan amount in some areas exceeds $700,000, which means the borrower is buying property valued over $1 million.

Non-QM represents a small sector of overall mortgage financing in terms of scale, but it’s also the hottest segment of the industry. “We have a variety of programs for first-time homebuyers, for low-income borrowers, for middle class but very underserved in the self-employed arena — which is where non-QM is really starting to grow,” Yoon said. “It’s a real disruptor.”

One particularly disruptive aspect for Excelerate was their take on stated income loans. Their stated investment program, launched in 2016, requires borrowers to have high equity, a substantial down payment, qualifying FICO scores, and reserves, but there’s no need for the lender to consider their income. If purchasing a rental property, for instance, the projected rent of the property would factor into the decision. “This is one of the staple programs in non-QM, however; we were one of the first ones to actually do it,” Yoon said.

Today, Excelerate Capital is a full-service mortgage banker and industry leader in non-QM lending. They also provide a full range of agency conforming loans, including FHA, VA, Fannie Mae, and Freddie Mac programs. All credit decisions are made internally, and, according to their website, “As a Wall Street Direct Lender, our guidelines are tailor-made for the modern borrower and all the scenarios they entail.”

As Yoon put it, “We’re disrupting because we’re one of the early adopters, and we’re innovating in the space. That’s been our calling card: We innovate within the sector and help create trends. Fintech in our sector is really behind, simply because we were the ones that created the crash … we were treated like the plague for many years, so we’re behind other industries. But the fintech movement is real, and it’s happening in real time.”

Excelerate is on the forefront, creating a proprietary underwriting engine specifically for non-QM that aims to create an excellent customer experience, similar to popular agency platforms. “We may be the only company doing that in our sector,” he added. “Because we were one of the early adopters, our relationship with Wall Street is well-connected.”

The guidelines for non-QM loans are increasingly dynamic, as they must be able to meet the needs of a rapidly changing lending environment. While agency loan guidelines might change a few times over five years, non-QM guidelines may change every quarter. “We’re constantly iterating to meet the market’s needs,” he stressed. “The innovation of loan programming is only happening in the non-QM sector. By definition, if you’re in non-QM you’re innovating constantly.”

That steady pace of innovation transcends creating new products and systems to creating a workplace culture that employees crave. “As a startup we didn’t have the capital of an established mortgage platform, so building a company culture was very important to me. I spent a lot of time cultivating a good culture within the company,” Yoon said. “The only way I could retain talent was to give people a place where they really liked working.”

Changing the temperature of the old-school, hyper-competitive working environment was another main objective. “In very good mortgage companies there’s a healthy blend of sales and ops synergy. I make it a point for our leaders to interact with each other, from different silos and departments, so it humanizes the relationship.”

The strategy is working. From the firm’s inception in 2014-19, only two people left the company. “Our retention rate was astronomical. Now at 400 employees it’s not the same percentage-wise, but compared to the rest of the industry we are definitely an outlier.” That’s Excelerate’s comfort zone, expanding the horizon with every forward step.