Empowering the Non-QM Market: The Strategic Role of Mortgage Due Diligence Firms

By Kim Hoffman, CMB, AMP

President, Mortgage Connect Risk Solutions

 

Executive Summary

As the non-qualified mortgage (non-QM) market continues to expand, originators and investors face increasing complexity in managing risk, ensuring compliance, and maintaining investor confidence. Mortgage due diligence firms play a pivotal role in this ecosystem by providing independent, comprehensive reviews that safeguard the integrity of loan portfolios. This white paper outlines the specific ways in which due diligence firms add value to non-QM stakeholders and highlights best practices for leveraging these partnerships.

 

Introduction: The Rise of Non-QM Lending

According to the Scotsman Guide, one out of 20 mortgages are non-QM – expect that to grow. Additionally, non-QM loans accounted for approximately 5% of total mortgage originations in 2024 and anticipate nearly 30% of mortgage-backed securitizations production volumes will be non-QM in 2025.

Non-QM loans serve borrowers who fall outside traditional underwriting criteria—self-employed individuals, real estate investors, and those with complex income streams. While these loans offer flexibility and market inclusiveness, they also introduce heightened risk and regulatory scrutiny. In this environment, third-party due diligence is not just a safeguard—it’s a strategic necessity.

 

How Due Diligence Firms Support Non-QM Originators and Investors

Loan-Level Regulatory Compliance Reviews

Due diligence firms conduct detailed audits to ensure each loan complies with federal, state, and local regulations, for example:

  • Ability-to-Repay (ATR) Rule
  • TILA/RESPA Integrated Disclosure (TRID)
  • Home Mortgage Disclosure Act (HMDA)

These reviews help originators avoid costly repurchase demands and legal exposure. 

 

Credit and Collateral Risk Assessment

Firms evaluate borrower creditworthiness and collateral value through:

  • Income and asset verification
  • Appraisal and valuation review
  • Debt-to-income (DTI) and loan-to-value (LTV) analysis

This ensures loans meet investor guidelines and reduces salability risk.

 

Data Integrity and Tape Validation

Due diligence providers compare and contrast loan data, documentation for accuracy and consistency, For example:

  • Cross-checking loan tapes with source documents
  • Identifying and resolving discrepancies
  • Ensuring data readiness for securitization

Accurate data is critical for investor confidence and rating agency approval.

 

Guideline Adherence and Exception Management

Non-QM loans often involve nuanced underwriting. Due diligence firms:

  • Confirm adherence to investor or originator guidelines
  • Flag and document exceptions with rationale
  • Provide narrative summaries to support investor decision-making

This transparency supports better pricing and risk assessment.

 

Technology-Driven Efficiency

Leading firms leverage automation and AI to:

  • Accelerate document and data processing
  • Improve accuracy in compliance testing
  • Enable real-time exception reporting

This reduces turnaround times without compromising quality.

 

Support for Securitization and Rating Agency Compliance

Due diligence reports are essential for rated RMBS transactions. Firms:

  • Provide third-party review (TPR) reports accepted by all major rating agencies
  • Certify compliance with SEC rules (e.g., Rule 15Ga-2 and Rule 17g-10)
  • Enhance transparency and investor trust in securitized pools

 

Distressed and Re-Performing Loan Reviews

For investors acquiring non-performing or re-performing loans, due diligence firms offer:

  • Payment history analysis
  • Servicing comment reviews
  • Title and lien validation

This enables informed acquisition strategies and portfolio management.

 

Best Practices for Non-QM Stakeholders

In order to maximize the value of due diligence partnerships, originators and investors should adhere to the following success standards:

  • Originators should consider engaging with a due diligence firm early in the loan lifecycle, have them perform your post-close quality control and issue you a reliance letter (this ensures a smooth investor transaction)
  • Customize review scopes to match risk tolerance and investor requirements
  • Use findings to refine underwriting and origination practices preventing future transactions delays

Remember, your due diligence provider is your partner in reducing execution risk, they are there to protect you from financial risk, ensure they have the right leadership, and tenured employees with experience in all products.

 

Conclusion

In a market defined by complexity and opportunity, mortgage due diligence firms are indispensable allies. Their expertise, technology, and independence empower non-QM originators and investors to navigate risk, ensure compliance, and build resilient portfolios. As the non-QM sector continues to explode, so too will the strategic importance of prudent, proactive due diligence.

 

Mortgage Connect Risk Solutions, formerly known as Adfitech, has provided these services for over 40 years. We have reviewed millions of loans, hundreds of thousands of pages of loan documents and are led by industry experts with decades of experience that spans origination, capital markets, credit, compliance, technology, and selling loans to the secondary market. We’d love to work with you, let’s connect @mcrisksolutions@mortgageconnectlp.com.

 


 

Navigating Budget Challenges in 2025 

The holiday season is here, with Christmas lights twinkling, decorations abound, and perhaps Thanksgiving leftovers still in the fridge. It’s also time to tackle the annual budgeting challenge. Predicting revenues and expenses for the upcoming year is always tricky, but 2025 presents unique difficulties.

Reflecting on 2024, the anticipated refinance boom didn’t materialize as predicted. Interest rates remain in the mid to high 6% range, and a significant 74.6% of outstanding residential mortgages are locked in at 5% or below. Beyond the possibility or refinances, higher interest rates have dampened the demand for loans for new housing, which has been already compounded by rising property taxes and homeowner’s insurance costs. 

The Silver Lining 

Despite these hurdles, FNMA and MBA economists forecast an increase in residential mortgage loan production for 2025. However, more volume doesn’t necessarily translate to higher profitability. The year is expected to bring the same interest rate volatility seen in late 2024, where a brief dip in rates led to a surge in mortgage applications, only for rates to rise again shortly after. 

Budgeting Amidst Uncertainty 

In the mortgage industry, we’re all accountable for the budget numbers we set. Over my 40-year career, I’ve seen how fluctuating interest rates can wreak havoc on operational staffing and cost control. But there are strategies to navigate these turbulent times. 

Strategic Planning for 2025 

One humorous yet impractical option is to buy a crystal ball from Amazon, though results may vary. A more reliable method might be flipping a coin—heads, production rises; tails, it falls. If all else fails, you can always pull out the dart board and take your best shot. Needless to say, these are not viable business strategies. 

As we approach 2025, with expected interest rate volatility and ongoing financial pressures, consider converting fixed costs to a variable cost model by outsourcing to a dependable vendor. This approach stabilizes profitability regardless of rate changes and eliminates the operational chaos of hiring and firing staff, managing overtime, and training new employees. The key is to select a vendor who understands your business and is committed to your success, ensuring that your costs are predictable and locked in for the year. A partner who’s been in your shoes and will work with you through the challenges that lie ahead, avoiding the pitfalls and guiding you to success. And as it relates to the budget? Your costs are locked in for the year, tied to your actual production regardless of what rates do. If you’ve already completed your 2025 budget, your accountability awaits you. You have a choice. 

 

Making the Right Choice 

You have two options: continue with unpredictable methods or partner with a trusted vendor offering stable, predictable costs. I advocate for the latter. For those who prefer the former, I wish you the best of luck in 2025. For everyone else, let’s discuss a strategic plan for your success in the new year. 


Celebrating Women’s Equality Day

On Women’s Equality Day, hosted every year on August 26, we honor the movement for universal suffrage that led to the 19th Amendment, celebrate the progress of women over the years, and renew our commitment to advancing gender equity and protecting women’s rights. This year, in honor of Women’s Equality Day we interviewed four women in leadership positions at Mortgage Connect and asked them important questions submitted by fellow employees that focus on advice, career achievements and what it means to be a woman not only in leadership but in this industry.


Appraising in Today’s Market

Andrew Bough – Executive Vice President, Valuations

It is fair to say that we are living in interesting times, both in terms of the world around us and the mortgage industry in general. After a protracted period of record low interest rates and more work than most appraisers knew what to do with, we are now dealing with a new reality – a slow market, an environment a lot of appraisers have never experienced. What’s also different this time are the various extenuating circumstances that are driving extreme change over a very short period of time. Interest rates recently went up faster than they have in over 40 years. Inflation continues to be at levels not seen in decades and mortgage applications are at 25-year lows. Despite this, we still have healthy unemployment and continued low delinquency rates. As a result, our business has changed dramatically.

So, what to do? How do you continue to be relevant, grow and succeed in a market like this? Appraisers need to look ahead at what it is lenders will be looking for in the future and prepare now to create new revenue opportunities.

First and foremost, service levels need to be exceptional. Whether you work for AMCs exclusively or a blend of clients, you must differentiate yourself. This is a service-orientated business irrespective of who your client is. In this new competitive environment, the work will go to those appraisers who exceed expectations. Go above and beyond to communicate effectively, and be super responsive to questions, updates, and revision requests. Build a great rapport with your clients. Be proactive. Spend a couple of extra minutes on your reports and provide a little extra support, continuously work on improving your report quality. Take some classes that actually teach you something.

During this transitional period, you should be actively looking to broaden your bandwidth to include specialty appraisal services. Learn how to review – there’s a ton of due diligence business available. Re-familiarize yourself with default work and REO appraisals – business that is on its way back. Become proficient with complex high-end assignments, reverse mortgage and new construction, all segments of our business where limited scope reports are unlikely used. Communicate with your clients ask them about the types or requests they’re receiving, and then adjust accordingly.

The days of churning out the “one size fits all” 1004/70 reports are long behind us. Appraisal modernization is upon us; this new risk-based approach to valuation product selection shouldn’t be feared, it should be embraced. There are a number of newly-introduced products that offer appraisers great opportunities to create additional revenue. Educate yourself on what is required and align with clients like Valuation Connect who are paying fair fees based on the scope of work required. The new technology and tools associated with these reports are something you must become more familiar with in this new environment. Make your clients aware that you are willing and able to take on a full suite of services.

By enhancing the quality of your reports as well as your customer service and communication, you can ensure you are considered first for new assignments. No matter what your appraising experience and background is, improve yourself by learning and adapting to the industry changes and position yourself for greater opportunities.


Andrew Bough is Executive Vice President & Head of Valuations. In his role, Andrew is responsible for the overall management and performance of every aspect of valuations. He oversees the ongoing development of key initiatives including the expansion of a best in class panel as well as valuation products and services.

A certified appraiser since 1993, Andrew has held important executive roles with regulated US lenders, including operations, and management of collateral risk for retail and wholesale lines. Previously, Andrew has served as the Executive Vice President and Chief Valuation Officer at Solidifi, Managing Director of Valuation at JP Morgan Chase, and head of credit and valuations at ING Direct USA.