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

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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.