MReport May 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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10 | TH E M R EP O RT TAKE 5 An industry veteran with more than 30 years' experience, Jon Gerretsen focuses on operations, customer relation- ships, and risk management as President of Trelix. Prior to joining Trelix, Gerretsen spent eight years with NYCB Mortgage company as Director of Residential Mortgage Operations. He recently spoke with MReport about the challenges faced by lenders in the non-QM market and some of the best practices they must bring to the table to succeed in this segment. * * * * * M // How are non-QM loans different from the subprime loans of the past? GERRETSEN // The mortgage loans crisis that occurred prior to 2008 was due to what would be considered loose underwriting standards. Most of those loans were products that required no verification—they were no income, no asset products. The market also had mortgage loans that technically weren't subprime. All those products were intro- duced into the market to expand homeownership. During the crisis, the true subprime loans, those that were underwritten to subprime standards, weren't the ones that experienced the tremendous defaults. They were underwrit- ten correctly because they were looked at from the individual level. It's a bit of a broad brush to say that all loans during that time were subprime. Non-income verification products were the ones that caused most of the is- sues, and non-QM loans are not that type of product, with the key difference between the two being that the products that don't come under qualified mortgage (QM) are underwritten manually. These are non-QM products. Before 2008, lenders could make independent decisions on QM products, so that if the loan-to- value was 50 percent, there might not even be a review of previous income. For today's QM products, federal regulations demand that each component of the file should stand on its own merit. As a result, not only does collateral have to be strong, but credit must be strong, and the debt-to-income ratio must be 43 percent or below. All these finance-specific criteria must be met independently. In a non-QM product today, some of these aspects can't be reviewed independently. For example, if a self-employed borrower has been in business for two years and provides bank statements that reach a certain threshold, he or she might qualify for a non-QM loan. Thus, non-QM loans bring in compensating factors to QM where other characteristics of the borrower or the property could help support areas that may not be meeting the stated level of ac- ceptance in QM. M // What are some of the challenges faced by lenders in the non-QM market? GERRETSEN // Lenders look- ing at non-QM loans face two key challenges today. First is the slow adoption of these products. Investors are still not jumping back in as they remain concerned Expanding Homeownership How can an expanding market for non-QM loans help both lenders and homebuyers? Jon Gerretsen, President, Trelix gives insights into the modern role of non-QM.

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