MReport November 2019

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10 | M R EP O RT TAKE 5 all the different technology options out there and then integrating them seamlessly. I wouldn't say there's one technology that's assist- ing the industry, but I'd say when you put them together, you can see a real difference. Fraud aware- ness and prevention tools, enabling us to catch fraud before it hap- pens, that has come a long way compared to 10 or 15 years ago. M // How should the industry be prepared for any possible future economic downturns or recessions? KELLY // It's a natural part of economic cycles. We can close our eyes and act like they're not going to happen, but they inevitably will. With responsible lending, you want to make certain that you don't fly too high or fly too low. You want to mitigate your risks now, so if there are eco- nomic downturns, you can protect yourself. From the origination side, one aspect is making sure your volume comes up is by expand- ing some of your offerings—per- haps looking at some of the products that you traditionally may not look at in the refinance boom, but also the underserved market products too. These can provide shelter against some of the production losses or declines, allowing you to replace losses with production in other areas. M // What are the most common misconceptions you encounter about non-QM lending? KELLY // Non-QM loan perfor- mance is very strong right now. That's the number one. Are you making responsible loans? The misconception may be that they equate it to what was happening in 2006, 2007, 2008—those were a very different type of loan. You have self-employed borrow- ers, and they don't necessarily fit into the boxes that government loans or conventional loans may require as far as underwriting requirements. They're not doing anything illegal. Uncle Sam affords them certain rights to write off taxes, and they're not going to pay more taxes than they need to. However, when you juxtapose that into the mortgage industry and the mortgage application of rules and underwriting principles, oftentimes they will fit into those boxes. If they're properly under- written, those are still responsible loans. M // Are there any legal or compliance issues that are unique to the non-QM space? KELLY // You want to make certain that you have the proper compliance audits in place. Also, you want to make certain that any of those compliance audits you do, you're doing them multiple times. There's a risk when you're getting into some of the higher-priced loans, so you have to be careful and mindful of that. Just like with any of the other loans, they are always going to be compliance considerations in this industry. You just want to make certain that you have your compliance department and team up to speed, and that they have the right tools made available to them. M // How could the potential expiration of the QM patch in 2021 impact the non-QM market? KELLY // It's an interesting concept. It's still a little way off, and there's a lot of speculation surrounding it. However, if it were to expire, many of those prod- ucts then would, instead of going into the QM side, would become non-QM. By its very nature, that would be a little bit of a windfall, but it'd be interesting to see. D enis G. Kelly is SVP of Sprout Mortgage, a non- agency/non-QM investor. Kelly has more than 20 years' executive experience in all aspects of the banking and real estate in- dustries. Kelly is also a published author and a recognized leader and innovator in the non-QM industry. M // How can the industry best meet the needs of underserved borrowers? KELLY // The best way to meet underserved borrowers is making certain that you have the product breadth available in the market. Many underserved borrowers are those that should qualify for a loan, but they oftentimes don't fit neatly into the box that would be considered agency loans or QM. To serve those clients, you must first have the product availability to meet their needs, but you must also know how to originate those loans—how to take it from concept all the way through securitization and performance. M // How are new technological developments changing the way you do business? KELLY // We're entering a more digital world, but you also have to balance that with the reality that some people can't properly access or use some newer technologies. You want to have the right tools available so you can address both groups. The non-agency space that I operate in tends to be a bit more manual, so anytime you can remove some of that manual nature through the application of technology, that certainly helps. You want to make certain you're using technology that actually improves the process, the customer experience, and the loans that you're getting. You don't want to forget that there still is a certain segment that yet has to come around to the technological advances. You want to compli- ment existing technology, but not always necessarily replace outright. M // What areas of technology are providing the most immediate benefits to the industry right now? KELLY // It's really a confluence of Reaching Underserved Homebuyers Denis G. Kelly, SVP of Sprout Mortgage, speaks to MReport about the unique opportunities and challenges presented by non-QM lending. "With responsible lending, you want to make certain that you don't fly too high or fly too low. You want to mitigate your risks now, so if there are economic downturns, you can protect yourself."

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