Real estate investment management firm Pretium Partners is acquiring thousands of homes from home construction company D.R. Horton Inc. in a $1.5 billion deal, as Bloomberg first reported. 

The deal includes a combination of completed homes and homes that are not yet finished, according to the outlet, which cited people familiar with the transaction who asked not to be named. 

Neither company commented to Bloomberg about the deal. 

More than 4,000 homes are involved in the transaction, which are primarily located in high-demand markets in the Southeast and Southwest, the Wall Street Journal reported. The homes, planned as rentals, have already been leased.

The deal comes at a time when a lack of for-sale home inventory is boosting the appetite for homebuilders

The transaction could also signal investors’ re-entry into the housing market after institutional investors shed properties at the end of 2022 following a drop in housing prices nationwide.

Founded in 2012, the Pretium platform capitalizes on investment and lending opportunities and has more than $50 billion of assets with real estate investments across 30 markets in the U.S, according to the firm.

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We’ve had some odd job reports over the years, but the key is to always follow the trend. That’s especially important with Friday’s data, which showed 339,000 jobs were created in May even while the unemployment rate increased.

As someone who wrote that we should get job openings toward 10 million in this expansion, I am always mindful of my other labor talking point. If COVID-19 didn’t happen, the total employment numbers in the U.S. today should be between 158 million and 159 million, or in a weaker labor market growth scenario, between 157 million and 158 million.

Today, we stand at 156,105,000, so I think we are still in make-up mode until we reach a range acceptable to a fast economic recovery.


That’s why the jobs data has beaten expectations 14 months in a row. What the U.S. has that other countries don’t is a massive young workforce. While population growth is slowing here, we have the demographic muscle that other countries don’t have — if we didn’t have that, our economic discussion would be different.


Now let’s look at the labor market on all fronts from the data we got this week to get a comprehensive view of the labor market today. On Friday the BLS reported job growth came in at 339,000, with positive revisions, while the unemployment rate went higher, as there was a drop in self-employed workers.

From BLS: Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose by 0.3 percentage point to 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance.

Hours worked have fallen in the last few months, and wage growth is slowing. The fear of 1970s-style inflation was that wages could grow out of control in a tight labor market. In theory, 2022 and 2023 are tight labor markets and wage growth is slowing down. This trend should continue for the next 12 months as well.


Here is a breakdown of that data for those aged 25 and older:

  • Less than a high school diploma: 5.7% (2 months ago, 4.8%)
  • High school graduate and no college: 3.9%
  • Some college or associate degree: 3.2%
  • Bachelor’s degree or higher: 2.1%.

The noticeable data line here is that the unemployment rate for those without a high school education is up almost 1% from two months ago.


Here is the breakdown of the jobs created this month, another big month for the government, which typically doesn’t continue at this pace. Construction labor has held up very well, even though housing permits have been falling for some time. The backlog from COVID-19 has been a jobs program for the U.S. as we are still slowly growing the housing completion data.


So the BLS jobs report is still pushing along, while wage growth is slowing down. Jobs Friday is one piece of the labor pie — we have two other data lines that we always need to keep an eye on to know the health of the labor market: job openings and jobless claims.

As the only person on Earth who talked about job openings data getting to 10 million in this recovery, I am surprised that job openings data is still around that mark. But that is off the recent highs of 12 million.


At this point of the economic expansion, I am putting more weight on jobless claims data than job openings (JOLTS). For me, the Fed doesn’t pivot, or the 10-year yield doesn’t break under 3.21%, until jobless claims break over 323,000 on the four-week moving average, and that isn’t happening either.

As we can see below, the Gandalf line in the sand has held up the entire year, even though it was tested many times.


As we can see below, the jobless claims four-week moving average is still far from breaking over 323,000. I chose that number using many different variables as I think when we crack about that level, it will be noticeable to everyone — even the Fed — that the labor market has broken.

From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 2,000 in the week ended May 27, to 232,000. The four-week moving average declined, to 229,500.


It’s important to understand the labor dynamics of this economic expansion. We had such a shock in the economy with COVID-19 and a strong labor market recovery that the make-up labor demand, which doesn’t get talked about much, is a significant reason we still see healthy numbers.

Also, it’s essential to understand the demographic difference now and what we had to deal with after 2008. The Baby Boomers are leaving the labor market, and every month that happens, they need to be replaced if demand is growing. This is why having a healthy number of younger workers not only helps with that but also provides replacement consumers, as those who leave the labor market tend to consume a bit differently than younger workers.

At this stage of the economic cycle jobless claims is the data line that matters most. Once jobless claims break above 323,000, then and only then I believe we can talk about a Fed pivot — first in their language and then possibly with rate cuts.

The Federal Reserve is scared to death of the 1970s inflation, and they genuinely believe that breaking the labor market is the best way to prevent that type of inflation from happening. As a country, we are fighting against a group of people stuck in the wrong decade with their economic mindset on inflation.

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The U.S. Department of Justice (DOJ) this week announced that it had secured a settlement of more than $3 million from Philadelphia, Penn.-based ESSA Bank & Trust over allegations that the company engaged in redlining majority Black and Hispanic communities from access to credit services around the Philadelphia area.

According to a complaint filed by DOJ in the U.S. District Court for the Eastern District of Pennsylvania, ESSA “failed to provide mortgage lending services and did not serve the credit needs of majority-Black and Hispanic neighborhoods in the Philadelphia metropolitan area” from 2017 to 2021.

“For too long, residents of communities of color have been unlawfully denied equal access to credit and shut out of economic opportunities,” said Assistant Attorney General Kristen Clarke of the DOJ Civil Rights Division in the DOJ announcement. “When banks engage in redlining, they perpetuate existing patterns of segregation and widen the racial wealth gap in our country. This resolution makes clear our commitment to holding banks and financial institutions accountable for modern-day redlining while ensuring access to fair lending in communities of color.”

Under a consent order still subject to court approval, ESSA has agreed to invest $2.92 million in a designated loan subsidy fund designed to increase access to credit for home mortgage, improvement and refinance loans, as well as home equity loans and lines of credit, in majority-Black and Hispanic neighborhoods within the bank’s lending area.

ESSA has also agreed to spend $125,000 on community partnerships and $250,000 on advertising, outreach, consumer financial education and credit counseling to the impacted communities specified in the complaint and consent order.

“The consent order also requires the bank to hire two new mortgage loan officers to serve its existing branches in West Philadelphia and conduct a research-based market study to help identify the needs for financial services in communities of color,” the DOJ added.

In a statement announcing the settlement, ESSA “categorically denies violating any fair lending laws or engaging in ‘redlining,’” according to a press release.

“ESSA and its Board of Directors believe this is a constructive resolution to a dispute that has lasted several years,” said Gary Olsen, ESSA’s president and CEO. “It is consistent with our guiding principles and longstanding commitment to provide equal lending opportunities to all of the communities we are privileged to serve. We plan on using these loan subsidy funds to expand opportunities for qualified borrowers who can benefit from this assistance. We’re happy and pleased to help families purchase homes. It is simply the right thing to do.”

Olsen added that during the the time period covered by the government’s complaint, “ESSA did not receive a single fair lending complaint from any customer or potential customer.” He also said that the company opened a branch and business center in downtown Allentown, “in a majority minority census tract.”

DOJ opened the investigation into ESSA after being referred by the Federal Deposit Insurance Corporation (FDIC).

“ESSA fully cooperated with the department’s investigation and worked expeditiously to resolve these allegations,” DOJ said.

ESSA’s redlining settlement agreement is the latest in a series of cases brought by the DOJ. In January, Los Angeles-headquartered City National Bank agreed to pay $31 million to settle a case that alleged it avoided providing mortgage services to majority Black and Hispanic neighborhoods between 2017 and 2020.

In July, the DOJ and the Consumer Financial Protection Bureau announced a $24.4 million consent order with Trident Mortgage Co., a subsidiary of Warren Buffet’s Berkshire Hathaway. In September, the DOJ also reached a $12 million-plus settlement with Lakeland Bank over claims the lender engaged in redlining in the Newark, New Jersey metropolitan area.

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Mat Ishbia is optimistic about the mortgage market. The Pontiac, Michigan-based United Wholesale Mortgage (UWM) CEO believes that 2022 and 2023 are equally challenging years, but the market will improve in 2024. Meanwhile, 2025 and 2026 will be off the charts.

What does Ishbia think about surging mortgage rates, lack of housing inventory and monetary and policy pressures

“That’s a people-who-are-losers mentality. And those people I don’t like being associated with,” Ishbia says. “We recognize what reality is. But it’s about the mindset; we think we’re winning now.” 

Ishbia says that the wholesale channel should reach 33% market share by 2026, compared to the current level of 22%. He also said that the growth will be achieved despite competitors exiting the space in part because of Ishbia’s cutthroat pricing initiatives, which will play a smaller role going forward. 

“Right now, there are 70 lenders out there. One lender leaving, two others leaving, it doesn’t matter at all,” Ishbia said. “It’s all about making sure they [brokers] have options.” 

But hasn’t UWM limited brokers’ options by imposing an ultimatum and prohibiting brokers from working simultaneously with UWM and two competitors, Rocket Mortgage or Fairway Independent Mortgage?  

“There were two companies out there that were doing stuff to hurt the broker community systematically,” the executive said. “The broker community is better because of that [the ultimatum].” 

Ishbia answered a range of questions in an interview with HousingWire in early May during UWM Live!, its brokers’ network conference held in its sports center in Pontiac. 

This interview has been condensed and edited for clarity.

Flávia Nunes: Where are we at in terms of the current mortgage market cycle?

Mat Ishbia: In the 2022 and 2023 markets, rates went up a lot. There’s a lot less refinancing and a lot more purchases. Is it the bottom? It’s hard to say it’s the bottom. However, I’d say a couple of months ago was when things were tight – from the fourth quarter [of 2022] – and the first quarter [of 2023] was slower because people will buy houses much more in the spring, summer and fall. 

I don’t know if it’s the bottom or not, but the reality is 2022 and 2023 will be recovery years; it’s going to break. And 2024, 2025 and 2026, they’ll be the three best mortgage years in history because everybody that’s doing 6.5% and 7% right now is gonna eventually need to refinance. I think 2022 and 2023 are equally tough years. We’ll get a lot better in 2024. And 2025 and 2026 will be off the charts.

Nunes: Surging mortgage rates is one challenge, but inventory is another. How can the market recover amid a lack of home supply? 

Ishbia: That’s a people-who-are-losers mentality. That’s what you’ll hear about on the earnings calls from some companies, But that’s just their excuse. The reality is there are a lot of people buying houses right now. The reality is you’ve got to compete, and you’ve got to win. We’re having a hell of a quarter. So, people who say inventory and rates and it’s bottom and it’s struggling, they just have a loser’s mentality. And those people I don’t like being associated with. So, the market is great. We’re on a great second quarter, and we’re going to keep on running. Brokers are out there and they’re winning. 

Nunes: And how are you taking advantage when the market gets better?

Ishbia: The market is still very good right now; we’re winning right now. But the market is going to get better. Rates lowering frees up inventory. No one is selling their $300,000 house at a 3% interest rate to buy a $400,000 home at 6% because then their payments are going to more than double. So what if rates were 4.5%? People would then sell the house because it is not as big of a jump if they wanna upgrade. And that will free up when rates drop. I’m not concerned about it at all. 

The stuff we’re doing in 2023 was built in 2020. The stuff I’m doing in 2024 has already been built. And we’re just working on the execution plans right now. We feel great about the strategy that we’re implementing and executing. All these other retail lenders are doom and gloom, saying: “The market is so hard, I gotta wait for next year.” We recognize what reality is. But it’s about the mindset; we think we’re winning now.

Nunes: Does it mean UWM will be back to overall profitability soon? 

Ishbia: It just depends on how you look at it. We made almost a billion dollars last year [UWM had $931.9 million in net income in 2022, including a $284.1 million increase in the fair value of MSRs]. I think that’s pretty profitable. If you take out the servicing rights marks, we make a whole bunch of money. When you look at the servicing values, those cover up blemishes or make you look worse than you are. I don’t even pay attention. We got to make money running the business. If you lose money in servicing, it’s just an asset that marks up and down based on how the rates were on March 31. It means nothing. But operationally, we’re very profitable.

Servicing rights are an asset I own that changes every day and that I have zero control over. I focus on things I can control, which is running the business operationally profitable: do more loans, watch the margins, and control our expenses to be profitable. In the fourth quarter, you saw a negative number on the headline. That’s not real, just like there are some quarters that a lot of companies show a really positive number, but it really wasn’t. We don’t pay attention to servicing assets. We focus on the business. 

Nunes: What are UWM’s plans with MSRs? Do you consider acquiring these assets?

Ishbia: That’s how we are: we don’t buy other portfolios. Other places buy loans and act as if they originated. That’s not origination. That’s the correspondent channel. It’s not real. We actually originate every loan; we don’t acquire MSRs. We close loans; we do originate ourselves here at UWM. So that’s not our business. 

Nunes: According to the Inside Mortgage Finance ranking, Pennymac is the top U.S. mortgage lender. How does UWM plan to compete with them? 

Ishbia: Pennymac doesn’t originate loans. They buy loans. The only originators are retail or wholesale. Small retail lenders originate the loan, close it, and then sell it to Pennymac. Who originated the loan? The retail lender. They [Pennymac] are just like a big MSR acquirer. They should be more like Bayview, Lakeview, and Mr. Cooper, who buys a lot of servicing annually. And I love Pennymac, I respect them, and their CEO is a good guy. They have a good retail, direct-to-consumer, and broker business in the wholesale channel. That’s just a billion dollars a month, or a billion-and-a-half dollars a month. But you have to look at IMF direct funded numbers. [Pennymac’s loan acquisition and originations reached $22.8 billion in Q1 2023, with correspondent channel’s commitments at $21.7 billion.] 

Nunes: Do you consider Pennymac a direct competitor?

Ishbia: Not at all. In the broker channel, they do like $500 million a month. They are good company. For the overall crown, they are not even the number two. Rocket is number two. 

Nunes: UWM is the top originator in the country, but you got there with ‘Game On,’ an aggressive pricing strategy. What is your pricing strategy looking ahead? 

Ishbia: Game On, as I talked about before, was an investment in the broker community to help more loan officers join the broker community and it helped the brokers who needed more loans in the toughest time in the market, which was the fourth quarter. It helped in the third quarter as well. We’ve kind of modified that strategy because, as I said, it wasn’t forever, but it was to help really catapult the broker community and it did that just as such. 

On the pricing stuff, I said that it’s 75-100 basis points. And even with my Game On pricing last year, we still finished at that range. [The company’s total gain-on-sale margins was 77 basis points in 2022, compared to 114 bps in 2021]

Nunes: What will that shift mean for the company’s market share?

Ishbia: We’ll keep the market share well above what we were before Game On. That will show success. We’re doing 30% market share pre-Game On, and the broker channel was smaller. Now, with the broker channel bigger, we did  54% in Q4. In Q1, you will see without Game On, if we do 30% again, it’s okay. If I do 40%, you will say: ‘He did a hell of a job.” If I do 50%, that’d be off the charts. I don’t think it will be quite that number, but we will come back down to more normalized numbers.

Nunes: What role does the ‘Control your Price‘ initiative, which gives brokers discount points to play with, have in this strategy?

Ishbia: It just helps them to compete for loans. They already have the best pricing because brokers have better pricing than retail. So, they have the ability, if they need something for a borrower, they might help a borrower out. They can do that. Control Your Price gives them flexibility. I’m trying to give brokers control over everything: control your closings with UClose, control your underwriting with Bolt, and control your disclosures with our docs systems. And it’s kind of a little bit of trickiness. We have control behind the scenes of everything with our technology. But we give them control so brokers can have all aspects of the business.

Nunes: We saw competitors exiting the wholesale channel as pricing got much more challenging. How does it affect the goal of increasing the wholesale channel’s market share? 

Ishbia: Ask the brokers out there how many lenders they work with. If there are less than five, then you have a problem. Right now, there are 70 lenders out there. One lender leaving, two others leaving, it doesn’t matter at all. It’s all about making sure they have options. As a broker, you have to have lenders competing at the same time for technology, service, partnership, price and underwriting time. That’s the benefit. When you’re retail, you only have one option, so they don’t have to compete with anyone. 

The point is to get the broker channel back to that 33% market share. We target 2026. So a couple more years to get there. I believe that’s realistic. There’s still a lot of work to do to get there. It depends on the refi boom and purchase market and how the brokers react. But we feel pretty good about how many LOs converted from retail to wholesale. We watch those numbers closely, but we feel pretty good about that target. 

Nunes: I spoke to a loan officer who is sending almost all of his loans, 98% to be exact, to UWM. Isn’t his brokerage firm effectively working as a UWM branch? 

Ishbia: He’s not sending 98% because he is required to. He’s sending 98% because we are the best. We have to be the best every day. If we are the worst in a month, he can send it to those other lenders right away. And that’s why wholesale is so hard. Most lenders don’t want to be great every day. Your technology has to be fantastic every day. Your pricing has to be sharp every day. They have options. They don’t work for me. 

Nunes: But hasn’t UWM tried to limit brokers’ options when it imposed the ultimatum two years ago, prohibiting brokers from also sending loans to Rocket and Fairway? How does it play out?

Ishbia: The goal was: there were two companies out there that were doing stuff to systematically hurt the broker community. And they [brokers] don’t work for Rocket and Fairway; they don’t work for me. So, I can’t tell them what to do. But I can say: ‘If you want to work with the best lender, you can’t help them [Fairway and Rocket] anymore because these companies are trying to hurt you. And whether you know it or not, I know it. And it’s been proven. I have data to support it. It’s no big deal if they decide to go elsewhere. But 95%-97% of all came with UWM because they understood. Even the ones that stayed with them have switched over since. The broker community is better because of that. 

Rocket is being sued right now, and it’s because they lied about it. If you notice in the complaint, it said that Jay Farner tweeted out: “Since All In, all these brokers are joining our channel.” They were lying, and Dan Gilbert retweeted it. They’re suing both of them for providing public lies.

[Ishbia is referring to a derivative lawsuit filed on May 5 in Michigan by a shareholder accusing Rocket Companies, its board of directors and executives, including Farner, of breaches of fiduciary duties and violations of federal laws. In response, a Rocket’s spokesperson told HousingWire the lawsuit’s “hodgepodge of allegations is a work of fiction – based on a complete distortion of reality,” all stock sales were done in complete accordance with company policy and the company will vigorously defend its reputation and hold accountable anyone who makes false claims.] 

Nunes: UWM is also the target of lawsuits regarding the ultimatum, no?

Ishbia: The reality is if a broker breaks the contract and if they have, we will address it, and we will win. And then we’ll take that money and put it towards to help the rest of the brokers because we don’t want the money. 

Nunes: You mentioned before that UWM will grow organically. Why is it not part of your plan to expand through M&As? 

Ishbia: We believe that culture and people are the keys to success. I can’t acquire some companies in California and Minnesota and try to put [into place] this culture. It’s like a cheating way to try to get more volume anyways. We organically grow and build.  

Nunes: Bloomberg reported in early April that more than two-dozen current and former employees say UWM has a toxic work environment, with racial disparities, sexual harassment, drug use and bullying by managers. Can you comment on these allegations? 

Ishbia: We will not comment on that.

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There have been a lot of market crash predictions over the past few years. Since the 2020 flash crash and subsequent asset price skyrocketing, investors have always had an inkling that this wouldn’t last. Once inflation hit decade-long highs, the Fed stepped in to quell constant price pumping, but that came with even higher mortgage rates. Now, commercial real estate investors and everyone else with short-term financing are stuck in a bind. Once these loans come due, they’ll either have to pay them off, refinance, or face foreclosure. So, what happens next?

While Dave Meyer and James Dainard are housing market experts, neither know macroeconomic data as well as Fundrise’s Ben Miller, whose job is to predict market patterns and make the best investing decisions. Last time we talked to Ben, he hit on the “Great Deleveraging,” which would force a massive commercial real estate crash, but today he’s talking about bank failures, a financial collapse timeline, and what he’s buying as soon as the market drops.

The wealthiest in America know that market crashes and financial collapses aren’t a time to worry; they’re a time to make millions! Ben shares the markets with the most opportunity, how to pick up properties for dimes on the dollar, and why hoarding cash during a time like this isn’t such a bad idea. So don’t fear market downturns like this; take advantage of them!

Hey, what’s up everyone? Welcome to On the Market. I’m your host Dave Meyer with James Dainard today. James, how you doing?

Good. I’m excited for one of our chats with Ben. I can go roundtable with Ben all day long. It’s kind of a dangerous road to go down.

James is talking about Ben Miller who is the CEO of Fundrise who has been on the show a couple times already and is honestly just like one of the most knowledgeable people about the economy in general. But he really knows a ton about the commercial real estate banking system. He knows a lot about different ways to make money in different climates. He’s one of these people who manages an enormous portfolio, like he’s got to keep making moves even during this type of climate. So we have a great conversation with him about what is going on in the economy in general and he gives some pretty specific predictions and advice about timing and when you should be buying when you shouldn’t. So if you are interested in the commercial real estate space at all, you’re definitely going to want to listen to this episode. Ben Miller, welcome back to On the Market. Thanks for joining us again.

Yeah, thanks for having me.

We have a lot of questions for you. You tend to be one of the most knowledgeable people we can bring on with regards to banking and debt and real estate strategy in general. We had a great episode with you, I think it came out back in January. We called it the great deleveraging. It’s a term you coined talking about the banking situation and some of the implications for investors. Before we get onto some of our new questions for you, could you just summarize the concept of the great deleveraging quickly for our audience?

Okay. Well, so there’s two words in it, great and deleveraging. So let’s just explain deleveraging.

I hope they know what great means. It’s self-explanatory.

So during the zero interest rate environment policy for the previous 15 years, most organizations and individuals normalize to super low rates. So you might be borrowing at 3%, even briefly at 2%. And when you borrow at low rates, usually it means you can borrow more money, right? Because if your interest payments are only 3% on a million dollars, right, it’s $300,000 a year. So when interest rates doubled or tripled, it meant that borrowers were over levered.
They have too much leverage because interest rates are much higher and so they have to delever or reduce the amount of leverage. And because it’s so broad, there’s so many borrowers in the situation, it’s a great phenomena, great deleveraging.

What are the broad implications of deleveraging on such a scale?

I think I started talking about this back in October and we talked about it together in January is that it’s so fundamental that everyone is affected. It’s like the pandemic and what are the consequences of the pandemic? Well, where do you start? So especially in the United States, which is such a highly levered society, it affects you even if you don’t realize it. It reminds me of Silicon Valley Bank failure. I got involved in that. I can tell you that story, which is an interesting story because that’s one of those things where there was no one in tech who wasn’t impacted by it, even if you didn’t bank with Silicon Valley Bank.

Just on the broadest scale though, the implications for investors is that… I remember you saying basically you are concerned that people are going to try and deleverage and there might not be enough money, there might not be enough debt available to people to actually restructure their loans. What are your main concerns or sort of-

Okay. I get it. So the essence of it is you have a recession. That’s the natural consequences of it and you have a financial crisis of some kind and those two phenomenon that feed on each other. So that’s what I’ve forecast, whatever it was, seven, eight, nine months ago and it’s playing out. We’re seeing tons of bank failures. We’ll see more. We’ll see other kinds of failures that’ll cause a recession which will cause more failures. And then we’ll go from a transition period where people wondered if it was going to go down to a full downturn and then we we’ll be at the bottom.
That’s a great place to be if you are an investor. So you don’t have to see it as a negative as long as you’ve maintained some liquidity, some reserves for that moment.

So I want to backtrack for a second. You said that you got involved in the SBB unwanted.

Yeah, we got to hear that.

I got to take a step back here. What did that look like? And then I think what we’re all wondering as we’re seeing that bank fail, like you said, it affected everybody. That’s a huge statement. And then we’re seeing things like First Republic and some other, Silver Gate. These other banks are starting to also have issues. A, what did you see when you went and got involved in that? And then what do you think the impact for us as investors, real estate or whatever is going to be in the next six to 12 months? Because as these banks are starting to have issues, sometimes the impacts don’t hit for six, 12 months down the stream. What are you guys seeing and what are you doing to work around that right now?

Yeah, it’s such a funny thing, especially if you haven’t been through a few of these before, is that when you see bad news in the headlines and it doesn’t affect you right away, people then start assuming it won’t affect you. If I went through ’01 and then I went through ’08 is there’s such a lag and you don’t appreciate it. Looking back in history how much of a lag there was. In ’08, I mean things started getting bad in ’06. It wasn’t until early ’08 when things were basically… I mean essentially some of these banks were dead man walking and it wasn’t even clear to the market until September, October.
So I think that’s the same thing happening again that there’s this lag effect. And then the reason there’s a lag is that everybody is fighting it, right? No one just capitulates and they fight it by entrepreneuring, by selling assets, by raising money, by closing their eyes and kicking the can hoping it gets better. And so that’s definitely happening today. It’s happening with all sorts of institutions everywhere. The thing about why is it the great deal leveraging is that when you borrow two times more than you should have or two times more than you could today, it’s not a problem until your loan comes due.
And then when everybody’s loans don’t come due overnight, they come due one by one and each time they come due, everybody tries to work out some way to kick the can and the bank doesn’t want to deal with it. So they try to kick the can too. Everybody is trying to kick the can, but the thing that’s why there’s this lag effect, there’s a wall. I mean you can’t keep the king forever.
I think this really interesting, the seeds of, I think the saying is in every success are sewed the seeds of its own destruction. And so last time the solution to the crisis was extend and pretend. Everybody who held on in ’08 and ’09, and ’10 ended up actually doing a lot better than if they dealt with the problem. So the lesson learned with everybody was don’t deal with the problem, extend, pretend, put your head in the ground and hold on. And actually everybody did great.
So everybody is assuming that’s going to work again this time and it won’t work this time for lots of reasons. I mean, it’s going to be a rich experience for everybody. I mean, it’s going to get worse. 2021, when you look back on it was so overinflated. It was so crazy. Prices got crazy and I’m like, that could happen the other way too, on the way down, that feeling of you’re just looking at things, you’re like, “This is crazy and it keeps falling. It’s so bad. How could this be? It doesn’t make any sense.” You’re like, “Yes, that’s that kind of experience.” And that is brutal. I mean, it is that negative sentiment that seeps into everything. So something like that ‘is coming. I think it’s coming September, October-ish this year. It’s really imminent.

Ben, what do you see that is so different this time? You said pretend and extend worked last time. What makes this round different?

It’s just a different problem. So the problem is over-leverage. There’s two ways you can deal with over-leverage, right? Two positive ways and one negative way. One is you grow your way out of it. Two is you pay the loan down and three is you default. You lose the asset. There’s a failure of some kind. And so some majority of the market will grow its way out. Some built residential will be fine, industrial will be fine. Lots of things will be fine. But then some part of the market will not like obviously office buildings.
Forget growing. They’re collapsing. And the thing about over-leverage is that everything is over-leveraged. So when one thing starts collapsing, it starts pulling down the next thing, the next weakest link in the chain and it cascades through the system. So that’s happening. I mean, I didn’t realize that the Trump administration had deregulated the banks.
What happened was Dodd Frank used to treat all banks greater than $50 billion. It’s too big to fail. And they were called systemically important banks. So they were really regulated. And then 2018 they rolled that back from 50 billion to 250. a lot of banks then said, “Great.” And they grew from 50 billion to 249 billion in the course of 36 months. Those are the banks that are blowing up. Why signature? Why Silicon Valley Bank? Why First Republic? They all fall in that sweet spot and they’re pulling down the next weak players which probably PacWest, Western Alliance and then eventually that’ll pull down some mortgage REITs and just will cascade through the system.

Ben, before we move on… James, sorry, just to make clear to the audience, the asset classes you’ve talked about are all commercial. Are you seeing any risk of some of this stuff in residential as well or are you mostly looking at the commercial asset class, like the broad commercial?

Yeah. I mean the commercial asset class is where the fundamental assets in decline. You don’t have that in residential. You go outside in real estate like the private equity market, which is hugely leveraged trillions of dollars. Most of those businesses, they’re good businesses just over levered, but they’re connected to the world that we care about too. And so when they go down, they’ll come back and soak up liquidity.
What happens in deleveraging is that just from a mathematical point of view, to have $100 million property just round numbers and it used to have an $80 million loan and now it needs a $60 million loan or 55 million loan, somebody has got to write a check of 20, $25 million. That check is being written by somebody somewhere. And if it’s not being written by you, the borrower, when the bank forecloses on you, the bank is writing that check because the bank is also levered, right?
If you take a mortgage REIT, there’s Arbor Realty Trust, if you guys know that is, that’s a big mortgage REIT. It’s just they only lend to multifamily. They foreclosed on four apartment buildings in Houston like a week or two ago, $229 million of foreclosure. And they are levered I think eight or nine to one. What? 85% levered. Yeah, they’re levered 85%. So their $220 million loan is actually levered with $195 million of borrowing and they probably borrowed from Wells Fargo or something like that. So when they foreclose on that loan, they have to turn around Wells Fargo like you have to write a check because there’s too much leverage now because that loan is now not performing.
So in the chain of connected lender to borrower as you delever the entire entire system has to delever. And what does delever mean? Someone is writing a check. Where are they getting that check from? They had to sell something, right? They don’t just have $25 million lying around. They had to sell stock. They had to take their money out of deposits and pay down that loan. So that liquidity is getting soaked up out of the market. The delever means you have to suck up this liquidity. And so that inevitably leads to a liquidity crisis.

So Ben, what you’re describing seems like a perfectly… It kind of seems like a Ponzi scheme a little bit to me at some point. These banks are, they’re funding loans, they’re reissuing them off, and then they’re levering up 85% which is getting sold on to somebody else who’s been levering that up. And what you keep talking about is that the can has to… It keeps getting kicked down the road and eventually it’s going to hit a wall. And then I think that’s the nature of a Ponzi scheme is you don’t know when that wall is or what’s actually going to cause that, but as they kick this can down the road, you also mentioned that it’s going to start having a natural effect downstream. Right?
It’s going to start pulling down other classes and that’s where it’s really going to get to us as real estate investors. Access to capital, access to debt is essential for growing. It’s essential for executing your business plans. Do you think that this is going to have some major impacts on us as a real estate. Even the small, not the big guys that are out buying all the big… The REITs buying up the defaulted debt, prefer your day-to-day investors. Do you see that coming backwards? The bank is going to be a lot more limited? There’s going to be a lot less access to capital for us at these smaller banks?
And then one other question I had was, is this going to start the domino effect of where we’re really going to go down to 10 to 20 core banks? Are these little banks going to just get wiped out of the market? It’s like because this could have major impacts if it starts sinking, right? If we start going into that free fall that can crush the market.

Yeah. So let’s do the first question because it does answer some extent the second one. So I would venture to get to already the fact that you can’t borrow from most banks that banking lending is virtually gone. That if you go to a bank today, you wanted to borrow $5 million. They’re likely to pretend that they’re yes, but it’s actually no. The banks today are defending their own liquidity. They’re worried about going out of business. They’re not going to extend liquidity to somebody else, they’re going to husband it or really just hoard it.
They’re going to hoard liquidity. So what does liquidity hoarding look like? Well, definitely not lending. But second, it means that if your loan comes due, if you’re not getting an extension, they’re going to be like, “Pay me. I need that liquidity.” So I don’t think that you can borrow in America today except for with one exception. And that is basically if you bring the bank deposits… And just to explain how banking works, if you give a bank $10 million in deposits, they lever it 10 times. So they can lend your money back to you.
That’s what they’re doing. That’s why they want deposits. Now, they want more deposits so they can hoard liquidity. So if you give them $20 million deposits, they’ll lend you five times that so they can get extra liquidity. So that’s the only place where you can get borrowing. And then the cost of borrowing, those are going to be very expensive, probably going to be at least 300 pips over over SOFR because cost of borrowing has gone up. If they’re borrowing at 4.5% for deposits and they have the cost of running the bank, they got to basically lend it 7% or 8%.

And that’s an interesting point and that that’s something that I know myself and other investors have been doing we’re actually out interviewing banks right now because as capital is locking up, we’re either, A, the banks that we have existing relationships with, we’re transferring more funds to them because they’re actually loosening up their guidelines… Not loosening up their guidelines, but they’re definitely giving us access to capital.
But that’s what you have to do as an investor right now. You got to go, “Okay. How much liquidity I have? I need to go shop this around and see who’s going to give me the most benefit.” And it really does work. I know I have another meeting with a private wealth company because they’re like, “Hey, if you bring us in your deposits, they’re actually giving you more lending power too.” And it’s essential for executing nowadays. It’s like the investors that have hoarded liquidity can actually shop their liquidity to the banks that need it really bad that also want to hoard liquidity.

So it’s like we’re all in this kind of weird cycle.

Hold on. Let me just let me make one comment about that though because it that’s definitely, we’re doing that, you’re doing that. But if you think about that systemically, anytime you move deposits, you took it from somewhere else, right? There’s no additional new liquidity. You’re moving it around and that’s causing basically the bank’s cost of doing business to go up because you’re basically able to negotiate good returns for your deposits, not just your deposit rate but also lending or other strategic assets you can get from the bank.
So even though you’re like that’s an opportunity, it’s also a sign ’cause that’s not sustainable. You can’t keep doing that and not end up with more banks failing.

Given the situation, Ben, I’m curious how you would evaluate the fed’s policy right now and whether or not they’re taking an appropriate action because it seems like a lot of this situation is brought on by super high interest rates and even as the existing collapses they’ve raised rates, they said they might pause, but I’m curious, would lowering rates help us avoid this situation or is this now all in motion no matter what happens?

It’s hard to criticize the Fed. They have a much different perspective than I do. They have an inflation. They have political mandates. So at this point it’s always hard with… Anytime anybody criticizes the Fed, you can always look at an earlier fed decision and blame them. So you can go all the way back to the failure of continental Illinois and 1980 whenever it was, five.
They had to eat the spider to catch the fly and so now they have to kill conflation which they basically created by the pandemic policy and then from this, they’ll create sort of the next problem. So if the priority is to eliminate inflation, which is their stated mandate, and they’ve been clear that they’re willing to basically let there be some pain in the economy in order to eliminate it. And the funny thing about the Fed, and this is also true with Chinese policy and Putin, they’re pretty clear.
I think people just don’t believe them. So the feds saying they’re not going to drop rates till the end of this year or until they see really clear data that inflation has come down to closer to 2%. We’re a long way from that. So basically we’re going to suffer through the next seven months as we wait for the Fed essentially to have the line of sight to the next paradigm which is a lower inflation environment.

Yeah. Well, the reason I brought up that question is because you were like there’s no new liquidity, which is true except if the Fed introduces new liquidity because they can do that. But given their, like you said their stated focus of controlling inflation, they probably don’t want to do that.

I think it’s super unlikely not only because of the Fed but also because of the politics. I don’t think that there’s any political will in the country for the Fed to print more money and buy more assets. I think that is not likely. I mean, on the far left or on the right, no one wants the Fed printing more money to add liquidity into the system.

But what happens if there’s more banks that start failing? ‘Cause they obviously backstopped all the deposits. So let’s say that gets a little bit out of control, is that going to require for them to break from that policy because it seemed like they jumped in fairly, fairly quickly when Silicon Valley Bank crumbled?

Yeah. I’ll give you sort of like my operating scenario for how… My baseline map of how I think plays out and then I sort of reevaluate it when I get new data, just ’cause I feel like it’s hard to answer a specific question when not giving you the whole… Because the whole way I think about it… Because inside of that specific answer to your question is the Fed what will do sort of balance sheet neutral activity like they did with Silicon Valley Bank, which is they guaranteed the deposits or FDIC did and then they created this bank term loan funding program where basically you could give them a treasury and they would give you back 100% of the money but you didn’t sell it to them. Just 100% loan.
So I think they’ll do lots of activity with their balance sheet, but I don’t think they’ll print money. I don’t only think they’ll lower rates until there’s really, really inflation is dead and buried and that’s because of the history of inflation. If you go back to Arthur Burns and Paul Volcker in both cases… And Volcker too, most people don’t know this, Volcker killed inflation in March 1980. It was dead. There was a recession. GDP went down on an annualized basis in Q2 of 1980 by 15%.
So he reversed his policy and dropped rates and injected liquidity into the system. And then by Q3 inflation rose from the dead and came back at double digit 12% rates. He was shocked. He was shocked. There’s a book on this called The Secrets of the Temple. Well, anyways, the point is that then he basically went at it hard and created this massive recession in 1981. So everybody the Fed knows about the zombie power or the inflation. It seems it’s able to rise from the dead despite you thinking it’s actually buried.
So that’s why likely they could go longer and harder at it than everybody who’s not an inflation expert. It’ll be unintuitive to us and we’ll be like, “What are we talking about? We’re economy in a recession. Stock market is collapsing. Everything is going bad. Why don’t you drop rates?” And the fed is like, “Well, we know that Arthur Burns and Paul Volcker made that mistake. We don’t want to make the mistake.” So that they’re going to wait longer than what seems intuitive to us, which is not going to be fun.

Yeah. I was going to say unfortunately that seems right but I guess wow, I didn’t realize that. I didn’t have 15% annualized decline and it’s pretty intense, right?

And see a quarter, yeah.

You could see why they reverse course. I mean, it’s probably the natural thing to do. But geez that that’s pretty crazy. So that’s a very helpful and well-informed opinion. It’s grim. So how are you adjusting your strategy and thinking about, you manage a very large real estate investing company? How are you guys proceeding with this thesis in mind?

I believe that it all breaks loose sometime this fall, September, October. I think that the debt ceiling crisis is the catalyst, not that the government is going to default, although there’s small possibility of that. I think it’s that it shuts down government, shuts down, spending, cuts budgets. And that combined with great deal leveraging combined with bank failures combined with everything else we’re living with today will drive us into recession. And the chance that the Republicans and Democrats agree to a budget without a government shutdown, without drama, seems remote.
So I believe that that shut down and that period of uncertainty, which by the way it’s not a first time in history that you can just go look at 1994, 2011 where you had a Democrat in the White House and Republicans in Congress. In both instances there was government shutdowns, a lot of drama, stock market fell, 20% spreads doubled. So imagine if today spread is doubled from where they are today’s.


Yeah. And it’s not even that they’re not going to resolve, it’s just that level of uncertainty and chaos will drive more institutions sort of off the edge. So sometime I think it comes to a head in this fall and then what I would plan to do is buy crazy. We’ve been trying to sit on as much cash and hold back and have reserves and I’ve been pretty negative for the last couple years. Even in 2021 I was like this curmudgeon and I’m going to tell everybody I’m like, “Just buy.” Because what’s going to happen I believe is that not only will there be everything that’s all this pain, but you can see the other side of it.
In 2024, you can see the fed dropping. The thing about a crisis is that they feel like they’re… Once you get a real crisis, it feels like it’s going to be that way forever. In 2008 people thought it was the end of American capitalism, end of banking systems. So we’ll have some period of real fear. I know we’re real estate investors, but I’m like buy liquid, buy liquid stuff, whether that’s like an asset-backed security or that’s the Vanguard, REIT index.
That’ll move 20% in 60 days, 90 days and the meantime you’ll try to buy one property and it won’t even trade. So it’s like the paper markets… I mean, especially asset-backed security, which is probably far from most people’s area. This happened every time in my careers that buildings won’t trade but the paper underneath of it will, you can go out and buy a lot of multi-family paper at what would be 35% LTV at a six, 7% interest rate.
You couldn’t buy that at a six or 7% cap rate and you can be $80 a square foot basis, I mean way, way, way deep into the portfolio of $500 million multifamily. I mean, the paper markets will just absolutely collapse because what’s happening with paper market just to go back to the great deal leveraging and the chain of borrowing the borrower borrowed 80 million from Arbor. Arbor turned around, securitized that and they borrowed 65 million from the market and that $65 million who bought that?
Who bought the AAA and the AA and the A banks? And so banks are going to be dumping all the liquidity. They have to dump that paper so they can knock out of business. And so the forced seller in the market is the bank.

So you’re saying that these banks are going to write the notes down. I mean up to where you could be buying them almost 35 cents on the dollar?

Well, a little more complicated than that but yeah. So right now banks are selling their performing loans. They told me they were going to do this and I was like, “How can you do that?” But it was in the news today. Bloomberg, I mean, I knew this was coming but I thought it was banks selling performing loans.
So PacWest sold $2.6 billion in construction loans for 2.4 billion. So 92 cents on the dollar to Kennedy Wilson which is a private equity fund complex. So it’s an average 8.4% interest rate on those construction loans because the construction loans have another two and a half billion of draws. PacWest didn’t have the money to fund the draws so they had to sell the loans.
So they’re selling performing loans at 92 cents on the dollar. That seems like, I don’t believe those numbers. I don’t believe that’s actually what happened, and that it was probably a structured transaction so that PacWest could tell everybody that it was 92 cents on the dollar, but there’s no way. I believe private equity fund bought it for 92 cents on the dollar.
But anyways, I know the paper they’ll sell, it’s the securitized bonds underneath of the building. It’s not the actual… Real estate investor is obsessed with trying to get ahold of the building. Don’t worry about the building, just focus on getting the returns. And you get that by buying essentially the securitized bonds.

Ben, for most of our audience who are smaller and probably don’t have access to that type of, I don’t know, maybe just aren’t used to buying paper and that kind of stuff, if they do want to buy the buildings, are there any specific property types within commercial that you think are going to do well? Like you said, office is getting crushed. Would you still buy office in a couple months?

No, I would never buy office. That’s crazy. What you can do, you can go to the bank and they can say, “Okay, you can pick…” If you’re an inside player, you know the market, I don’t know, make up someplace. James, I’m going to pick on you here, but let’s say I’m like, “I bet you, James, overextended, James probably he is doing okay, but if he’s loans come due, he’s going to want an extension.” And I go to the bank and say, “Hey, bank. James is not doing that great. Why don’t you sell me that loan?”
PacWest just fell over 90 cents a dollar. Why don’t you to sell me your loan for 92 cents on the dollar. You need liquidity. Maybe I’ll pay 100 cents on the dollar. Maybe I’ll just buy James’ Loan. And the bank is like, “Oh great. I need liquidity and you’re willing to literally take James’ loan like his…” I’m going to make up a number, “$10 million loan on his $15 million property? You’ll buy from me at a good price?” So they just got liquidity. It’s like getting deposits. They just literally took something that was an illiquid asset worth millions of dollars in the balance sheet. They got liquid and now I’m James’ lender and then James shows up, he’s like, “I need an extension. I can’t refinance today.”
And I’m like, “Sorry, James, I’m going to foreclosing you if you don’t pay me off.” And James is going to have a hard time finding a refinance property, you’re going to end up owning James’s apartment building for 65, 70 cents on the dollar because the bank basically sold you the loan.

There’s going to be some shark swimming in the debt market.


That was happening a lot in 2008 and ’09. People are coming in the back door buying debt, foreclosing it out. Well, I remember seeing that quite a bit.

Yeah. It’s not something I’d want to do because if you’re going to buy one or two properties in this cycle, a great way to do it is to get ahold of that loan because what’s your worst case scenario? James pays you off.

Yeah, right.

Probably he had some default interests and maybe the bank sells it for 98 cents on the dollar or 95 cents on the dollar. If it’s a floating-rate loan and you’re probably getting a good yield on that, are you getting seven, 8% on a floating-rate loan today with the option to potentially own it for 65 cents on the dollar? Pretty good.

One of the best deals I ever did was buying a note for three days and then foreclosing it. And the bank, like Ben said, they wanted to dump the note. We bought it for 20 cents on the dollar and then we sold it at the auction for 60 cents on the dollar. It was crazy. I was like, “Wow, this was easy. We didn’t have to fix it. We didn’t have to lease it. It was done.”

Yeah, paper. You can give Wall Street a lot of grief. Man, it’s so much easier dealing with paper than with property. So I went to dinner last week with a big bank. It’s one of the biggest regional banks. Some people might call them a super regional. And we went to dinner ’cause we had a lot of deposits with them and they wanted to just press the flesh and they wanted more deposits from us. So we had a long dinner and I’m just asking them lots of questions. One of the things I asked them is I say, “I heard about banks who are needing to sell performing loans. Isn’t that a sign of real weakness? You sell non-performing loans, but sell performing loan means your liquidity crisis of the bank and the liquidity crisis means the bank is in trouble.”
And they said, “No, no, no, not at all. Lots of banks are doing it. We’re even going to do it.” That doesn’t mean we need to stop that. “Oh, okay. How are you going to decide what loans to sell?” I’m like, “What price are you going to sell them for?” They’re like, “Well, we’ll just sell the ones that we don’t have a deep relationship with, i.e. no deposits.” And they called them the ankle biters. “We’ll just sell the ankle biters.”
I was like, “Okay. We’ve bought a lot of banks over the last few years and those banks have a lot of loans that we inherited and relationships we don’t inherited. And so we’ll just sell those ones.” “What price do you think you’re going to get?” “Well, PacWest is about to set the market, so we’ll find out.” So today came out 92 cents on the dollar, which by the way, I do not believe. There’s no way. There’s some hidden structure in that that’s giving them a headline number because PacWest or any bank today is obsessed with having headline numbers that support the bank’s narrative that they’re liquid and healthy.
So there’s probably hidden structure in that deal. But anyways, the point is banks are sellers. Probably every bank, you could go to them and buy loans from them and that probably the structure is either seller financing or maybe some take-back risk that you can push back some of the risk, or some, there’s a deal to be had. And then the problem is the banks will be inundated. So it’s having a bank relationship where you have deposits. You show up with deposits and say, “By the way, can you put me on the top of your list when you’re selling nonperforming assets in Seattle?” They’re like, “Sure, of course we will. That sounds great. We have a relationship with you.” Which means deposits. So it’s a very mean rich opportunity for investors with liquidity.

All right. Well, that’s great advice. I mean, I think for everyone who is listening to this, if you don’t know how to do this, there are funds obviously, I assume Fundrise also does this. There are ways to get into this if you aren’t familiar with how to do this yourself. Or do you know is this something that a normal real estate investor bank could feasibly do on their own?

We have a debt fund and we’re out there lending people who need capital to basically pay down their loans. This is true almost all professions, most people are focused on the thing that they know how to do. So they might be a flipper and they want to flip, and that’s what they’re all they’re focused on, but they’re at… I know lots of office developers and they just wanted to do office. They would buy office buildings and even when it was clear that work from home was going to really be a problem for them.
So right now it’s not the time to buy properties, it’s the time to be in the lending business or focused on credit, on finance. That’s where the opportunity is, whether you’re in paper or you’re in banks or you’re going to just be a bridge lender. And so trying to buy right now is premature. It’s just it’s not a buying environment. You can buy maybe later this year or next year. Anybody who has a problem, first thing is not going to deal with it. They’re going to basically hope it goes away, hope that the fed that drops rates and then they’re only going to deal with it when it’s a serious problem.
And the first thing they’re going to do is see if they can borrow money. So if you’re going to lend money, then you can lend it to them and you can go probably a 15% return or some really high yield. And then after they can no longer borrow money, then they’re going to sell the building. And that’s at least probably six months away.

So that’s why you see September, October, this all needs to basically play out?

Well, first there’s going to be the macro crisis and then borrowers were going to be stuck with… There’ll be no money. This is hard. They’ll go through a period with no money anywhere that already there’s so little money in the market. And the institutional market, there’s no money. No money institutional market either. Don’t believe the headlines. They’re really distressed. Starwood property trusts as an example, close to the edge, really close to the edge. They’re levered here. You can go look at this. They’re levered 15 to one.


They have a $70 billion asset base. Do you think that asset base is going to have any losses? It’s an office. They have 30% are performing office. They’ typically lend 80%. So they’re just praying that it doesn’t come, doesn’t hit them. That’s a good example of maybe they survived, but that’s like there’s a razor thin margin. They have 6%. That’s equivalent 93.3% leverage. So they have 6.6% equity on a $70 billion base. And that’s Starwood, right? That’s not like one is saying that’s a weak, unsophisticated player.

All right. Well, we do have to wrap this up, Ben. This is a really helpful analysis from you. Thank you. And I think it’s a good warning for anyone who’s in the commercial space to be wary of buying right now. But as Ben said, there’s still good opportunities if you can get into lending. And if not, sounds like your advice would be to wait a couple of.. Till at least Q4-ish to start considering buying anything. Ben, is there anything else you think our audience should know before we let you get out of here?

My father used to say, “You know it’s the top when everybody thinks it’ll never be a bottom again. So you know it’s the bottom when people think it’ll never be a top again.” So there’s a cycle. We’re going to go into the down part of the cycle. People will lose their heads and that’s the opportunity. It only happened half a dozen times in your life. So keeping that perspective ahead of time, obviously when things were hot was to… And then when things get cold, and things were really bad. I had one of my best friends when bankrupt in ’08. He’s fine now. He’s fine. Totally. So it’s just not to let the doom and gloom overwhelm your perspective.

That’s a great way to go out because even though your short-term analysis is grim, it’s good to know that your long-term analysis is still positive.

I think we’re going to have a roaring, roaring comeback. I think it’s going to be incredible, but it’s not going to be this year.

All right. Well, Ben, obviously people can find you at Fundrise. Is there anywhere else that they should look for you if they want to learn more about you?

Yeah, I have a podcast also called Onward, which is, podcasting is so fun. So if you want to hear a little bit more in the weeds on this type of stuff, I love getting into it.

It’s a great podcast.

Awesome. Great. I know James was listening to it today.


All right. Well, Ben, thank you so much. We appreciate you being here. It’s always fun to have you on, and hopefully we’ll see you again soon.

Yeah, thanks a lot guys.

Man, I love when someone gives us a specific timeline where they think things are going to happen, where it’s just like September, October, things are going to go (censored) and that’s when you start buying. So should we have him back in September, October?

I definitely think we should have him back, which that’s coming off the seasonal month. We might see that. Who knows? I’m hoping that something happens.

Honestly, yeah. I mean, I think hopefully it’s not just this huge thing that cascades throughout the whole economy, but I think there is a sense that valuations are still too high and things do need to come down. So I think we’re just going to have to wait and see.

Well, I’m be on pins and needles. I’m so burnt out of waiting for the shoe to drop, so let’s get the shoe dropped and let’s get moved on.

I totally agree. If it’s going to happen, let’s just get it over with and maybe it will. So anyway, thanks again to Ben. It’s always fun having him on. If you haven’t listened to his previous episodes, I think there’s one back in January. It’s called The Great Deal Leveraging where he goes into the risks here in a more technical way. You should definitely check that out. But we’ll definitely have him back on again in the future. James, thanks as always for being here, and thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.


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The Federal Housing Finance Agency (FHFA) officially implemented an updated pricing framework for Loan-Level Price Adjustments (LLPAs) in May to improve homeownership prospects for first-time homebuyers with lower income and weaker credit scores. It’s a simple goal, but as is often the case in U.S. housing policy, it is being executed in a very complicated manner.

The changes, which sparked a Culture Wars debate, reduce or eliminate LLPA fees for first-time homebuyers and those with low and moderate incomes, and raise fees on most borrowers with credit scores of 720 and 759 and down payments of between 10 and 20%. 

There’s been a lot of misinformation about the changes, so let’s be clear: it still costs more to have a lower credit score, and borrowers with higher FICO scores are less penalized than those with lower scores; one way to think about it is that lower FICO borrowers aren’t being penalized as much as they had in the past. The FHFA also argues that the targeted fee eliminations based on income, not credit score, are primarily supported by higher fees on loans for second homes, investment properties and cash-out refinancings.

While the debate about cross-subsidization, the politicization of the agencies and whether we even need LLPAs rages on, we wanted to look at the practical implications of the FHFA courting borrowers at the bottom rungs of the pricing matrices and making it more expensive for other prospective borrowers. 

Are low-FICO, first-time homebuyers better off with a conventional mortgage and reduced LLPA fees, or an FHA loan with none at all? We spoke to multiple loan officers and Washington, D.C.-based think tank Urban Institute to hear their takes.

MIP cuts and LLPA cuts

Because an FHA loan requires lower minimum credit scores and a required down payment as little as 3.5%, they are especially popular with first-time homebuyers. While the FHA loan allows a borrower to put less money down and doesn’t come with LLPAs, that flexibility comes with a high upfront and annual costs in the form of mortgage insurance premiums (MIP). 

In March, FHA Commissioner Julia Gordon made it a little cheaper. She announced that the agency would be reducing annual mortgage insurance premiums by 30 basis points to 55 bps, reducing costs for already-stretched borrowers as home affordability hit an all-time low.

It’s not a huge cut, but it’s enough to tip the scales in favor of FHA loans for some borrowers even with the LLPA reductions on conventional loans, several LOs told HousingWire. Borrowers with low- and moderate incomes and lower FICO scores will still pay more for a conventional mortgage after factoring in PMI costs that are triggered for borrowers putting down less than 20%, the LOs said. 

“The real issue is that with these adjustments, these 660 FICO borrowers with 5% down, they’re going to end up going FHA because not only is their rate going to be higher on the conventional loan, their mortgage insurance costs are going to substantially higher than FHA,” a production manager in Northern California said. 

Of course, every borrower’s financial situation is a little different and the new LLPA changes will add borrowers for whom conventional lending is marginally more attractive than getting a FHA loan, said Janneke Ratcliffe, vice president of Housing Finance Policy Center at Urban Institute.

“That used to be [the case] for nobody with LTV above 95 based on our calculations, but now the people with the very highest credit scores will have a breakeven choice with FHA vs conventional GSE loans,” Ratcliffe said. 

For example, borrowers with credit scores of 760 and above and an LTV of over 95% will continue to be better off or basically breakeven between an FHA and GSE loan with a 35% private mortgage insurance (PMI), according to the Urban Institute’s analysis. 

“If you’re at 740 FICO and a 95% LTV, it’s a $5 difference,” Ratcliffe noted. 

The changes are marginal enough to be absorbed in a lender’s pricing strategy or other variables could make up for the difference, she explained. 

LLPAs are waived for Fannie Mae‘s HomeReady and Freddie Mac‘s HomePossible loan borrowers; and loans to first-time homebuyers with qualifying income that is or below 100% area median income (AMI) or 120% AMI in high-cost areas.

Excluding the first-time buyers who are waived from LLPA fees, no new groups of borrowers will get a clearly better execution with FHA after the changes.

Some will move to more of an “either way” place, so that lender decisions around pricing can more make the difference for these. “People should shop, right?” Ratcliffe added.

In 2022, only 7.6% of purchase loans that Fannie Mae closed were above 95% LTV, according to the Urban Institute. This category of borrowers has historically been the sweet spot for the FHA.

Brian Parkinson, loan originator at Alerus Mortgage pointed to the possibility of Fannie Mae and Freddie Mac trying to bridge the gap between FHA mortgages serving minority clients and conventional loans for lower credit score borrowers.

“We also find that FHA mortgages serve minority clients in a higher percentage than conventional mortgages for lower credit scores. I don’t know if Fannie Mae and Freddie Mac are trying to bridge that gap,” Parkinson said. 

There are various other reasons, besides pricing, why high LTV borrowers with high credit scores don’t take FHA loans, but many of them are better off after May 1, according to Ratcliffe.

“It’s all about (home) equity, that’s a big buzzword in Washington these days,” Bob Yopko, mortgage broker at First Equity Residential Mortgage, said.

But whether low credit score borrowers with a low down payment would be approved for a conventional loan by the GSEs is another question, Yopko noted. 

“They haven’t forgotten what they did in 2008, where basically, everybody could get a loan and they’re not doing that again. They’re trying to protect their portfolios and make good loans. At the same time, trying to be fair to first-time homebuyers. So it’s kind of a mixed message,” he explained. 

While FHA loans have favorable rates for borrowers, they are often shunned by listing agents in competitive markets — which in turn makes conventional loans more appealing to borrowers.

With the limited inventory, real estate agents are going to lean towards a $200,000 conventional loan rather than a $200,000 FHA loan “because of some of the ticky tacky things and FHA appraisers may call out,” Don Bleuenstein, president at Gem Home Loans, said.

With the changes hardly benefiting a new group of first-time borrowers, Parkinson noted this is when the loan officers’ skills and knowledge come in to figure out the best option for the borrower.

“All of this stuff has to be sifted through with the mortgage professional to figure out what’s the best program, and what program do we need to use to have a successful accepted purchase offer. That’s what gets tricky.” Parkinson said. 

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Mortgage rates jumped last week amid a debt ceiling impasse and expectations of another federal funds rate hike. However, rates have started to reverse course over the last few days, following news of a debt agreement and an expectation that the Federal Reserve may pause hikes. 

On the fiscal side, President Joe Biden and House Speaker Kevin McCarthy struck a deal on Saturday to suspend the $31.4 trillion U.S. debt limit until January 2025 and cap government spending. On Wednesday, the deal passed in the House with a wide margin (314-117) and the support of both parties. The Senate is expected to vote on the bill on Friday, just a few days prior to Monday’s default deadline. 

Meanwhile, on the monetary front, there is a growing perception that the Fed may skip a federal funds rate hike in its meeting scheduled for June 13-14, despite a still-strong economy and persistent inflation. Officials want to assess more economic and bank lending data and may hike rates later this summer, as the Wall Street Journal reported. Fed officials are especially focused on Friday’s jobs report and signs that the labor market has finally cooled down. 

In the housing market, Freddie Macs Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the weekly rate increase. The 30-year fixed-rate mortgage averaged 6.79% as of June 1, up 22 basis points from last week’s 6.57%. The same rate averaged 5.09% a year ago at this time.

Sam Khater, Freddie Mac’s chief economist, said the increase in rates measured by the survey happened “as a buoyant economy has prompted the market to price in the likelihood of another Fed rate hike.”  

“Although there has been a steady flow of purchase demand around rates in the low to mid 6% range, that demand is likely to weaken as rates approach 7%,” Khater said in a statement.

Other indexes show mortgage rates’ downward trend in the last few days amid lower fiscal and monetary pressures. 

The 30-year fixed rate for conventional loans, which hit 7.14% at Mortgage News Daily on Friday, was down to 6.88% on Wednesday. HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.72% on Wednesday, down from 6.85% on Friday.

The weeks ahead 

Mortgage rates usually follow the 10-year Treasury yield, which retreated from 3.81% on Monday to 3.60% on Thursday morning as a resolution to the debt ceiling impasse seemed to materialize, according to George Ratiu, the chief economist at Keeping Current Matters. 

“The spread between the 10-year Treasury and the Freddie Mac 30-year mortgage rate remains close to 300 basis points, a range typically seen during times of significant economic volatility,” Ratiu said in a statement. 

“While mortgage bond investors remain concerned about the downside risks for both the economy and housing markets, a successful debt ceiling bill is expected to bring mortgage rates lower in the weeks ahead,” Ratiu said.

However, according to Jiayi Xu, a economist, the successful passage of the debt ceiling deal does not provide an absolute safeguard against negative financial and economic consequences. 

“Once the deal is reached, the U.S. government is expected to quickly increase issuance of Treasury bills, which has the potential to cause short-term liquidity challenges at banks, as businesses and households may reallocate their funds towards higher-yielding and relatively safer government debt,” Xu said. 

“In order to keep attracting depositors, banks might be compelled to raise interest rates, thereby squeezing profit margins. This could lead to further rate increases across various loan products offered by banks, including both business loans and personal loans.” 

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The second quarter of the housing market is experiencing a unique set of circumstances that are shaping the real estate landscape. The housing market traditionally experiences heightened activity during the second quarter, with increased listings, buyer interest and home sales. However, a combination of factors such as higher mortgage rates, inflation, rising home prices, lower inventory levels and recent bank collapses have contributed to a sense of uncertainty among purchasers and sellers alike. 

This prevailing hesitancy is reflected in the market, as potential buyers adopt a more cautious approach when it comes to making real estate decisions and sellers adapt their strategies to current market conditions. 

High mortgage rates, low affordability result in low buyer enthusiasm 

The ongoing situation with high mortgage rates has resulted in a decrease in buyer enthusiasm in the real estate market. During the first quarter, 30-year fixed mortgage rates fluctuated between 6.1% and 6.7%. Experts predict that these rates will continue to vary between 6% and 7% throughout the rest of the second quarter. 

The affordability gap continues to widen, making it more challenging for buyers, especially first-time buyers with limited equity, to enter the market. 

If the trend of high rates continues, it is possible that home prices may lower as the year progresses. This could occur as sellers adjust their expectations to align with the changing market conditions, giving buyers slightly more leverage.

When mortgage rates eventually do drop, it often leads to increased activity from buyers who had been waiting on the sidelines, hoping for more favorable interest rates. 

Inventory remains tight 

During the pandemic, one of the main factors contributing to the steep rise in home prices was the limited housing supply. Although inventory levels have increased compared to this same time last year, they are still only about half of what would be considered a balanced market. The rise in inventory can be attributed to homes taking longer to sell once they are listed, as well as a decrease in the number of new listings entering the market. 

This article is part of our ongoing 2023 Housing Market Update series that wraps with a virtual event that brings together some of the top housing experts. The event provides an in-depth look at the top predictions for this year, along with a roundtable discussion on how these insights apply to your business. To register for the on demand version, go here.

According to the National Association of Realtors, the inventory of unsold existing homes reached 1.04 million at the end of April 2023, equivalent to approximately 2.9 months’ supply. Further, the ongoing “lock-in effect,” which continues to discourage households with advantageous mortgage rates — over 70% of borrowers — from listing their homes. This phenomenon is contributing to the limited housing supply, and it is unlikely to change unless mortgage rates decrease in the current quarter. 

Despite these challenges, there is an opportunity for homebuilders in the market. With buyers facing fewer choices in the resale market, many are turning to newly constructed homes, resulting in an unexpected boost in business for homebuilders. Builders are capitalizing on this trend by developing more spec homes and offering additional incentives such as rate buydowns, which are not typically available on existing homes. 

Homebuilders are also targeting first-time buyers who are frustrated by the tight housing market. Some companies are strategically building in less expensive areas and reducing the size of their builds to address issues of affordability. These efforts aim to capture the attention of buyers and provide them with viable options in a challenging market. 

Future outlook 

While the current market conditions have resulted in decreased buyer enthusiasm and intensified competition, experts remain cautiously optimistic about the housing market rebounding. Adjustments in seller expectations and potential drops in mortgage rates could create more favorable conditions for buyers. Additionally, the opportunities for homebuilders to cater to changing buyer preferences and address affordability issues provide hope for a more balanced and dynamic housing market in the future.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author responsible for this story:

Russ Stephens at

To contact the editor responsible for this story:
Brena Nath at

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The private-label and agency mortgage-backed securities (MBS) markets, the primary sources of liquidity for many mortgage lenders, are taking a beating so far this year.

That dour performance mirrors what’s happening in the primary mortgage market — where origination volume is down drastically year to date in 2023.

There’s no sugar-coating that stark takeaway, several industry observers said. The math bears it out.

Ben Hunsaker, a portfolio manager focused on securitized credit for Beach Point Capital Management, said in the current volatile high-rate environment, it’s been difficult for issuers to execute deals in the private-label space that offer more than a very thin gain in terms of net interest margin. Consequently, he said, in addition to high rates keeping many would-be homeowners on the sidelines, many thinly capitalized independent mortgage lenders (IMBs) are “not going to push” non-agency origination volume right now because of the execution hurdles in the secondary market.

“The return for the origination dollars they’re putting out just isn’t that great … and they might have to take credit risks [on new loans] that they wouldn’t have otherwise have to take,” risking what little capital they have left to spare, Hunsaker explained.

For agency loans, there’s a similar problem facing lenders. Hunsaker said the interest rate that IMBs need to charge the borrowers “in order for them to securitize [loans through the agencies] and make a profit has to be pretty darn high, to the point where it’s going to drive down volume.”

“So, that’s why you’ve see them [IMBs] all cut material amounts of headcount in their origination channels and their loan officers, etc., because their cost structure has to shrink,” Hunsaker said. “So, it’s a really tough environment, and they’re [IMBs] very much relying on their retained mortgage-servicing portfolios to keep the lights on at this juncture.”

The MBS math

A report released Thursday by real estate data firm ATTOM shows that in the first quarter of 2023, 1.25 million single-family home mortgages were originated nationwide­ — the lowest mark since 2000. The first-quarter 2023 origination volume is down 19% from the final quarter of 2022, representing the eighth quarterly decrease in a row; and its down by 56% compared with the first quarter of 2022; and off 70% from the the first quarter of 2021.

“Lenders saw opportunities dwindle even more during the first quarter as the longest slowdown in mortgage activity in at least 20 years continued,” said Rob Barber, ATTOM’s CEO. “… The latest slide extends a run that started two years ago and has carved away nearly three-quarters of the home-mortgage business. 

“Things remain uncertain in the near future, with the potential for interest rates and inflation to go either way, but the spring buying season will be a key indicator of whether things may turn around.”

The performance and outlook for the secondary mortgage markets are equally grim. A recent report by Kroll Bond Rating Agency (KBRA) shows that issuance of private-label prime, nonprime and credit-risk transfer residential mortgage-backed securities (known as RMBS 2.0) stood at only $13 billion in the first quarter of this year, “the second lowest quarter in the last three years, only higher than Q4 2022 at approximately $7 billion.”

KBRA projects that 2023 RMBS 2.0 issuance will “be just over $65 billion, down 36% from … $102 billion in 2022.”

“…We expect all sectors to decline in the remainder of 2023, mainly due to sharp interest rate increases that have decreased overall mortgage production and have made refinancing unattractive,” the KBRA report states.

Also greatly depressed is the performance of the agency MBS market — which, for the purposes of this analysis, includes Fannie Mae, Freddie Mac and Ginnie Mae. Data from SIFMA, a leading trade group representing broker-dealers, investment banks and asset managers, shows that year to date through April of this year, all-agency MBS issuance stood at $291 billion, down from $826 billion for the same period in 2022. 

A recent report from real estate investment firm The Amherst Group forecasts that the net issuance of agency MBS is projected at $325 billion for 2023 and $375 billion for 2024. Those figures reflect a substantial reduction in new and existing-home sales and refinancing.

By comparison, agency net MBS issuance in 2021, when interest rates were half of what they are today, came in at $870 billion. Net issuance in MBS represents new securities issued less the decline in outstanding securities due to principal paydowns or prepayments.

Volatile times

In recent weeks, the flap in the U.S. Congress over whether the nation’s debt ceiling would be raised or not also factored into the already volatile rate environment. The pending resolution of that crisis — marked by bipartisan approval of a debt-ceiling deal in the House on Wednesday evening, May 25 — represents a huge tragedy averted to be sure, according to market observers. Still, it doesn’t solve the underlying issues depressing mortgage originations and related secondary-market issuances.

“I believe by the time by the time you release this story, the debt ceiling will be fixed,” said Ryan Craft, CEO of real estate advisory and asset-management firm Saluda Grade, in an interview late last week. “And, if it’s not, then nobody’s going to be reading this story because there’s going to be huge, huge problems.

“I believe that investors have been calm about it and handled it [the debt-ceiling crisis] well,” he added. “Rates have moved up mildly during the last couple of weeks, but it hasn’t, I don’t believe, directly affected things in as catastrophic of a way that it could have because I think investors and markets believe that it has to and always will get fixed [the debt ceiling].”

Craft said the major headwind ahead, however, “is going to be inflation,” which is “hard to solve.”

“We’re taking a very blunt instrument toward it with higher interest rates [from the Federal Reserve],” he said. “If inflation continues to nag at us, then you can continue to see a Fed that’s going to view interest rates as the weapon to fight it, so that obviously is a huge headwind toward mortgage lending and capital-market finance around securitization issuance and debt.”

Brian Hale, founder and CEO of consultancy Mortgage Advisory Partners, said in his view the 30-year mortgage rate has to drop into the mid-5% range at a minimum before the market can gain any real momentum. As of now, with rates in the 7% range, there simply are not enough homeowners willing to put their homes on the market, which is crippling housing inventory.

According to Goldman Sachs, some 99% of homeowners now have a mortgage rate below 6%, and 28% of those borrowers are locked in rates at or below 3%, with 72% having rates at or below 4%.

“If spreads remain wide from Treasury debt to agency MBS, and then you put non-QM [a non-agency loan] at a wider spread than that, then the pricing of that and the ability to sell that to a consumer in the primary market is very difficult,” Hale said. “If you want to be successful in the mortgage business, you have to do business … with people who sell real estate.

“So, until people are willing to sell their houses and trade for another house, you don’t have enough inventory to drive normalcy in either the real estate market, which begets the [secondary] mortgage market.”

David Petrosinelli, a senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks around the country, said in his view the Federal Reserve can’t really do much more harm than it already has to the housing market, even if it bumps rates another 25 to 50 basis points before pausing — or dropping the benchmark rate, now in the 5.1% range.

“Ultimately, however, I think mortgage rates will be lower by the end of the year,” he added, offering a note of optimism. “I think that will help on the supply side, even though we will continue to be challenged there for sure, but I think [secondary market] deals will become more executable.

“If I had to say where I had maybe the most conviction, I think it’s that mortgage rates will be lower by the fourth quarter, or maybe even earlier than that. …. And I think that’s a recipe for a healthier housing market.”

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Connecticut-based lender and servicer Planet Home Lending has acquired the assets of Illinois-based retail lender Platinum Home Mortgage Corporation. The financial terms of the transaction have not been disclosed. 

With the acquisition, Planet will inherit the majority of Platinum’s origination staff and branches throughout the country. The deal also expands Planet’s footprint in the Midwest, Northwest and West Coast markets. 

Founded in 1993 by Bill and Michael Giambrone, Platinum has 22 branches and 79 active loan officers, according to the mortgage tech platform Modex. The company’s assets will add to Planet’s 30 branches and 128 active LOs. 

“I don’t think retail is great for anybody right now with rates high and home values high, but it’s a good time to be investing in retail,” Michael Dubeck, CEO and president of Planet Financial Group, parent of Planet Home Lending, said in an interview.

“We’re taking a long-run view that it’s going to pay off. It’s an investment down the road,” the executive added. “We look to acquire right-sized, financially solid distributed retail companies.” 

Platinum’s current president and CEO, Lee Gross, will join Planet as senior vice president and continue to lead the Platinum team. According to Gross, the move to the new company brings “access to improved pricing, technology and marketing to Platinum’s branches.” 

“In addition to agency and GSE home loans, Planet also has niche products tailored to today’s tight real estate markets, including self-funded One-Time Close (OTC) construction loans as well as manufactured housing and renovation mortgage loans,” Gross said in a statement.  

Planet, which originates loans through the correspondent and retail channels, plans to grow organically and via mergers and acquisitions. However, according to Dubeck, the lender has no plans to enter the wholesale space, as it would create channel conflicts. 

In April 2022, Planet agreed to acquire assets from Homepoint’s delegated correspondent channel for $2.5 million in cash. The transaction doubled Planet’s clients base in the correspondent space, with 60% of these clients delivering loans monthly to the lender, Dubeck said.  

“Correspondent is probably our most mature and efficient channel,” Dubeck added. 

Planet was the third largest correspondent lender in the first quarter of 2023, following Pennymac Financial and AmeriHome Mortgage, per Inside Mortgage Finance (IMF) estimates

The lender originated $6.5 billion in mortgage loans from January to March, with $6.3 billion from the correspondent channel. According to IMF, it was enough for the lender to become the 9th largest mortgage lender in the country.

Regarding its servicing portfolio, it had $68 billion in owned mortgage servicing in the first quarter of 2023, the 29th largest servicer by this metric in the U.S. In early May, the company launched a commercial servicing division led by James DePalma and Janina Woods.  

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