This week’s question comes from Aaron on the Real Estate Rookie Facebook Group. Aaron is asking: What paperwork do I need to close an off-market deal? If presenting a cash offer, can it all be done between me and the seller? Do you typically ask for an inspection period?

Off-market real estate deals can seem tricky when you’ve never done one before. For the most part, investors only deal with on-market deals where their real estate agent walks them through the closing process. When you’re pursuing off-market deals, you’re on your own (for the most part), but that doesn’t mean that closing on a new deal has to be complicated.

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

This is Real Estate Rookie, episode 186. My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

And welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the stories, the lessons, the information, and inspiration you need to kickstart your real estate investing journey. Ashley Kehr, what’s going on? What’s what’s new in your neck of the woods? How are things on the east coast today?

Well, I think I’m going to head over to a property that I recently purchased, and just kind of wander around a little bit. It’s 30 acres. It’s got three ponds and it’s finally a nice day. I’m finally walking kind of [crosstalk 00:00:42].

I was going to say, how are you going to wander around? You mean hobble or bear crawl your way through those 30 acres?

Yeah. My son actually hurt himself on a trampoline last night, my youngest one, and he decided last night that he needed to use my crutches. So we put them as low as they could go and, obviously, still not compatible for him. And he just basically drags them around the house that he needs crutches. So at least they’re still getting good use, I guess.

There you go. Like mother, like son. I love it.

Yeah. What about you, Tony?

Actually, today, my big focus is working on the presentation for our Big Bear resort. So, whenever you do these big syndications, so I’m learning a lot as I go through this process. Whenever you do these big deals, and you have one big meeting where you invite all the potential investors and they kind of see what the deal looks like. So yeah, we’re just working on that, so that way all of the accredited investors that are interested can kind of learn the ins and outs of what we’re doing. So we’re super excited about this project.

Is there a pitch deck you’re putting together?

Yeah. Yeah, it’s a pitch deck. Yeah.

Cool. Yeah. I can’t wait to see it.

It’s going to be the pitch deck. Yeah. There’s so much upside here, so we’re really excited. So it’ll be a fun day for us.

Are you using a software yet to manage the syndication?

So the actual investor’s portal and all that stuff? So what’s been recommended to us is called InvestNext. We [crosstalk 00:02:06].

Did you sign up for them yet? Because, I have an affiliate link. That’s what I was getting at.

You do have an affiliate link? Well, there’s some guy that does, it’s called fund administration. So he helps you make sure that your distributions match what your PPM says. So I guess this guy has some kind of relationship with InvestNext. He’s actually creating the account for us.

Yeah. Cool. Well, nice.

Yeah. So it’ll be exciting.

Yeah. InvestNext recently just sent me a super nice North Face zip-up, so make sure you get one of those, too.

Oh, okay. Yeah, I got to grab one. Are you using InvestNext for one of the campgrounds?

No, I’m setting it up as just a portal to collect names, to create a list of accredited investors, so that when I am ready, I have that list set up, so.

Oh, cool. That’s awesome. Yeah. So if you guys haven’t heard of InvestNext, they’re a software tool that a lot of syndicators use to help manage their accredited investors that come into the syndication. Well, I guess technically, they don’t all have to be accredited investors, because some syndications you can allow for non-accredited. But anyway, when you’re doing a big fundraise like this, it’s a platform that kind of helps you manage all the people that are investing. So if you’re doing that kind of thing, be sure to check it out. All right. So today’s question comes from Aaron Nygaard, and a quick side note, if you guys haven’t watched the show Fargo, the main character, his name is Lester Nygaard. So anytime I see the last name Nygaard, that’s what I think of.
So anyway, Aaron Nygaard is today’s lucky guest. So Aaron’s question is what paperwork do I need to close on an off-market deal, and why? If there are cash offers, can it all be done between me and the seller? Do you typically ask for an inspection period? Any help with those questions would be great. So I’ve done a few off-market deals, so I can kind of share my experience. Typically, what we do first, Aaron, is that we’ll get a purchase contract set up. And then once we have that purchase agreement signed between both parties, we’ll take that, here in California, I usually take it to an escrow company. And then escrow is the one that kind of facilitates that transaction between me, the seller, and title. And then they’ll draft up pretty much all the other documentation you need to make it a legally binding agreement.
You can still ask for everything you would ask for on an on-market deal. So you still maybe put an earnest money deposit, you still have your inspection period. If you are buying this with a loan, you can have a loan contingency. So all of the things that go into a regular on-market transaction, from a purchase agreement standpoint, can also go into this off-market transaction. The only difference is that the property was never listed and typically, there’s no real estate agent kind of playing the role of middle man between the buyer and the seller. So you guys make an agreement, take it to title and escrow, they facilitate that transaction. So how has it been for you, Ash?

So usually what I do is I’ll do a letter of intent first. So usually it comes out to one or two pages. And basically, it’s just stating your intent is to purchase this property, located at, the buyer is, the seller is, it’s going to be a cash offer at this amount, the deposit is going to be this, and then if there are any contingencies. So I always put contingent on attorney approval, contingent on if there’s going to be financing, financing, or you sell your own house or something like that. I always put that in there. And then there’s just a couple other things. If you Google letter of intent, you can kind of get a bunch of ideas, a bunch of samples, of what it could look like. It’s really not meant to be a contract. It’s really just to get them to agree to the terms.
And then I take that letter of intent, in New York State, you have to use an attorney for closing. So I take that letter of intent and I send it to my attorney, who actually takes that information and puts it into a real estate contract for the property. And then my attorney takes it from there. And the seller, I’ll recommend them an attorney to use, or if they have their own attorney, I’ll give them a copy of the contract, once it’s executed, for them to give their attorney. And then our attorneys communicate from there. And basically, it’s out of my hands after that, and they take care of everything such as the title work. So definitely the letter of intent is nice, because if they don’t accept your offer, you didn’t waste a ton of time going through a real estate contract at first.
And then I also like to do multiple letter of intents, maybe one seller financing, and then one conventional financing, or a cash offer. And then I present them to the purchaser, or the buyer, that way. And then as far as an inspection, it depends what type of house I’m buying or what property. So I’m trying to buy a campground right now. I am doing an inspection on that property, because if the water lines are bad, that could be a huge expense to me. But if I’m buying a $20,000 dumpy little cabin that I’m gutting anyways, I do not do an inspection. But as Tony said, anything that if you were buying a property off the MLS, you can put any of the same contingencies or things in the contract as you would if you were buying on-market, including furnishings, if you want furnishings included or the lawnmower or things like that, too.

Yeah. So I guess the last piece of advice to Aaron would be just go out and find a local, either attorney, escrow company, title company in whatever market you’re in, let them know that you have this off-market transaction, and most should be able to kind of guide you through that process, because that’s how we got started the first time we did an off-market deal.

Yeah, Tony, that’s great advice. And even contacting them before you even start looking for those off-market deals too, so that you have them ready and they can kind of guide you, this is what we would need from you in order to put together a contract, so you know what you could put into your own initial contract or your own letter of intent, too, so. Okay. Well, we have to get out of here, and Tony is actually doing something exciting today. He’s got interviews for a personal assistant.

Finally. So if you’ve ever sent me an email or a text message and it took me days or weeks to respond, hopefully that will all change after we finish recording [crosstalk 00:08:25].

Yeah. Well, exciting, Tony, and I hope the interviews go well. Thank you guys for listening. And if you missed out on applying for the position as Tony’s administrative assistant, make sure you follow him at Tonyjrobinson on Instagram to find out about any more new hires he has, and then you can follow me at wealthfromrentals. And I have no idea what I need, so if you listen to this podcast and are a loyal listener and you know something that I need and that you can help with, please message me a DM, slide into my DMs and tell me what I need and how you can do that for me. Thank you guys so much for listening. My name is Ashley and he’s Tony, and we will be back on Wednesday with a guest.


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This week’s HW+ member spotlight features Jeremy Potter, chief evangelist at Stavvy, a 2022 Tech100 Mortgage winner. Potter was recently promoted after serving as head of legal and capital markets and is a thought leader in the industry, regularly sharing his insights on how the industry can move forward through the power of innovation. He has also held leadership roles at Quicken Loans, now Rocket Mortgage, and Normcom Mortgage.

Below, Potter answers questions about the housing industry:

HousingWire: What is your current favorite HW+ article and why?

Jeremy Potter: My favorite HW+ article is Bill Conroy’s The crypto mortgage is the new kid on the block because it helped me frame up many of the emerging tech plays in the industry.

HousingWire: What is the best piece of advice you’ve ever received?

Jeremy Potter: “Make sure everyone is included” was my mother’s advice when I was still in elementary school. I continue to refer to this as the best piece of advice I have ever received because it reflects two key values.

First, and most importantly, she was adamant that I was thoughtful and intentional to include everyone in games, activities or invitations. Her advice helped me broaden my awareness to look out for opportunities to bring people together and that trait remains one of the aspects of my success today. 

Second, I am reminded daily how important it is to ensure responsible innovation. Making sure everyone is included spans from our diversity, equity & inclusion commitments to our product development where we create greater opportunities for our clients. 

HousingWire: If you could have picked another career what would it have been?

Jeremy Potter: If I had picked a different career path, I would likely have become a college professor. I applied for several Ph.D. programs after undergrad and thought I would study the American Presidency. 

My senior thesis was on a framework of measuring Presidential decision-making in a second term when reelection was not an option. One reminder from that paper that I use today is that the best leaders invite rigorous debate and embrace those who challenge an idea or policy to make it better.  

HousingWire: What are 2-3 trends that you’re closely following?

Jeremy Potter: Here are the trends that I am closely following:

  1. iBuyer and Rent-to-own platforms for first-time homebuyers
  2. Blockchain and tokenization technology for smart contracts and fractionalized ownership
  3. Dad jokes on Instagram reels

HousingWire: If you could change or implement one piece of housing regulation, what would it be and why?

Jeremy Potter: The SECURE Act allows for fully digital mortgage closings that would unlock greater adoption of eClosing and RON. While this is integral to what we are building at Stavvy, I truly believe faster adoption will also generate the type of cost savings and incentives for investors that actually pass through lower cost mortgage options to consumers. 

Yes, it’s about increasing digital assets to move us toward a more efficient, liquid secondary market, but the real win is when the savings associated with trusted, immutable loan closing & delivery benefit new loan programs for existing and potential homeowners.

HousingWire: What’s one thing that people aren’t paying attention to that you think they should be paying attention to? 

Jeremy Potter: Greater investment and incentives for factory-built housing.  “Jobs that create houses.” Factory-built and modular housing is more innovative and scalable than many people realize.  It’s also more modern and appealing to first-time home buyers. 

We’ve all heard stories about 3-D printing but many modular builders are proving more tangible results are possible in this space. Across many markets, especially where I live in Detroit, there is a need for both employment and more affordable housing. 

I don’t mean affordable housing in the HUD definition, though I know that’s needed too.  I mean, a house that working Americans can afford in their community.  We need more supply solutions that make it easier to create, build and finance mid-market housing that directly addresses historic racial and economic inequality.  

To become an HW+ member, click here.

For more information on HW+ benefits, click here.

To view past issues of our HW+ exclusive HousingWire Magazine, go here.

The post HW+ Member Spotlight: Jeremy Potter appeared first on HousingWire.

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It’s an excellent time to discuss housing inventory. The housing market shifted in March of this year. As the 10-year yield broke above 1.94% and mortgage rates rose, we saw the impact on housing data. Since the summer of 2020, this has been my main talking point on what can cool down housing; it’s a 10-year yield above 1.94%, meaning rates above 4%.

We see this in the data. Purchase application data, while doing better than I thought it would with rates over 5%, is still negative year over year, and this time it’s real. Last year we had COVID-19 comps. Now, it’s no longer the case, this negative trend is real on a year-over-year basis.

This week’s purchase application data showed week-to-week growth of 0.2%. The year-over-year data is down 16%. The four-week moving average is down 12.5%. I anticipated negative declines of 18%-22% by now, so that hasn’t happened yet on the four-week average. We will have more challenging comps to work in October of this year, and maybe that 18%-22% decline will happen then.

Today, however, the purchase application data is actually down to levels we saw in 2009!

Yes, crazy to think, but this is a survey trend data line, and the housing market was in free-fall at that time. That’s not the case now because we have’t had a credit boom post-2010 as we did from 2002 to 2005. If you connect the lines, you can see where we are on a historical basis.

What is going on here? How can housing inventory be so low today when it skyrocketed back in 2009? Let’s take a look here together because I have been worried about unhealthy home price growth since the breakout in housing demand in 2020, but it’s not because of record-breaking credit demand. It’s more of a lack of supply.

If you follow the trend of housing supply since 2014, it’s been falling every year — with a pause in 2018-2019 — and then collapsed lower post-2020. Now don’t get me wrong: demand is better in 2020 and 2021 than in any single year from 2008 to 2019. We had roughly 300,000 more existing home sales in 2020 than in 2019 and 800,000 more in 2021. I would average those two out because I believe we got some demand push through from the second-half surge in demand in 2020 into 2021.

So, on average, just 500,000 more homes were bought than in 2019. If I take existing home sales from 2017 levels, it’s roughly, on average, just 300,000. Currently, home sales are falling like when rates rise.

As you can see below, the inventory keeps falling from 2014 levels, and even with the weakness in demand this year, we are nowhere close to 2013 levels, let alone 2018 levels.

I don’t believe housing inventory below 1.52 million is a natural state for the U.S. housing market. This is a red danger zone area for forced bidding action, which destroyed my affordability models in just 2.5 years since the start of 2020. In reality, my worst fear for housing came true, and it got even worse in the early part of 2022 as we had record low inventory creating more forced bidding. You can understand why I upgraded the housing market from unhealthy to savagely unhealthy

Of course, being “team higher rates” since February of 2021 isn’t the most popular talking point, but in 2022 I increased my call for higher rates to create some balance — otherwise or pricing can get even worse. We are seeing higher rates do their thing. Today pending home sales came in at another decline.

Inventory data for the first time is showing growth, which is a good thing, folks; we don’t want to stay at these low levels and see more and more unhealthy home-price growth.

But we should ask: Why is inventory so much lower now if purchase application data is at 2009 levels — a period in time when inventory was rising noticeably in 2006, 2007, 2008 and 2009?

The first answer is that people are staying in their homes longer post-2008. Housing tenure ran at five to seven years from 1985-2007 and now is 11-13 years from 2008 2022. The Baby Boomers are not selling their homes en masse, and we have more investors providing shelter for renters than before.

However, the spike in inventory that we saw from 2006 to 2011 can be attributed to the massive credit bubble we had from 2002 to 2005. You don’t want to overcomplicate this topic. Credit stress was evident from 2005 to 2008. People were filing for foreclosures and bankruptcy for years, and then, after all that, the job loss recession happened in 2008.

With a credit boom and credit bust, the monthly supply for homes in America got over six months for years. It took many years to clear up the credit deleveraging process that needed to occur in the U.S. housing market due to rapid credit expansion with exotic loan debt products.

The housing market post-1996 has had a hard time creating more than six months’ supply unless you have extreme housing weakness and forced credit selling. These two factors were happening from 2006 to 2011 and added supply to the market. Demand has been stable enough to keep supply low, and we have no forced credit selling since the great financial crisis. This has been an issue in getting the market balanced for some years now.

What about the builders? We have more housing starts under construction now than in recent history! This is true except for one big reality!

The monthly spike in the new home sales sector looks like massive inventory should be here. Well, six months of that supply are homes that haven’t even been started, and only three months of supply are completed. We have a lot of multifamily construction going on that won’t help the homebuyer.

On top of everything else that we need to deal with on housing, housing completion data has looked terrible for years. People forget when rates rose to 5% in 2018, it delayed housing construction from really growing for 30 months. Then COVID-19 happened and the rest is history; I can’t express to you enough how everything that was supposed to go right for housing flipped negatively, and this is just one of them.

So when we look at the housing starts data, we need more context with it, and we can see that it has a much different backdrop than what we saw from 2002 to 2005, when housing starts were driven by new home sales and single-family starts on a credit bubble. Now we see a different reality with a big push in multifamily construction and a lack of complete data.

Of course, one of the issues now is that rising rates impact the new home sales sector more than the existing home market, so the builders, while not in the same situation they were in in 2002-2005, will be more cautious in building homes with the rising rate risk cancelations and future buyers. They’re at a disadvantage because their homes are more expensive than the existing home supply.

Hopefully, this article outlines the issues we have had with housing since 1996 and why it’s been hard to get inventory to grow unless we see major demand weakness and forced credit selling. I am rooting for more listings than anyone else, but I understand the limits that we have been under post-1996.

Higher mortgage rates in the past have created more days on the market and cooled down the rate of price growth, which I am hoping for again. However, the homeowner’s credit profile is much better this time around. Their cash flow is better.

They have fixed debt costs while their wages rise, an excellent hedge against all this inflation we are dealing with.

On top of all that above, they have nested equity, and more than 40% of the homes in America have no mortgage debt at all. I am hoping that if demand gets weaker, home sellers won’t be so stingy and will lower their prices because they have so much equity now. Hey, a person can hope, right!

Enjoy the Memorial Day weekend and realize that not all economic cycles run with the same playbook. We have to learn to talk about the housing market in a more sophisticated way that doesn’t have to do with an epic housing crash for clicks. Sometimes a long, painful drag is even just as bad and that home prices rising way too much is the crisis now.

The post Purchase apps are at 2009 level: where’s the inventory? appeared first on HousingWire.

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Last week, the Biden Administration unveiled the Housing Supply Action Plan (HSAP), a new proposal that aims to make homeownership and renting more affordable. The median home price in the United States has risen nearly 47% since April 2019, and rents have increased by over 21% over the same period, according to BiggerPockets’ internal data. 

There are a lot of elements to this proposal, but together they aim to increase housing affordability by reducing the housing shortage in the country. Each piece generally falls into one of four categories: Zoning Reforms, Financing, Owner Occupancy, and Cost Controls. The plan, if enacted, would pay for such proposals with a combination of existing funding (largely taken from the bipartisan infrastructure bill passed last year, as well as Department of Transportation budgets) plus new spending proposals. 

Estimates of the size of the housing shortage vary depending on the source. On the lower end, Moody’s Analytics says it’s about 1.5M units. On the other end of the spectrum, the National Association of Realtors estimates it’s about 5.5M. 

Regardless of which estimate you look at, a housing shortage is a problem. First and foremost, it creates a situation where many Americans find it increasingly difficult to find a place to live, and existing housing units go up in price, straining budgets. It’s simple economics—if supply cannot meet demand, prices will rise. This dynamic has played a significant role in the rapid property value increases over the last several years. 

Of course, many other factors have recently pushed up prices, such as super-low interest rates, demographic demand shifts, inflation, and low inventory. But the lack of supply is one of the long-term trends impacting the housing market since before the pandemic and is poised to continue to impact the housing market for years to come. 

As a country, there simply has not been sufficient building since the Great Recession: 

New Privately-Owned Housing Units Authorized in Permit-Issuing Places - St. Louis Federal Reserve
New Privately-Owned Housing Units Authorized in Permit-Issuing Places – St. Louis Federal Reserve

This proposal aims to correct that. While none of these proposals have gone into effect, and many more details are needed to understand the impact fully, we can examine the information we have so far.

Zoning Reforms 

Zoning in many areas restricts the building of high-density developments. Think of places where only single-family homes can be built, where height restrictions exist, or municipalities that prevent the construction of Accessory Dwelling Units (ADUs). Any real estate developer or builder is likely very familiar with many of these restrictions that make it difficult to build a bunch of units quickly. Proposals in the Housing Supply Action Plan aim to reward municipalities that reform their zoning and land use laws to encourage more building and higher density. 

As an example, some independent analysis by the Urban Institute suggests that these types of reforms, along with the improved financing proposed in the HSAP could lead to the construction of 1 million additional ADUs in the next five years. ADUs are an attractive option to boost residential density, as it allows homeowners and smaller investors the chance to add units at relatively low costs, with relatively less permitting and risk. 

Financial Reforms

There are many federal programs that can help fund new housing, but the programs are disparate and difficult to navigate. The HSAP imagines streamlining these programs to make it easier to build affordable housing. 

Specifically, one proposal calls for $25B to be distributed to state and local governments to create up to 500,000 housing units designed to meet the local community’s needs. 

Additionally, the proposal aims to finance the building of 800k new rental units for low-income tenants and expand financing access for building ADUs. 

Owner Occupants

Recent data shows that investors, mainly institutional investors, have accounted for an increasing share of home purchases. To help owner-occupants, the plan will instruct the Department of Housing and Urban Development (HUD) to sell their inventory of properties, which is estimated to be about 125,000 units, to would-be owner-occupants rather than investors. Currently, investors can buy HUD homes if no owner-occupant bids are accepted. 

Cost Controls 

Amid the backdrop of high inflation, the HSAP is looking to curtail the skyrocketing prices faced by builders and developers. 

The first part of the plan calls for partnerships with the private sector to improve supply chain efficiency and eliminate any disruptions resulting from the COVID-19 pandemic. 

The cost control proposal will promote the construction of modular and manufactured homes, which have become far more cost-effective in the last several years, and could help to bring the average cost of building a new single-family home or small multifamily down in the coming years. 


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At this point, the HSAP is just a proposal. Many elements of the plan will likely change before implementation if implemented at all. Even if these policies move forward, none of them offer a quick fix. 

The plan is likely to evolve over the coming months and could take years for full implementation. The main takeaway is that there is a concerted effort in the White House to address the housing supply issue and improve affordability.  

To stay on top of this news and other investing-related news, check out BiggerPockets’ newest podcast, On The Market, where Dave and a panel of expert investors debate the latest real estate trends, news, and data. 

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There’s no question that 2022 has seen serious changes to the housing market. Between significantly fewer refinances, rising mortgage rates and housing inventory nearly cut in half since 2020, loan officers (LOs) and brokers face a pivotal time where adaptation is a must for success. In a housing market vastly different from the pre-pandemic period, how can industry professionals position themselves to achieve growth despite these current obstacles?

When it comes to business growth this year and beyond, industry experts agree that 2022 is the year of the non-qualified mortgage (non-QM) loan. With nearly 50% of the workforce today comprised of freelancers, gig-workers, the self-employed and small business owners, fewer borrowers fit the traditional mold required to secure conventional loans. However, not all LOs and brokers are set up to take on an influx of non-QM business.

“Our workforce has evolved drastically in recent years. More people are diversifying their income streams and opting to work for themselves or through real estate investments. While this segment of the population may be completely credit-worthy, they don’t always fit the traditional qualification guidelines to get a home loan,” said Jeff Gravelle, co-head of production at Newrez. “As that sector continues to grow, so does the potential for loan officers and brokers to bring them on as customers with the right type of products.”

“Non-QM loans are harder than other loan products, so lenders must invest the time, resources and education into their sales teams and brokers to learn the intricacies of non-QM products. That way they’re better equipped to sell and serve their customers with these innovative products,” added Gravelle.

From processes and procedures to incorporating the right tech stack, suiting up to start offering non-QM products means first finding the right business solutions. Partnering with a team that understands how to approach home loans for borrowers with complex finances can make the difference between another year of profit growth and the unfortunate possibility of loss in business, making it one of the most crucial decisions for any lender.

Bracing for the challenges of non-QM

With an anticipated doubling in market share in 2022, non-QM products are top of mind for almost every mortgage industry professional. As LOs and brokers prepare to expand their selection of loan offerings, gaining a firm understanding of available products and how to best employ them for their customers will be essential. That means getting acquainted with the challenges common to the non-QM market.

Although the addition of non-QM loan options can undoubtedly end up being a lucrative move, the sector presents certain hurdles that not all lenders are prepared to clear just yet. For instance, processing non-QM loans manually can be prone to human error, cutting into the efficiency of a business. With higher-risk loans like non-QM, the need for optimization needs to be underscored from the outset to avoid costly mistakes.

There is also the matter of efficiency versus increased lending cost. With non-QM in a current transition state, forecasting future demand levels can be tricky. While investing too little in additional capacity and resources could result in difficulty managing increased demand, the alternative could mean investing too much and having demand not meet expectations. In either event, the outcome is less than ideal from a business perspective.

In addition, handling regulatory compliance and risk management will be a big concern for lenders breaking into the non-QM market. As government regulations constantly shift, keeping on top of and adhering to these changes can become a time-consuming task. Juggling their own compliance risks along with the ability-to-repay rule as it applies to non-QM loans means an additional component to be kept up in the air, and dropping the ball could have heavy consequences.

It’s not uncommon for worthwhile investments to carry a certain amount of risk, and non-QM loans are no different. Luckily, when it comes to incorporating non-QM products into your loan offerings, risk mitigation can be as simple as partnering with the right team and learning to understand the needs and trends of a new customer population.

Unique loans for unique borrowers

One of the most meaningful advantages of offering non-QM options is the ability to tap into a market of historically underserved borrowers. These borrowers may have already experienced rejection when applying for more traditional loans due to factors like having less than perfect credit, high debt-to-income ratios, low reportable income and a number of other increasingly common reasons such as being self-employed or freelance workers.

More and more frequently, these factors don’t impact a potential borrower’s ability to repay. They are simply being excluded from the homebuying market due to traditional loan requirements that don’t meet the needs of their unique finances. From first-time homebuyers to those looking for vacation or investment properties, non-QM loans come in all shapes and sizes, ideal for a variety of borrowers in a variety of financial positions.

With so many different types of borrowers beginning to look towards non-QM for their lending needs, LOs and brokers are wise to incorporate a diverse set of loan options. This means partnering with a company that offers non-QM options tailored to satisfy the needs of several borrower types will be crucial to growth in 2022 and the years to follow.

Smart Series by Newrez

The professionals at Newrez understand that borrower needs constantly shift and they are dedicated to providing a product line that evolves right alongside these changing needs. To meet the growing demand of unconventional borrowers, Newrez has focused on creating a series of non-QM products ready to satisfy the unique needs of a new generation of homebuyers.

Providing bespoke products for different types of non-traditional borrowers, the Newrez Smart Series is the perfect solution for LOs and brokers who want comprehensive loan offerings that work for borrowers who don’t fall within the traditional qualifying guidelines. The Newrez non-QM suite is comprised of three different loan types, each designed for a different kind of borrower.

Ideal for the self-employed borrower, SmartSelf is one of three non-QM products that make up the Smart Series. Ridding these borrowers of the requirement to provide a W-2, SmartSelf allows for alternative income documentation to qualify for a mortgage. With the number of self-employed borrowers only continuing to grow, this is a huge opportunity for hopeful homebuyers who have been previously rejected due to their form of income.

Falling outside the eligibility requirements for standard agency and prime jumbo programs due to a credit event or isolated lapse in credit performance is another common reason for mortgage loan rejections. For borrowers in this position, SmartEdge offers competitive financing solutions and a gateway to homeownership even in the event of a credit history that is slightly less than spotless.

Lastly, a non-QM loan explicitly designed for experienced real estate investors, SmartVest is perfect for those seeking to purchase or refinance an investment property that is owned for business purposes. This loan allows borrowers to buy additional investment properties with less documentation than conventional loans. Moreover, borrowers can access equity in a current portfolio of homes to purchase additional properties or use the market rent from the subject property to qualify.

Why partner with Newrez?

To guarantee borrowers and investors financial success well into the future, Newrez has designed a process from application to closing that makes for a seamless and stress-free home buying experience. With knowledgeable non-QM underwriters with specific Smart Series training and certification, a dedicated operations team keeping the wheels turning behind the scenes and the right tech to support borrowers each step of the way, partnering with Newrez will keep customers satisfied and profits growing as borrower needs evolve.

“We are seeing a large number of lenders who are new to the Non-QM market issue their Non-QM products. Non-QM lending and underwriting is a skill acquired over time with experience, as it is scenario-based lending that is significantly different than what any conventional underwriter is used to doing,” said Mike Smeltzer, senior vice president of Non-QM lending at Newrez. “It is important to choose a lender that has experience in this field and the ability to deliver with customer satisfaction. Newrez has the expertise and underwriting knowledge to deliver that type of positive customer experience.”

Newrez is committed to making the lending experience painless and possible for a new type of homebuyer with the help of their non-QM products. To learn more about partnering with Newrez, visit

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The most affordable manufactured homes are financed with private loans with higher interest rates, shorter terms and fewer consumer protections than mortgage loans.

The homes financed by these loans come without land, like a car, and the homeowner typically rents the land beneath their home. The home itself is a depreciating asset, which makes it difficult for manufactured homeowners to build equity or intergenerational wealth. The loans, called chattel, are rarely refinanced.

That means the 17.5 million Americans who live in homes financed with chattel — about 42% of the manufactured housing market — don’t enjoy the consumer protections that long-established legislative bulwarks afford those with a traditional mortgage.

But the government sponsored enterprises may now be on the cusp of entering the chattel market.

The GSEs, which back mortgages on traditional site-built homes, currently do not provide financing for chattel. That’s despite being ordered by Congress, in the aftermath of the Great Recession, to specifically serve manufactured housing.

The enterprises thus far have shunned the affordable end of the market. Instead, they have opted to finance manufactured homes that more closely resemble site-built homes, are titled as real property and cost much more. Both Fannie Mae and Freddie Mac also have backed commercial loans on mobile home communities. Freddie Mac has sought to educate borrowers on options to convert chattel financing to real property.

“Instead of serving the market as it is, they’re essentially trying to change the market to something it isn’t by favoring real estate loans,” said Mark Weiss, CEO of the Manufactured Housing Association for Regulatory Reform, which represents manufactured housing lenders and builders.

Freddie Mac aims to purchase 1,500 to 2,500 chattel loans by 2024, though it does not yet have a product for it. Fannie Mae is considering the matter with its regulator, the Federal Housing Finance Agency.

Freddie Mac’s goal to finance chattel loans also received a prominent shout-out in the Biden administration’s national affordable housing plan. To observers, it’s a clear indication of momentum building for the GSE to finance chattel, for which affordable housing advocates continue to argue.

Proponents of government-backed chattel loans say the sector is not as risky as it has been in the past.

Manufactured homes are no more vulnerable than site-built homes in extreme weather events, industry groups claim. Manufactured housing lenders say the sector has reformed its past risky underwriting practices. A subprime crisis afflicted the sector long before it appeared in the wider mortgage market. Faulty loans on mobile homes led to the downfall of the nation’s largest manufactured home lender in 2002, ensnaring Fannie Mae on its way down, an episode both GSEs remember well.

The GSEs have not yet explained how they would provide liquidity for loans made on a depreciating asset. Also up in the air is whether they would shape the market to fulfill their charter, or act as a passive secondary market participant. The chattel market is still highly concentrated, with the top five manufactured housing lenders accounting for nearly three quarters of chattel originations, the Consumer Financial Protection Bureau found.

Despite potential risks, manufactured homes as a source of affordable housing backed by the government is tantalizing.

Aside from renting, it’s often the only available option for many borrowers who can’t afford to buy the now median $375,000 home. The median chattel loan amount is $59,000, according to the CFPB, versus $237,000 for a site-built loan.

But it’s not clear manufactured homes financed by chattel loans can be an engine for long-term wealth building, as conventional mortgage financing is.

“The public policy purpose behind promoting homeownership is to create an avenue for long-term wealth building. There’s also a public policy interest in ensuring people have safe and affordable housing,” said Ed DeMarco, former acting director of the FHFA. “Chattel can be one form of providing safe and affordable housing. But it doesn’t mean that [type of] housing is going to be a path for wealth creation.”

A little bit jumbled

Fannie Mae has good reason to be cautious about manufactured housing. It’s been burned before.

Years before subprime took hold in mortgage, risky underwriting wreaked havoc on manufactured housing. Now-defunct Green Tree Financial Corp. made loans hand-over-fist in the 1990s, with loose credit requirements on depreciating mobile homes. It was able to conceal the faulty loans for years through creative accounting, however, and sold itself to Conseco for $6 billion in 1998.

But when home prices depreciated, it flamed out, and its parent Conseco filed for bankruptcy protection in 2002. At the time, 70% of Fannie Mae’s $9 billion manufactured housing portfolio were Green Tree loans bought by Conseco.

Fannie Mae waived liens on the portfolio, in exchange for servicing fees and increased servicing oversight, and recorded a loss of $83 million on securities it held, Fannie Mae documents show.

Fannie Mae did not respond to a request for comment.

“A lot of subprime behaviors showed up in the chattel market first,” said Paul Bradley, president of ROC USA, a nonprofit that helps manufactured housing communities convert to resident ownership. “This was classic fog-the-mirror underwriting and lending, invoice-fixing.”

A former Fannie Mae official who observed the debacle firsthand said mortgage finance was not built to address a depreciating asset, and Fannie Mae did not understand counterparty risk well enough at the time.

“We were really good at getting things really wrong when we got them wrong,” the former official said.

Fannie Mae “stepped in right before bankruptcy and wound up taking it on the chin,” said Weiss, of the Manufactured Housing Association for Regulatory Reform.

“The underlying lender had significant problems and was not handling things in the proper manner,” Weiss said. “But that’s not the market today — it’s just a completely different situation.”

Although the underwriting has changed, according to Weiss and other lenders, Fannie Mae still remembers the Conseco debacle. And both of the GSEs are demonstrably cautious when it comes to supporting chattel lending.

“Our friends at Fannie and Freddie who have put boots on the ground and really decided to educate themselves on manufactured housing have been fantastic,” said Cody Pearce, president of Cascade. “They believe in the product, that it’s the No. 1 solution for affordable housing. But then they run up against the credit risk and pricing teams, and it seems to get a little bit jumbled.”

Momentum builds

Regardless of whether the GSEs have an appetite for financing the affordable end of the manufactured housing spectrum, financing for chattel is gaining political traction.

On May 16, the Biden administration released a sweeping affordable housing plan, which specifically called out chattel loans as a vehicle for affordable housing.

The plan bluntly stated it would “Deploy new financing mechanisms to build and preserve more housing where financing gaps currently exist: manufactured housing (including with chattel loans that the majority of manufactured housing purchasers rely on).”

The Biden administration is banking on FHFA’s approval of Freddie Mac financing chattel loans.

That’s far from a foregone conclusion. Freddie Mac, the plan points out, first will conduct a feasibility assessment of whether it can finance chattel, and then it will seek FHFA’s approval. Although the president can now remove the FHFA director at-will, giving the Biden administration much greater authority over the agency, it is still an independent regulator, not a cabinet-level agency, like the Department of Housing and Urban Development.

Freddie Mac declined to comment. An FHFA spokesperson said that “any personal property loan purchases for DTS would be subject to FHFA approval as we explore manufactured housing financing options with the Enterprises.”

The FHFA also said it plans to host a public listening session sometime in the summer, focusing on financing options and consumer protections related to manufactured housing.

The Biden administration housing plan also highlighted increases to Fannie Mae and Freddie Mac’s purchase targets for manufactured housing loans titled as real estate, as well as efforts by HUD to update its building code, to “modernize and expand their production lines,” and help manufacturers respond to supply chain issues.”

A HUD spokesperson said the Federal Housing Administration would look to increase its loan limits to align with manufactured home sales prices to increase usability of the program. The agency will continue to monitor supply chain issues and maintain flexibilities, to help continue the production of manufactured homes “which are necessary to meet the demand for this important source of affordable housing supply,” the spokesperson said.

Despite the Biden administration’s stated plan, the path forward for government-financed chattel lending remains uncertain. It’s a frustrating dilemma for Lesli Gooch, president of the Manufactured Housing Institute. Research her organization conducted based on data from lenders — which it shared with the CFPB — contradict the idea that chattel loans are riskier than real estate loans.

The seriously delinquent rate for chattel loans in the first quarter of 2021 was just 0.38%, compared to 1.75% for manufactured home loans titled as real estate. The delinquency rate also was orders of magnitude lower than that of FHA loans, with just over one in every 100 chattel loans at least three months past due in March 2021, compared with more than one in every 10 FHA loans at the same time.

“We have data showing these loans are performing well — this is not about risk,” Gooch said, of the GSEs’ reluctance. “A lot has been done to get over the sticking points. At some point we have to stop doing research and move forward.”

Here’s an idea

Industry stakeholders have some ideas for how the GSEs could finance chattel loans without taking on too much risk. Affordable housing advocates hope the GSEs would not just provide financing, but seek to improve the market for consumers.

The GSEs already require tenant pad lease protections for manufactured housing communities for which they provide commercial loans. Could the same logic be applied to chattel loans?

Currently, the Truth in Lending Act and the Real Estate Settlement Procedures Act don’t apply to chattel. Mortgages require a detailed loan estimate when a borrower applies for financing, and a lengthy disclosure at closing. Not for chattel.

Site-built homes and manufactured homes with mortgages have foreclosure protections and are covered under the CARES Act. In case of default for chattel loans, they go through repossession, a process with fewer consumer protections.

“We’re seeing what they’re able to do with the tenant pad lease protections initiative,” said Rust. “They’re driving consumer protections with their market power. Why can’t they do the same thing in chattel?“

Freddie Mac protections for manufactured housing communities it finances already include a one-year renewable lease term, unless there is good cause to not renew, 30-day written notice for rent increases and the right to sell the manufactured home to a buyer that qualifies as a new tenant in the community.

But the GSEs could make further demands, given the right leverage. Bradley, of ROC USA, said the GSEs could provide secondary financing that requires longer loan terms, and limit rent increases for the land on which manufactured homes sit.

“If they came in with a mortgage conventional residential rate and term, they would find the industry very receptive to whatever added protections they would need to provide on that product in the community. But if they are going to just mimic what chattel lenders do — 15 to 20 year term financing, 6% to 8% to 10% interest rate — then no, the industry is not going to change one bit.”

But what of the inherent risks in manufactured housing?

David Brickman, Freddie Mac’s former CEO, last month posed a solution: using credit risk transfers as a mechanism to offload that risk and spur affordable housing, including manufactured housing.

“Specifically, the GSEs could work with existing lenders to develop a standardized product for manufactured housing chattel loans, including a single set of loan terms and documents, credit parameters and delivery mechanics, which would create significant value and bring helpful liquidity to an otherwise fragmented market,” Brickman wrote in a piece published by the Urban Institute.

To guard against the higher risk of chattel loans, Brickman suggests the GSEs initially could require lenders or investment partners to take on risky portions of loan pools.

Having an established secondary market is a tantalizing idea for Pearce, of Cascade. But his firm is not only waiting for the GSEs.

In 2019, Cascade, which specializes in chattel loans, went to market with its first private-label securitization. It securitized another manufactured housing loan pool in 2021 of $163 million over 1,889 loans, which were mostly chattel. Fitch rated a $103.2 million notes tranche with a preliminary AAA rating.

Gooch, of the Manufactured Housing Institute, asked, “If you have lenders able to do this with PLS offering, why can’t Fannie and Freddie do it?”

Pearce chalks the GSEs’ reluctance up to their past experience with the manufactured housing sector’s subprime crisis in the early 2000s. After that point, he said, underwriting guidelines changed and the sector was “ahead of the curve” when the single-family crisis hit.

Ultimately, after the Dodd-Frank reforms, the GSEs were able to move beyond the mortgage crisis mindset on site-built housing, Pearce said. But they have not moved beyond past blunders with affordable manufactured housing.

“The GSEs’ memory of that is strong, they’re passionate about it,” said Pearce. “But it’s not fair to hold manufactured housing accountable for such a long time for something that was repaired and changed.”

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A Fannie Mae survey published in mid-May found that mortgage lenders see value in appraisal modernization, specifically in the implementation of non-traditional appraisals and inspection-based appraisal waivers. However, they have several more pressing priorities when it comes to what they’re investing in.

Out of 200 senior mortgage executives surveyed, who represent 188 lending institutions, 94% think that appraisal modernization efforts will simplify the origination process. The main benefit of appraisal modernization, according to the first-quarter sentiment survey, is that it will help shorten the loan origination cycle time.

One mid-sized lender echoed the opinion of others that appraisals still take too long.

“Currently, the appraisal process is the biggest issue facing the mortgage industry,” the mid-sized lender said. “It causes significant delays, higher costs due to involvement of [appraisal management companies], and there are fewer experienced practitioners that understand more complex collateral assignments.”

Lenders surveyed also think that modernizing appraisals could help enhance appraiser capacity and lower borrower costs. With a declining number of appraisers in the field and rigorous requirements to enter the profession, lenders say that appraisers are stretched thin in how many properties they can get to. Implementing desktop appraisals would help alleviate this.

“They cannot get to all the houses we need appraised,” said one mid-sized lender that participated in the survey. “If they can, they want to charge more money for the appraisal. The charge gets passed on to the consumer so it’s hurtful for consumers.”

Despite a majority of lending institutions agreeing that adopting new technology for appraisals would be beneficial, survey takers identified several other priorities that were even more important.

Forty percent of lending institutions reported that a consumer loan application digital portal was either a first or second priority of their investment and eMortgages — eNote, eRecording, and eClosing — came in a close second with 39%. The desire to invest in appraisal modernization came in third place, with 29% of lending institutions reporting that this was a top-of-mind investment.

Lenders also mentioned concerns and roadblocks with adopting new appraisal modernization tools. Some of the biggest challenges listed by lenders include: speed, or lack thereof, of industry implementation and integrating these tools with loan origination systems.

Appraisal modernization efforts in the housing industry have ramped up because of the pandemic.

In March 2022, the Federal Housing Finance Agency (FHFA) made hybrid appraisals a permanent fixture. Both Fannie Mae and Freddie Mac now allow appraisals to be conducted remotely, using public records such as listings and tax appraisals, for purchase loans.

Meanwhile, the Department of Housing and Urban Development (HUD) recently extended its timeline for allowing desktop appraisals for certain transactions impacted by the pandemic. The policy now expires on December 31, 2022.

Concerns remain, however, around whether automated valuation models (AVMs), used in desktop appraisals, have the potential to bake-in and amplify racial bias, in part by relying on historical sales comparison values.

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As 2022 proves to be a challenging year for the housing market, lenders are looking to take advantage of potential downtime by improving their internal processes. HousingWire recently spoke with James Deitch, CEO of Teraverde, about the changes lenders can make to their business models in order to remain profitable.

HousingWire: Between interest rate hikes, tight housing supply and geopolitical uncertainty, many industry professionals are feeling the pressure of a volatile housing market. Why is now a good time for lenders to focus on improving aspects of their business, such as customer experience and cost structure?


Jim Deitch: Lenders face constant competition for time and resources. The past two years were all about getting loans closed, shipped and funded. There was little time for customer experience or cost focus. Margins were wide and compensated for about every issue. And justifiably so.

Suddenly the brakes come on, really hard. Rates increase really fast. And most every issue that fat margins used to cover are exposed. Cost per loan and customer experience are two issues, both driven by a common denominator, the lender’s business model.

Every business model is defined by mission, process and technology. I’ll give an example outside of our industry. I spent two days in Dallas at Southwest Airlines Headquarters, just off Dallas Love Airport, for research on one of my books. Southwest’s mission is to “Connect people to what’s important in their lives through friendly, reliable, and low-cost air travel.” The two days at Southwest illustrated the connection of mission, process and technology to their business model. Above all other aspects, Southwest strives for simplicity.

Southwest flies the Boeing 737 platform. Every pilot, flight attendant and mechanic can work on every aircraft since every 737 is certificated (airline speak for licensed by the FAA) as a single aircraft type. American Airlines by contrast currently operates seven different aircraft types, meaning pilots and mechanics can only work on their aircraft ‘type’. Southwest flies point to point routes, not through major hubs. No seat assignments, so Southwest can turn an aircraft around from touchdown to take off in under an hour. Integrated technology speeds the flight and improves safety. Every aircraft has a heads-up display which allows for landing in zero visibility if required in an emergency. As a result, Southwest aircraft fly about 2 hours more per day than their competition. There’s a lot more to Southwest’s business model, and check out my book, “Strategically Transforming the Mortgage Banking Business” for a deep dive.

Southwest is the only major airline that operates this model. The standardized platform makes consistent process and performance possible. It also lets Southwest have a cost advantage of about 15% per revenue seat mile flown. That’s a competitive advantage over other airlines. It’s hard to duplicate their business model. So many interconnected elements that all strive for efficiency and simplicity. All aimed to “connect people to what’s important in their lives through friendly, reliable and low-cost air travel.”

Think about your lending business model. Does your technology harmonize together, or are there siloed systems that serve different employee groups? Are there common processes for efficiency? How many processes require manual intervention? How do you measure results that impact profitability, efficiency, and productivity? How is the customer experience engineered from first contact to boarding the file in servicing? When was the last time you examined the end-to-end process? Is now the time to address these issues? I think so. The landscape has changed dramatically, and what worked the last two years won’t work well going forward.

HW: Lenders are facing a brutal 2022 forecast following two great years for the housing market and are looking to build business models that will profit this year and beyond. What strategies can these lenders take now to prepare for sustainable profitability?

JD: Primarily, a business model should flex to provide profitability regardless of market conditions. This is hard to execute but is conceptually straightforward.

Compensation cost is the largest impediment to sustainable profitability and a flexible business model. According to the MBA Quarterly Mortgage Report, compensation is about two-thirds of the cost to originate and close a loan. Increasing labor productivity is the key to sustainable profitability.

Jonathan Corr, retired CEO of Ellie Mae (now ICE Mortgage) addressed lenders’ tendency to use labor rather than automation colorfully. Corr described it as, “Filling business process holes and leaks with ‘human spackle’ when automation and reengineering are more direct and efficient answers. Lenders tend to fill the holes and the leaks with human spackle, as it’s a quick band-aid. There’s no reason to have all that human spackle cost and inefficiency. Human spackle also adds to the timeline to close a loan. Eliminate human spackle and closing a loan is going to take a lot less time, a lot less cost, and a better customer experience. “

So how does a lender resolve the compensation issue? Many lenders are laying off employees to balance their workforce with the reduction of volume. That’s an unfortunate temporary solution to an inflexible business model that is overly reliant on human spackle.

How do I know the industry has an inflexible business model? Regardless of loan production levels over the past seven years, the labor component is 66-70% of total cost. That is the definition of inflexibility. One would expect investment in technology and rising volumes to reduce the labor component per loan. It hasn’t. Thus, lenders cannot flex their costs as volumes vary, nor harvest the efficiency that should accrue from the technology investment.

2015 2016 2017 2018 2019 2020 2021
Personnel       4,699       4,802       5,347       5,524       5,094       5,272       5,866
Total Cost to Produce       7,046       7,208       8,083       8,278       7,578       7,535       8,565
Compensation % 67% 67% 66% 67% 67% 70% 68%

So now what? Short term, right-size your employee count. Regrettable, yes. But simultaneously commit to fixing the business model and business process that brought you the 65-70% labor component to begin with. Decide to improve process, build in flexibility and reduce the likelihood of painful layoffs in the future.

HW: How can lenders adopt a data-driven business model that ensures profitability, liquidity and risk management today?

JD: Our team at Teraverde has created a way for a lender to assess and improve their business process. We call this the ‘EAOO’, which is an acronym for Eliminate, Automate, Outsource, Optimize.  EAOO is our proprietary data-driven disciplined method to evaluate the entire business process end to end. It is employed as follows:

Starting at the end of your process, identify the smallest definable component of your process and define that component as a task. Then consider if that task can be improved by taking the task through the EAOO regimen. Then move to the next smallest component and work forward until you reach the point of first customer contact.

The EAOO regimen is a waterfall to evaluate each task, as described below:

● First, can you eliminate the task by considering whether the task is necessary, or how the task could be consolidated into another task? If the task cannot be eliminated, consider the next step of automation.

● Can you Automate the task internally using robotics process automation, workflow management or similar automation tool? If the task cannot be automated internally, consider the next step of outsource.

● Can you outsource the task externally to a specialized outsourcer? Outsource doesn’t mean offshore. A lender can outsource to on-s. e or off-shore vendors. If the task cannot be outsourced, then consider optimization of the task.

● Can you optimize the task by finding the most efficient, least cost method to accomplish the task?

Once EAOO is completed for the first task, repeat the EAOO evaluation for each task within the overall end to end process. Invariably we find many opportunities to eliminate, automate, outsource and optimize the components of a lender’s process.

We speed this EAOO process up with some data-driven magic. That data driven magic includes an analysis of about 400 elements that produce ‘metrics that matter’. The data driven magic finds process variations, flaws and inefficiencies. It assesses the productivity of individual personnel and opportunities to improve individual performance. It uncovers hidden opportunities to increase pull-through. It assesses and improves the coordination between systems within your tech stack, and opportunities to better configure your tech stack.

EAOO is a data-driven intentional process to drive human spackle from your process, improve labor productivity, and build more flex into a lender’s business process. It improves the business process to be more flexible and productive. The EAOO process can’t be shortcut. One can’t achieve a sustainable profitable business model by tolerating bad process.

Here’s the key point from Jonathan Corr: Toleration of bad process leads to ‘human spackle’ being used to patch over fundamental deficiencies, with ‘checkers checking the checkers’, and multiple passes through manual process.

EAOO is a different approach to intentionally disrupt and improve your own business process. EAOO is an intentional walk-through of an entire business process, starting at the back end of the process and walking forward.

HW: What solutions does Teraverde offer to help lenders enhance their business models in preparation for a more profitable future?

JD: Our approach is not ‘best practice’ or selling you another technology solution to insert into your tech stack – it is helping you develop the right business processes with the tech stack that you have to deliver your desired customer experience to your customers.

We find that most lenders are using only a fraction of the capability of their existing tech stack. And human spackle is how the lender compensates for not exploiting the full capability of their technical systems.

Teraverde can help in two ways. The first is to achieve transparency and visibility into the opportunities to improve your business. That transparency and visibility arises from using metrics that matter to continuously evaluate your business. These metrics that matter constitute your single source of truth from the appropriate systems of record in your business.

Metrics that matter rarely come from static reports or dashboards. Metrics that matter identify the relationships of processes and systems that drive profitability, efficiency, and productivity. Our clients often describe “aha” moments when the association of processes, systems and data reveal actions that can meaningfully improve your results. The ability of senior leaders and managers to easily explore their data is the key difference of our Coheus® solution.

The second way we can help is to engage in an EAOO project with the lender. We use our data driven magic to analyze about 400 data elements that produce ‘metrics that matter’ together with an automated assessment of the DNA of your tech stack to speed the EAOO process.

The key differentiator of Teraverde is our people. We have experience as CEO, COO, CFO, CTO and CIO of actual lenders. We are not auditors or coders dispensing products or advice about lending. We are lenders with hundreds of years of extensive lending leadership experience. All focused on helping you get the right business process in place.

We help you continuously improve the process through transparency and visibility of metrics that matter from a single source of truth. No other firm offers such a focused and proven approach to a flexible, sustainable business model free of human spackle.

The post How lenders can improve business models in 2022 appeared first on HousingWire.

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When writing about the ’80s banks and passbooks, I started to see a pattern emerge concerning customers and refinance loans and rates. They were so high; then so low. I started thinking about farming. Farmers know that you can’t keep putting the same plants in the same dirt season after season. You kill your soil. You ruin the balance of nutrients. You over work the chemistry. It stunts plant growth and yields. It changes how they grow.

We have overworked our ground and it needs a rest. Housing Wire’s expert, Logan Mohtashami keeps saying we need a reset. He says in a Tweet earlier this month, “I believe some of the confusion around higher rates is that some people expected more demand destruction faster. This is why I stress higher rates need duration to work its magic.”

Crop rotation one: Homeowners stay in their homes for 30 years

Rates have been on the decrease since 1981. It was a rotation of crops back then to adjust inflation. In the early ’80s, rates were above 18% for a fixed-rate loan. Most people paid those loans for 30 years, on time. Some moved and, in that process, got better rates. Refinances were not marketed then like they are today, nor were they the norm for a homeowner.

Back then, the real estate agent found a home and the purchaser went to their bank and got a loan. This is a customer of an agent, and a customer of a bank, conducting a financial transaction and contractual purchase transaction. Most times, the bank relationship was established before the home was found. The customer bought a home to stay in for 30 years. This was viewed as a one-time transaction —  one growing season.

Multiple crops per year: Move-up buyers and refinancing

The internet, online banking and more lenders made the word “refinance” one that grew our industry. Look at just one person who purchased a single-family home in the mid-1990s —they outgrew the starter home and needed the ‘forever’ home they dreamed of.

What if that one loan turned into three to six loans? When rates were 8% in 1995, this customer bought that forever home. They went to their bank and get a 30-year fixed rate loan.

By 2004, they heard they could refinance, possibly get some cash out. Some went risky with a popular ARM loan and got a 6.5% rate. It saves them $200 a month, and feels good.

Servicers of the ARM loan start calling them in 2008 for a locked rate or fixed, lower rate. They happily accept 5.50% fixed. This saves them $150 more a month, and it is stable in this wild upside-down market.

By 2017, they figure they are overpaying when their buddies get a 4% rate. So, they go to an online bank to shop rates. Twenty people call them, and they lock in at 4% fixed rate. During COVID-19, rates were 3.25% and with nothing else to do, the homeowner can save money and refi again — rates will never be this low again, right? The servicer called one more time in June of 2021, equity was high, rates are at 2.4% and, man, you must do this one. This is as low as rates go.

Over 25 years, this one person has been a mortgage customer of six different mortgage companies, each saving him over $100 per month. Even if the homeowner moved or made a purchase in the middle of this process, one of the refis would have been a purchase. And, that purchase likely needed more refinances when rates fell.

Some of these people got second homes or investment properties. The rates have gone down over and over since the 1980s. When rates increased, they were nothing but small blips that paused a borrower. Homeowners always had a good reason to refinance.

It’s time for a reset

Now, rates are up. They rose more than the news could keep up. By the time they reported 4.5%, rates were really over 5%. Now, the homeowner will sit tight for a few years.

We need a reset and one that will continue into 2023. To the borrower, rates have always been going down. The borrower has saved hundreds per month every time. We have drained the soil and run out of places to grow our crop. The market has fixed it for us.

But the seeds are still being stored for the next crop. People are still buying homes.

The 2022 inflation market fixed it for us. Homes cost more and rates are through the roof. Refinances are less than half the business being done today. Servicers and refi shops are in a drought.

How do we clean the fields? We wait. After a year or more of these rates, things will be different. For starters, there will be fewer of us — loan officers, banks, brokers. Layoffs, consolidations, acquisitions, mergers and joint partnerships will change the landscape.

Technology, artificial intelligence (AI) and possibly cryptocurrency will change the transaction. Rates will eventually come down, opening the door to the next boom. The hundreds of thousands of homes sold in 2022 and 2023 above 5% will want to save that $200, so the cash-out refinances and ARM loans all need to reset.

The survivors

There are fewer mortgage people doing all the work. The people left are the survivors. The companies that are left are the ones who combined resources and people. The tech they have ready will be efficient and consumer friendly. The relationships will be long term and lead to long-term business partners.

Marketing and customer incubation will involve education, counseling and long-term contact well after the transaction. Processing will speed up with automated VOEs and instant verified bank statements. UW will be easier and faster with day one certainty. Virtual docs will speed up and make disclosures and closings less cumbersome. Mortgages will be easier to do and complete.

The field will be primed for the seeds to grow again. They will grow fast and plentiful. Refinances will take over the market. There will be more loans than we can efficiently process for years.

New business and old business will create a new refi boom. The builders will have more inventory. Home prices should stabilize. The new relationships with Realtors and lenders will be beneficial to all parties. We will make hay when the sun shines. We will reap what we sow, and it will be good for our business.

BJ Witkopf is a mortgage specialist with Assurance Financial.

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

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Despite the turbulence in the U.S. economy fueled by inflation, international tensions and rising mortgage rates, the private-label securities (PLS) market recorded a strong first quarter, at nearly $43 billion in issuance, and is projected to finish 2022 with record volume.

That $43 billion mark represents the second-highest issuance total since the global financial crisis (GFC) some 15 years ago and also was nearly two-and-a-half times above issuance volume for the first quarter of 2021, according to a recent market assessment by Kroll Bond Rating Agency (KBRA). 

The report focuses on so-called RMBS 2.0 deals, defined as all post-GFC residential mortgage-backed securities issuance in the prime, nonprime (including non-QM) and credit-risk transfer (CRT) spaces — the latter typically issued by the government-sponsored enterprises.

“In our view, this [performance] is due to the inherent diversification of RMBS 2.0 deals among subsectors differently sensitive to interest rates, a large variety of issuer types, and a quickly appreciating home-price environment,” the KBRA report states. 

Those dynamics lead KBRA to project record nonagency (private label) residential mortgage-backed security (MBS) issuance for the year, though at a declining rate in the coming quarters. 

“We continue to expect 2022 will close as a record post-GFC issuance year with almost $131 billon in aggregate [RMBS 2.0] issuance,” KBRA reports. “… KBRA expects Q2 2022 to close at approximately $38 billion, and Q3 to decrease further to $29 billion across the prime, non-prime, and credit-risk transfer segments because of rising interest rates and an unfavorable spread environment for issuers.

“… To date,” the KBRA report continues, “issuance spreads [have] widened rapidly for all sectors as supply and demand volatility hit nearly all-time highs.”

The spread is a measure of relative yield value between two types of debt instruments, such as a benchmark U.S. Treasury bond and a mortgage-backed security. As spreads widen in an unfavorable way for issuers, MBS prices tend to decline. Bond prices, however, move in the opposite direction of yield — with a higher yield (the ratio of a bond’s coupon to its price) deemed compensation to an investor for the added risk in a volatile market.

Among the factors industry experts contend are contributing to the volatility in the MBS market, and consequent deal-execution challenges, are fast-rising interest rates in combination with the Federal Reserve’s tapering of its MBS holdings. 

“So the Fed is clearly on a rate-hiking cycle,” said Seth Carpenter, chief global economist at Morgan Stanley, in a presentation at the recent Mortgage Bankers Association’s (MBA’s) Secondary and Capital Markets Conference & Expo in New York City. 

“They raised rates 25 basis points in March,” Carpenter continued. “They raised rates 50 basis points in the May meeting. And [Fed] Chair [Jerome] Powell was clear that the next couple of meetings looked like 50 basis points [hikes], so call it the June meeting and the July meeting.”

Carpenter said Morgan Stanley expects rate bumps after July are likely to return to the 25 basis points level until “we get to a peak of about 3.25% [for the Federal Funds rate] early next year.”  

For now, the Fed is not purchasing new MBS to hold in portfolio, and it also is allowing a portion of its existing portfolio to run off its books as those securities mature. But what happens if the Fed’s run-off strategy isn’t sufficient to meet its MBS divestment goals?

“They’re going to let their mortgage-backed security portfolio prepay without being reinvested, and there will be a cap of $35 billion [a month] starting at half that for the next three months,” Carpenter explained. “Our forecasts from my colleagues at Morgan Stanley suggest that given what the Fed has in their portfolio, [MBS] prepayments [run-off] are unlikely to get up to $35 billion a month.

“Will they end up then selling mortgage-backed securities on an outright basis to get up to that $35 billion level? I think the answer has to be the following: We’re not sure.”

The Fed’s continuing effort to wind down its $2.7 trillion MBS portfolio is expected to fuel widening spreads in the MBS market because it creates more supply to be absorbed, Bloomberg intelligence analyst Erica Adelberg explained in a recent Bloomberg report. That, in turn, puts downward pressure on pricing,

Regardless of how the Fed proceeds in shrinking its MBS portfolio, however, Mike Fratantoni, chief economist for the MBA — who also spoke at the recent MBA conference — expressed confidence that the MBS market will weather the storm. He described it as the “second most liquid market in the world.” 

“There are buyers domestically and abroad for mortgage-backed securities,” he added.

The issue ahead that Fratantoni zeroed in on is investors’ reactions to perceived market volatility, sparked by uncertainty. “Even if it’s not going to result in a [Fed] sale [of its MBS holdings] … every sort of rumination about that has the potential to lead people to change their position,” he said.

Sonny Weng, vice president and senior credit officer at ratings firm Moody’s Investors Service, explained in a recent interview focused on the PLS market that because of inflation and the volatile rate environment, coupled with an abundance of MBS supply — due, in part, to the Fed’s monetary policies — investors are demanding a higher MBS coupon, or the rate of interest paid annually on a note at par value.

The gap between rates on mortgages currently, compared with the much lower rates in 2021, also is creating another layer of deal-execution challenges. A recent market report by digital mortgage exchange and loan aggregator MAXEX reflects that reality.

“…Private-label securitization (PLS) spreads continued to move wider throughout April as issuers digested lower-rate mortgages [3% or lower] that remain in inventory as current market rates rise rapidly,” MAXEX states in its May market report.

Weng added: “And obviously, when your mortgage pool has a lower [interest] rate, and you also have to cover certain fees, a higher coupon translates into a higher funding cost for the issuers.”

There is a light at the end of that pipeline, however, according to MAXEX. “We expect this trend to continue in the short term until issuers’ pipelines stabilize and, over the coming months, note rates closer to 5% migrate to PLS [private label securities],” the company’s report states.

KBRA also indicates that impacts from the pandemic and the war in Ukraine “are important factors in our issuance projections for 2022, and these factors may also influence 2023.”

“Mortgage rates are generally expected to increase further as the Fed attempts to cool down rampant inflation and the housing market, impacting issuance as well,” KBRA’s market-forecast report states.  “…We expect the prime sector to decline in 2022, mainly due to sharp interest rate increases that have decreased overall mortgage production….

“Similar themes could continue through 2023, causing prime issuance to be negatively impacted further. The non-prime sector’s expected issuance is projected to increase moderately in 2023 as spreads normalize after rising precipitously in Q2 2022.”

Another bright spot going forward this year for the PLS market, according to KBRA and MAXEX, is the potential for solid non-agency PLS issuance backed by investment properties and other more “esoteric” offerings. 

“… We are still seeing an increase in the number of second homes and investor property loans being traded through the exchange to avoid the LLPA [loan-level price-adjustment] increase instituted by the FHFA [Federal Housing Finance Agency] for second-home and high-balance loans delivered to the agencies after April 1,” the MAXEX May market report states.

KBRA reported that MBS issuance backed by mortgages on nonowner-occupied properties (NOO), such as investment properties and second homes, “was strong in Q1 2022, with over 10x year-over-year growth.”

“We continue to expect further issuance in this segment…,” the KBRA forecast report states. “This expectation is partly due to existing NOO securitization pipelines built through the end of 2021 and early 2022. 

“… In addition to traditional RMBS 2.0 issuance, reverse mortgage, mortgage servicing rights-backed issuance, home equity line of credit-backed deals, PLS CRT, Ginnie Mae early-buyout (EBO), and other esoteric RMBS transactions are also poised to increase in the remainder of 2022 and 2023 as interest rates rise further.”

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