Real estate investment trust Redwood was founded in the early 1990s as the need for more private investors in the mortgage market grew. Like its competitors, the company wanted to replicate what the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have done for decades by acquiring mortgages and providing liquidity to originators.
“We were originally built to serve banks and others with the thought that there was no private sector [to invest in mortgage assets],” Christopher Abate, Redwood CEO since 2018, said in an interview. “We would partner with banks to buy their loans and securitize them so the banks could recycle their capital.”
After 30 years, Redwood still seeks to fill voids in the mortgage market.
For example, bank regulators in July released a plan to increase capital requirements for residential mortgages, the Basel III Endgame rules. Redwood executives are positioning the company to acquire mortgage loans in the market, mainly jumbos, with the expectation that banks will have a reduced appetite.
Abate doesn’t think “banks are going to necessarily exit the mortgage market,” but they will “be heavily disincentivized from growing mortgage portfolios.” Ultimately, “the real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us.”
Another opportunity is in the home equity space. Redwood launched in September its in-house home equity investment (HEI) origination platform called Aspire. Through Aspire, Redwood plans to directly originate HEIs by leveraging the company’s nationwide correspondent network of loan officers and establishing direct-to-consumer origination channels, the company said.
“The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI,” Abate said. “The way the investor gets paid is that you share in the upside of the home.”
Abate explained the impacts of the Basel III Endgame rules on the market, the rationale behind the home equity investment product, and more about Redwood strategies in an interview with HousingWire from a company’s office in New York last week.
This interview has been condensed and edited for clarity.
Flávia Nunes: How has Redwood strategically positioned itself in the residential mortgage space amid all of these potential regulatory changes?
Christopher Abate: Redwood is almost a 30-year-old company. The company was originally built to serve banks and others with the thought that there was no private sector [to invest in mortgage assets], only Fannie Mae and Freddie Mac. We would partner with banks to buy their loans and securitize them so the banks could recycle their capital. We don’t originate residential mortgages. We don’t service them. We’re very similar to the GSEs. We modeled the business to serve that role in the private sector. The mortgage market has changed over the decades. We’ve seen a few cycles. We’ve got the Great Financial Crisis, the Covid-19 pandemic, and now we’ve had a lot of interest rate volatility. Along the way, there have been many regulatory changes that have impacted the market; the CFPB has been created, and there’s the Dodd-Frank Act. Then there are the Basel rules, the regulatory capital rules for banks. And that’s what’s really in play today.
We’ve positioned the company, from a strategic perspective, with the thought that banks will be heavily disincentivized from growing mortgage portfolios as an earning asset class. The banks are not going to necessarily exit the mortgage market because the mortgage asset is the biggest that a client takes out, and you want to be there for all the cross-selling in all the other consumer products. Banks will always serve their best clients. But viewing the mortgage portfolio as an investment class, that’s where the posture will shift because the capital required to hold against it [residential mortgages] is going to go up. And just based on the rapidly rising rate of deposits, just given where interest rates are at, the net interest income that they earn is getting squeezed. Banks move slowly. This will be an evolutionary shift, not an overnight shift.
Nunes: As you noted, bank regulators released a plan to increase capital requirements for mortgages through the Basel III Endgame rules. Can we expect changes to what was proposed?
Abate: Yes, it will change. In particular, some of the sliding scale capital charges are based on things like LTV [loan-to-value]; there’s a fair likelihood that that changes because of the way it disproportionately impacts first-time homebuyers and underserved communities. But the rule is not going away. Bank regulators are paid to keep things safe. And the idea that regulators are going to allow banks to continue to do what a First Republic or Silicon Valley Bank did, I don’t see that in the cards.
We saw significant changes after the Great Financial Crisis, which was more of a credit crisis. We saw banks getting out of risky credit mortgages like option ARMs and some subprime lending happening back then. There will be changes. Banks will not wait for the rule to be finalized to start implementing it. There will be some evolution to the rule itself. But the thrust of the rule is that it’s going to be more expensive for banks to hold mortgages.
Nunes: If banks won’t wait for the Basel III Endgame to be finalized, how are they anticipating the rules?
Abate: A year ago, banks were very happy to hold mortgages, deposit rates were sticky, and the cost of deposits was still very low. Now, all of them are looking for a capital partner, at least an option to have liquidity. The tone has changed dramatically amongst bank executives. Some banks move more slowly than others.
I like to remind people that independent mortgage banks live and die by liquidity. They care about the basis point. Banks don’t operate that close to the ground. Things take longer to develop, but the relationships are also typically stickier. Once you forge a strong partnership with a bank partner, the likelihood of them shopping for that liquidity is much less than an independent mortgage bank that is trying to optimize every dollar.
Nunes: In your recent 2Q 2023 earnings report, you mentioned acquiring three bulk pools of loans from depositories, primarily with seasoned underlying loans at attractive discounts. How is the secondary market now for these trades in terms of volumes and prices?
Abate: I certainly expect RMBS volumes to go up significantly over time. It’s not something that happens overnight. We’ve been active. We just completed a deal in August. I would expect us to continue using securitization.
Right now, we’re in this hybrid phase where loans that are getting securitized are partially seasoned loans, and some of the loans have gone down in value–the lower coupon mortgages. The banks have been slowly selling some of those, and Wall Street dealers have quite a bit in inventory. We’re still seeing a lot of that aged collateral coming out through securitization. Issuers like Redwood have been combining current coupon mortgages. We saw this last year in the private sector securitization market, where we had all of this aged inventory. It was hard to get investors to focus on the collateral because there was so much sitting in inventory that they could price it wherever they wanted to. The pricing now is probably the best it’s been in a year, maybe two years. So, the market is finally starting to cross back into more current coupon on-the-run production, which is what we’re focused on.
We’ve completed well over 100 residential securitizations, close to 140 If we factor CoreVest. There’s been years we’ve done 12-15 securitizations. There’s been years where we’ve done none or one. So, we very much want to get volume going again to the extent we could be in the market with certainly a deal a quarter, but if not two or three, that would feel the base to me.
Nunes: In terms of products, what the current landscape brings in terms of opportunities?
Abate: Right now, the biggest opportunity, ironically, is in the regular prime jumbo market because that was the product banks were most focused on. And they weren’t wrong to focus on it from a credit standpoint because when the banks got through the Great Financial Crisis, all the big regulatory shifts were to get them out of taking risky mortgages on the balance sheet. Then, they started taking less risky mortgages, which are jumbos. The real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us.
Nunes: Redwood also launched a home equity platform. What is the strategy here?
Abate: When you look at prime rates in the high single digits and add a credit spread to that, even for the most well-qualified borrowers, you are looking at a 10% to 12% interest rate on a second mortgage. For a well-qualified borrower, 750 FICO or above, and a low-LTV first mortgage, you might be comfortable paying 10% to 12%. But that’s the best-case scenario. For everybody else, unlocking that equity is even more expensive. We’re seeing that for the traditional second mortgage products, there’s way more investor demand than consumer demand.
We’ve rolled out the traditional products and a newer product called home equity investment [HEI] options. The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI. The way the investor gets paid is that you share in the upside of the home, so the home price appreciation. There are a lot of use cases for HEI over traditional products. If you think about somebody with a lot of student debt or lower FICO, they’re going to qualify for a very expensive second mortgage. So, this is a good option. It doesn’t add to their monthly payment obligation. You can do what you want with the cash, just like with a home equity line of credit, but not having the payment. It’s a bridge until the second mortgage is cheaper.
Nunes: To invest in this product, investors must believe home prices will keep rising, right?
Abate: There are a couple of things investors care about. You have to believe in a HPA [home price appreciation] story. But one way we mitigate that is we strike the price of the home at a discount to its current appraised value. So that, even if the home is sold next week, the investor will make money. If you believe that interest rates are nearing the top, as far as the Fed’s rate hike cycle, HPA should start to realign. If rates are going down, HPAs are going up. Investors are starting to get comfortable with this huge move in rates, hopefully, this fall is gonna pause.
Then, ultimately, the investors want to understand if we give you $100,000 with this HEI, when do they get their money back? Because it’s a 30-year product. And that’s where we’ve designed the product, which is unique to Redwood, that creates strong incentives for the homeowner to refi.
Nunes: How did you get the property at a discount?
Abate: The product is for people in their homes that are not moving out. There isn’t an actual transaction on the property. It’s somebody that wants to stay in their home. And if it’s a $1 million home, and we offer you $150,000 HEI, we might strike that HEI at $900,000. Let’s say it’s a $1 million home, and for purposes of coming up with the investor return, we’re going to call it a home at $850,000. Even if they sold the home at a $50,000 loss, the investor would still generate a return, and that’s what gets investor capital into the asset class. But what the homeowner gets is all of the proceeds, the cash and no monthly payments
The investors are institutional investors, well-known institutions, firms, pension funds, and life companies; they’re all just to varying degrees focused on HEI now. And the big reason is that nobody’s been able to tap this massive home equity opportunity. We are going to give it a try.
Nunes: Residential mortgages are just one facet of the business. What are your plans for commercial real estate, which has had a challenging year?
Abate: What we do here in New York is our business-purpose lending platform. We realized a number of years ago that investors are becoming a much bigger participant in the real estate markets. Serving them and providing bridge loans to investors who want to flip homes or provide turned-out financing for investors who want to rent homes, that’s an entire other residential business that we run under the flag of CoreVest. In residential, we’ve more or less stuck to our knitting of non-agency. We’ve had opportunities to enter the agency space in the past and participated in certain instances, but mostly, what we do is non-agency.
Nunes: You mentioned banks, but what are the business opportunities with IMBs?
Abate: We’ve had a great long-term relationship with the IMBs. The IMBs have a big opportunity to pick up some [market] share. Since the Great Financial Crisis, most of our business has been with the IMBs. We have a network of between 150 to 200 [partners], predominantly non-banks that we will buy mortgages from. We expect that to rebalance in the next few years. But the IMBs are also a big opportunity to take clients from the banks.
Nunes: And what are the plans for servicing mortgage rights?
Abate: Servicing will continue to move out of the banks. That’s another big opportunity that we’ll focus on. We don’t plan to operate as a servicer, but we might own servicing rights. What we’ve done typically is when we own servicing rights, we will subservice. We want to hire somebody with a call center. And we’ll pay them a monthly fee. But when you balance out the revenue potential with the servicing asset, with the cost of service, there are still good opportunities. There’s a lot of competition for servicing. For some mortgage REITs, that’s their primary asset class, just not for us.
Nunes: Can you shed some light on your partnership with Oaktree and Riverbend?
Abate: Both of those are related to the business-purpose lender space. Oaktree is a great example of us expanding our capital partnerships into the private credit sector. Redwood is a publicly traded company, and historically, when we needed to raise money, we would do a common stock offering or a public market deal. When rates started going up, things got pretty ugly for the mortgage REIT space and the public markets. We and all other mortgage REITs started trading at discounts. Raising money in that environment hasn’t been overly attractive. So, building partnerships with private credit firms like Oaktree to focus on specific asset classes is a big part of what we want to do. One aspect that’s attractive to us is we can earn asset management fees.
The Oaktree model is something that we want to replicate on the residential side as the jumbo opportunity picks up. We’ve been in discussions with other private credit investors and institutional investors who see the same opportunity as in jumbo and non-QM.
Nunes: With a reported cash and cash equivalents of $357 million as of June 2023, can we anticipate any M&A activities, especially considering the challenges faced by many lenders in the industry?
Abate: M&A activity has picked up in the space and based on our track record, we are a logical call. Part of our strategy is: to be active in M&A, you have to be active. It’s not efficient to call on at eight, seven different firms. You start with the ones that have shown interest in actually transacting. We have seen some opportunities, and nothing I can share in this interview, but it’s safe to say we’ve been active in M&As and we’ll continue to focus on that as part of our growth strategy.
We haven’t been open to it [acquiring a lender]. For many years, we’ve wanted to keep the business sort of regulator-light. The best way to do that is not to directly face consumers with products. We’re comfortable originating to investors, that’s what CoreWest does. But investors are sophisticated business-run ventures and not homeowners who may or may not be sophisticated in the financial markets. We have tended to not originate, but I think where we’re at as a company is from a strategic standpoint, we’d be much more open to it through M&A.
Nunes: What do you expect for the macro landscape in the coming year?
Abate: There’s such a vast shortage of supply of homes in many parts of the country, which is supporting home prices. The Fed consciously inflated home prices, particularly during the COVID years. These high asset values prevented normal credit losses you might see through a cycle. The combination of QE-fueled asset prices with an economy that hasn’t dropped off too much has created a strong housing market.
But credit in residential housing should perform immensely better than many facets of the commercial real estate market. There’s so much vacancy in these central business districts. These buildings are valued based on cash flows– not like a residential home, which is an appraisal. If it’s 50% full, it’s worth half as much. From a credit standpoint, certain facets of the commercial real estate sector will have a rough road ahead.
I’m probably supposed to say this, but I feel better about my sector. The technical supporting housing will continue to be strong. The big challenge with residential today is just transaction activity. If you own a home with a 3% mortgage, you don’t want to sell it. If your home suits your needs, the prospect of doubling your monthly payment to move is very unappealing. The real challenge in residential has been a lot of capacity to make loans, but there’s not much demand. If rates do stabilize, that will change quickly. When the market thought in January that rates were stabilizing, we saw a pickup in loan activity, and then they started going up again; we’ll see what happens this fall.
Nunes: Do you see a crisis on the commercial side of the market? If so, how could it impact the residential side?
Abate: It’s hard to say. The only real obvious driver for a crisis is what could be a permanent impairment of occupancy in these commercial office buildings. The way that can affect our markets is there’s a trickle-down effect. If the buildings aren’t full, the restaurants aren’t full, the delis aren’t full, the subways are not full, and the hotels aren’t full because people aren’t traveling to see people in the office. That could have an effect on the economy in general, which would impact housing indirectly. As far as the economy goes, the airports seem more full than ever, and hotels seem to be doing fine. Overall, [the problem] is probably mostly office. But if it keeps getting worse, it certainly could have downstream effects.
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Redwood Trust CEO Christopher Abate on the REIT’s appetite for jumbos, home equity
Real estate investment trust Redwood was founded in the early 1990s as the need for more private investors in the mortgage market grew. Like its competitors, the company wanted to replicate what the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have done for decades by acquiring mortgages and providing liquidity to originators.
“We were originally built to serve banks and others with the thought that there was no private sector [to invest in mortgage assets],” Christopher Abate, Redwood CEO since 2018, said in an interview. “We would partner with banks to buy their loans and securitize them so the banks could recycle their capital.”
After 30 years, Redwood still seeks to fill voids in the mortgage market.
For example, bank regulators in July released a plan to increase capital requirements for residential mortgages, the Basel III Endgame rules. Redwood executives are positioning the company to acquire mortgage loans in the market, mainly jumbos, with the expectation that banks will have a reduced appetite.
Abate doesn’t think “banks are going to necessarily exit the mortgage market,” but they will “be heavily disincentivized from growing mortgage portfolios.” Ultimately, “the real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us.”
Another opportunity is in the home equity space. Redwood launched in September its in-house home equity investment (HEI) origination platform called Aspire. Through Aspire, Redwood plans to directly originate HEIs by leveraging the company’s nationwide correspondent network of loan officers and establishing direct-to-consumer origination channels, the company said.
“The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI,” Abate said. “The way the investor gets paid is that you share in the upside of the home.”
Abate explained the impacts of the Basel III Endgame rules on the market, the rationale behind the home equity investment product, and more about Redwood strategies in an interview with HousingWire from a company’s office in New York last week.
This interview has been condensed and edited for clarity.
Flávia Nunes: How has Redwood strategically positioned itself in the residential mortgage space amid all of these potential regulatory changes?
Christopher Abate: Redwood is almost a 30-year-old company. The company was originally built to serve banks and others with the thought that there was no private sector [to invest in mortgage assets], only Fannie Mae and Freddie Mac. We would partner with banks to buy their loans and securitize them so the banks could recycle their capital. We don’t originate residential mortgages. We don’t service them. We’re very similar to the GSEs. We modeled the business to serve that role in the private sector. The mortgage market has changed over the decades. We’ve seen a few cycles. We’ve got the Great Financial Crisis, the Covid-19 pandemic, and now we’ve had a lot of interest rate volatility. Along the way, there have been many regulatory changes that have impacted the market; the CFPB has been created, and there’s the Dodd-Frank Act. Then there are the Basel rules, the regulatory capital rules for banks. And that’s what’s really in play today.
We’ve positioned the company, from a strategic perspective, with the thought that banks will be heavily disincentivized from growing mortgage portfolios as an earning asset class. The banks are not going to necessarily exit the mortgage market because the mortgage asset is the biggest that a client takes out, and you want to be there for all the cross-selling in all the other consumer products. Banks will always serve their best clients. But viewing the mortgage portfolio as an investment class, that’s where the posture will shift because the capital required to hold against it [residential mortgages] is going to go up. And just based on the rapidly rising rate of deposits, just given where interest rates are at, the net interest income that they earn is getting squeezed. Banks move slowly. This will be an evolutionary shift, not an overnight shift.
Nunes: As you noted, bank regulators released a plan to increase capital requirements for mortgages through the Basel III Endgame rules. Can we expect changes to what was proposed?
Abate: Yes, it will change. In particular, some of the sliding scale capital charges are based on things like LTV [loan-to-value]; there’s a fair likelihood that that changes because of the way it disproportionately impacts first-time homebuyers and underserved communities. But the rule is not going away. Bank regulators are paid to keep things safe. And the idea that regulators are going to allow banks to continue to do what a First Republic or Silicon Valley Bank did, I don’t see that in the cards.
We saw significant changes after the Great Financial Crisis, which was more of a credit crisis. We saw banks getting out of risky credit mortgages like option ARMs and some subprime lending happening back then. There will be changes. Banks will not wait for the rule to be finalized to start implementing it. There will be some evolution to the rule itself. But the thrust of the rule is that it’s going to be more expensive for banks to hold mortgages.
Nunes: If banks won’t wait for the Basel III Endgame to be finalized, how are they anticipating the rules?
Abate: A year ago, banks were very happy to hold mortgages, deposit rates were sticky, and the cost of deposits was still very low. Now, all of them are looking for a capital partner, at least an option to have liquidity. The tone has changed dramatically amongst bank executives. Some banks move more slowly than others.
I like to remind people that independent mortgage banks live and die by liquidity. They care about the basis point. Banks don’t operate that close to the ground. Things take longer to develop, but the relationships are also typically stickier. Once you forge a strong partnership with a bank partner, the likelihood of them shopping for that liquidity is much less than an independent mortgage bank that is trying to optimize every dollar.
Nunes: In your recent 2Q 2023 earnings report, you mentioned acquiring three bulk pools of loans from depositories, primarily with seasoned underlying loans at attractive discounts. How is the secondary market now for these trades in terms of volumes and prices?
Abate: I certainly expect RMBS volumes to go up significantly over time. It’s not something that happens overnight. We’ve been active. We just completed a deal in August. I would expect us to continue using securitization.
Right now, we’re in this hybrid phase where loans that are getting securitized are partially seasoned loans, and some of the loans have gone down in value–the lower coupon mortgages. The banks have been slowly selling some of those, and Wall Street dealers have quite a bit in inventory. We’re still seeing a lot of that aged collateral coming out through securitization. Issuers like Redwood have been combining current coupon mortgages. We saw this last year in the private sector securitization market, where we had all of this aged inventory. It was hard to get investors to focus on the collateral because there was so much sitting in inventory that they could price it wherever they wanted to. The pricing now is probably the best it’s been in a year, maybe two years. So, the market is finally starting to cross back into more current coupon on-the-run production, which is what we’re focused on.
We’ve completed well over 100 residential securitizations, close to 140 If we factor CoreVest. There’s been years we’ve done 12-15 securitizations. There’s been years where we’ve done none or one. So, we very much want to get volume going again to the extent we could be in the market with certainly a deal a quarter, but if not two or three, that would feel the base to me.
Nunes: In terms of products, what the current landscape brings in terms of opportunities?
Abate: Right now, the biggest opportunity, ironically, is in the regular prime jumbo market because that was the product banks were most focused on. And they weren’t wrong to focus on it from a credit standpoint because when the banks got through the Great Financial Crisis, all the big regulatory shifts were to get them out of taking risky mortgages on the balance sheet. Then, they started taking less risky mortgages, which are jumbos. The real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us.
Nunes: Redwood also launched a home equity platform. What is the strategy here?
Abate: When you look at prime rates in the high single digits and add a credit spread to that, even for the most well-qualified borrowers, you are looking at a 10% to 12% interest rate on a second mortgage. For a well-qualified borrower, 750 FICO or above, and a low-LTV first mortgage, you might be comfortable paying 10% to 12%. But that’s the best-case scenario. For everybody else, unlocking that equity is even more expensive. We’re seeing that for the traditional second mortgage products, there’s way more investor demand than consumer demand.
We’ve rolled out the traditional products and a newer product called home equity investment [HEI] options. The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI. The way the investor gets paid is that you share in the upside of the home, so the home price appreciation. There are a lot of use cases for HEI over traditional products. If you think about somebody with a lot of student debt or lower FICO, they’re going to qualify for a very expensive second mortgage. So, this is a good option. It doesn’t add to their monthly payment obligation. You can do what you want with the cash, just like with a home equity line of credit, but not having the payment. It’s a bridge until the second mortgage is cheaper.
Nunes: To invest in this product, investors must believe home prices will keep rising, right?
Abate: There are a couple of things investors care about. You have to believe in a HPA [home price appreciation] story. But one way we mitigate that is we strike the price of the home at a discount to its current appraised value. So that, even if the home is sold next week, the investor will make money. If you believe that interest rates are nearing the top, as far as the Fed’s rate hike cycle, HPA should start to realign. If rates are going down, HPAs are going up. Investors are starting to get comfortable with this huge move in rates, hopefully, this fall is gonna pause.
Then, ultimately, the investors want to understand if we give you $100,000 with this HEI, when do they get their money back? Because it’s a 30-year product. And that’s where we’ve designed the product, which is unique to Redwood, that creates strong incentives for the homeowner to refi.
Nunes: How did you get the property at a discount?
Abate: The product is for people in their homes that are not moving out. There isn’t an actual transaction on the property. It’s somebody that wants to stay in their home. And if it’s a $1 million home, and we offer you $150,000 HEI, we might strike that HEI at $900,000. Let’s say it’s a $1 million home, and for purposes of coming up with the investor return, we’re going to call it a home at $850,000. Even if they sold the home at a $50,000 loss, the investor would still generate a return, and that’s what gets investor capital into the asset class. But what the homeowner gets is all of the proceeds, the cash and no monthly payments
The investors are institutional investors, well-known institutions, firms, pension funds, and life companies; they’re all just to varying degrees focused on HEI now. And the big reason is that nobody’s been able to tap this massive home equity opportunity. We are going to give it a try.
Nunes: Residential mortgages are just one facet of the business. What are your plans for commercial real estate, which has had a challenging year?
Abate: What we do here in New York is our business-purpose lending platform. We realized a number of years ago that investors are becoming a much bigger participant in the real estate markets. Serving them and providing bridge loans to investors who want to flip homes or provide turned-out financing for investors who want to rent homes, that’s an entire other residential business that we run under the flag of CoreVest. In residential, we’ve more or less stuck to our knitting of non-agency. We’ve had opportunities to enter the agency space in the past and participated in certain instances, but mostly, what we do is non-agency.
Nunes: You mentioned banks, but what are the business opportunities with IMBs?
Abate: We’ve had a great long-term relationship with the IMBs. The IMBs have a big opportunity to pick up some [market] share. Since the Great Financial Crisis, most of our business has been with the IMBs. We have a network of between 150 to 200 [partners], predominantly non-banks that we will buy mortgages from. We expect that to rebalance in the next few years. But the IMBs are also a big opportunity to take clients from the banks.
Nunes: And what are the plans for servicing mortgage rights?
Abate: Servicing will continue to move out of the banks. That’s another big opportunity that we’ll focus on. We don’t plan to operate as a servicer, but we might own servicing rights. What we’ve done typically is when we own servicing rights, we will subservice. We want to hire somebody with a call center. And we’ll pay them a monthly fee. But when you balance out the revenue potential with the servicing asset, with the cost of service, there are still good opportunities. There’s a lot of competition for servicing. For some mortgage REITs, that’s their primary asset class, just not for us.
Nunes: Can you shed some light on your partnership with Oaktree and Riverbend?
Abate: Both of those are related to the business-purpose lender space. Oaktree is a great example of us expanding our capital partnerships into the private credit sector. Redwood is a publicly traded company, and historically, when we needed to raise money, we would do a common stock offering or a public market deal. When rates started going up, things got pretty ugly for the mortgage REIT space and the public markets. We and all other mortgage REITs started trading at discounts. Raising money in that environment hasn’t been overly attractive. So, building partnerships with private credit firms like Oaktree to focus on specific asset classes is a big part of what we want to do. One aspect that’s attractive to us is we can earn asset management fees.
The Oaktree model is something that we want to replicate on the residential side as the jumbo opportunity picks up. We’ve been in discussions with other private credit investors and institutional investors who see the same opportunity as in jumbo and non-QM.
Nunes: With a reported cash and cash equivalents of $357 million as of June 2023, can we anticipate any M&A activities, especially considering the challenges faced by many lenders in the industry?
Abate: M&A activity has picked up in the space and based on our track record, we are a logical call. Part of our strategy is: to be active in M&A, you have to be active. It’s not efficient to call on at eight, seven different firms. You start with the ones that have shown interest in actually transacting. We have seen some opportunities, and nothing I can share in this interview, but it’s safe to say we’ve been active in M&As and we’ll continue to focus on that as part of our growth strategy.
We haven’t been open to it [acquiring a lender]. For many years, we’ve wanted to keep the business sort of regulator-light. The best way to do that is not to directly face consumers with products. We’re comfortable originating to investors, that’s what CoreWest does. But investors are sophisticated business-run ventures and not homeowners who may or may not be sophisticated in the financial markets. We have tended to not originate, but I think where we’re at as a company is from a strategic standpoint, we’d be much more open to it through M&A.
Nunes: What do you expect for the macro landscape in the coming year?
Abate: There’s such a vast shortage of supply of homes in many parts of the country, which is supporting home prices. The Fed consciously inflated home prices, particularly during the COVID years. These high asset values prevented normal credit losses you might see through a cycle. The combination of QE-fueled asset prices with an economy that hasn’t dropped off too much has created a strong housing market.
But credit in residential housing should perform immensely better than many facets of the commercial real estate market. There’s so much vacancy in these central business districts. These buildings are valued based on cash flows– not like a residential home, which is an appraisal. If it’s 50% full, it’s worth half as much. From a credit standpoint, certain facets of the commercial real estate sector will have a rough road ahead.
I’m probably supposed to say this, but I feel better about my sector. The technical supporting housing will continue to be strong. The big challenge with residential today is just transaction activity. If you own a home with a 3% mortgage, you don’t want to sell it. If your home suits your needs, the prospect of doubling your monthly payment to move is very unappealing. The real challenge in residential has been a lot of capacity to make loans, but there’s not much demand. If rates do stabilize, that will change quickly. When the market thought in January that rates were stabilizing, we saw a pickup in loan activity, and then they started going up again; we’ll see what happens this fall.
Nunes: Do you see a crisis on the commercial side of the market? If so, how could it impact the residential side?
Abate: It’s hard to say. The only real obvious driver for a crisis is what could be a permanent impairment of occupancy in these commercial office buildings. The way that can affect our markets is there’s a trickle-down effect. If the buildings aren’t full, the restaurants aren’t full, the delis aren’t full, the subways are not full, and the hotels aren’t full because people aren’t traveling to see people in the office. That could have an effect on the economy in general, which would impact housing indirectly. As far as the economy goes, the airports seem more full than ever, and hotels seem to be doing fine. Overall, [the problem] is probably mostly office. But if it keeps getting worse, it certainly could have downstream effects.
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Buyers bemoan lack of housing inventory: NAR
Over one-third (34%) of prospective buyers have yet to purchase a home because there are not enough homes for sale in their budget, according to a new survey from the National Association of Realtors.
The other top reasons include buyers are waiting for mortgage rates to drop (18%) and buyers are waiting for prices to drop (9%), according to the survey, which was published on Thursday.
These are the same top three reasons buyers cited for not buying in the 2023 REALTORS Experiences and Barriers of Prospective Homebuyers Across Races/Ethnicities conducted for NAR by Morning Consult, and also published on Thursday. However, among buyers, the number one reason was waiting for prices to drop, followed by waiting for mortgage rates to drop/rates impacting affordability, and not enough homes in their budget available for purchase.
The Realtor survey was sent out in late July to 55,751 randomly-selected residential Realtors. NAR received 1,919 responses by the mid-August close date of the survey. The homebuyer survey was conducted by Morning Consult in June 2023. Of the 2,201 respondents, 587 were white, 560 were Hispanic/Latino(a), 533 identified as African-American/Black and 521 identified at Asian American or Pacific Islander (AAPI).
In the realtor survey, Millennials were the largest home buyer generation represented. Forty-two percent of agents reported that they were working with Millennials, followed by Gen X at 22%, Baby Boomers at 12%, Gen Z at 8% and Civics (those aged 78 and older) at 1%.
White homebuyers were the largest racial group represented at 58%, followed by Hispanic/Latino(a) at 11%, African-American/Black at 10% and Asian-American at 3%.
Over half of the Realtors (51%) reported they their buyers were first-time buyers. In the buyer survey, 71% of white respondents reported they currently own a home, while 67% of African-American/Black responses said they do not currently own a home. In addition, 89% of Hispanic/Latino(a) buyers, as well as African-American/Black buyers said they will be first-time buyers, compared to just 65% of white respondents.
When broken up by race or ethnicity, white buyers are more likely than other races to report not yet having a purchased a home mainly due to lack of availability in their budget, while Hispanic/Latino(a) buyers are more likely to be hampered mainly by the inability to save a sufficient down payment. AAPI buyers are most likely to be waiting for prices to drop and African-American/Black buyers are most likely to report trouble getting approved for a loan due to credit issues as the main reason they have not bought yet.
Generationally, Gen X (12%) and Baby Boomer (11%) buyers are more likely than other generations to be waiting for prices to drop (only 9% of Gen Z buyers and 6% of Millennial buyers are waiting for prices to drop). However, Baby Boomers are the least likely to be concerned about competing with all-cash buyers, with just 24% listing this as a concern compared to 34%-42% for the other generations.
Exploring finance options
According to the Realtor survey, 77% of their prospective buyers who have applied for a loan, have been approved, while 6% have applied but been denied. Of those who have been denied, 12% report it is due to low credit score and 9% report it was due to insufficient down payments.
Black/African-American buyers who have not been approved for a loan are more likely than other racial or ethnic groups to have been denied due to low credit scores, at 32% versus 17% or less for the other racial and ethnic groups.
Realtors reported that 68% of their buyers were considering a conventional loan, 38% were considering an FHA loan, 8% were considering a VA loan and 7% said their buyers did not need home loan financing. FHA loans more likely to be considered by African-American/Black and Hispanic/Latino(a) buyers than white and AAPI buyers, and white and AAPI buyers were most likely to not need financing, at 8% and 9% respectively, compared to 4% or less for other racial and ethnic groups. Broken down on generational lines, 25% of Baby Boomers report not needing financing, compared with just 8% or less for younger generations.
First time buyers (54%) are more than twice as likely as repeat buyers (22%) to consider an FHA loan. Divided among racial and ethnic groups, African-American/Black buyers (62%) and Hispanic/Latino(a) buyers (57%) are more likely to consider FHA loans than other groups (34% or less). Generationally, younger buyers are more likely to consider FHA loans with 57% of Gen Z buyers reporting they have considered an FHA loan, compared to 11% of Baby Boomers.
Among buyers who were eligible for FHA or VA loans, 20% of realtors said their buyer clients have not considered VA or FHA because they do not want to pay private mortgage insurance (PMI) (21%) or they are worried their offers will be less competitive with these options (19%).
According to the survey, 53% of realtors say that at least one issues is holding their latest buyer back from saving a competitive down payment, with 23% reporting current rent or mortgage payments holding buyers back, 17% reporting credit card balances or payments, 12% reporting student loan debt and 11% citing car loans.
First-time buyers are significantly more likely to struggle with these challenges than repeat buyers, with twice as many first-time buyers reporting that they are struggling with credit card payments (22% vs. 11%), and student loan debt (17% vs 7%). When broken down via race and ethnicity, AAPI (52%) and white buyers (52%) were more likely than African-American/Black buyers (31%) and Hispanic/Latino(a) buyers (36%) to report that nothing was holding them back from saving for a down payment. Along generational lines, younger buyers are more likely to be held back by student loan debt (20% of Gen Z, 15% of Millennials, and 8% or less for older generations), car loans (16% of Gen Z vs. 3% of Baby Boomers) and childcare expenses (12% of Gen Z, compared to 2% of Baby Boomers). Overall, the older the buyer the more likely that none of the above issues are holding them back from saving for a down payment, with 70% of Baby Boomers reporting that none of these issues are holding them back compared to 40% of Gen Z buyers.
Despite their challenges, only 23% of Realtors reported that their buyers dealing with these challenges have applied for down payment assistance programs, while 12% of consumers reported that they were unaware of these programs.
The number one reason, at 30%, Realtors cited as to why their buyers who were aware of down payment assistance programs did not apply was that their income was too high. This was followed by 19% who said their buyers didn’t know enough about the programs and 17% who were worried about the competitiveness of their offers in a multiple bid situation.
First time buyers were three times more likely to have applied for down payment assistance programs than repeat buyers at 30% compared to 10%. Similarly, the younger the buyer, the more likely they are to have applied for a program, with 36% of Gen Z buyers reporting they had applied versus 11% of Baby Boomers).
Among racial groups, AAPI buyers were the least likely to have applied to a down payment assistance program at 13% versus 22%-31% for other groups. In addition, they were the most likely to say they were unaware of the programs at 26% compared to 8%-13% for other racial groups.
Location, Location, Location
When determining the location of their future home, 71% of realtors reported that their buyers were determining the location of their next home base on the location of their job or the job of someone in their household. Of the remaining roughly 30%, 16% said their buyer work fully remote and 14% reported that they buyers are retired. They are typically looking for 30 minutes or less of driving time (consumers reported 25 minutes or less).
Baby Boomer were the most likely to be retired at 61% compared to 2%-9% of other generations, while Gen X buyers were the most likely to work fully remotely at 24% versus 9% to 14% for other generations. Millennials (84%) and Gen Z buyers (86%) are the most likely to determine the future location of their home based on the location of their job (28% to 67% for older generations), and similarly, first-time buyers (83%) are more likely than repeat buyers (57%) to determine location based on the location of their job.
Compared to other racial or ethnic group, Hispanic/Latino(a) buyers were most likely to determine the location of their future home based on the location of their jobs, at 82%, compared to 69% to 74% for other groups. White (16%) and African-American/Black buyers (12%) were the most likely to be retired or not workings (other groups ranged from 7% to 8%).
Nearly half (49%) of realtors said their buyers have no preference between existing and new construction, however white buyers were significantly more likely than other racial groups to prefer existing homes at 46% compared to 27% to 35% for other groups.
The vast majority of realtors (89%) said their buyer clients were buying a primary residence, while 6% reported they were buying an investment property and 5% said they were buying a vacation or rental home.
Discrimination remains under reported
Of the realtors surveyed, 1% of realtors reported that their buyer experienced discrimination during buying process, while 13% were unsure. Among the 14 realtors who reported that their buyer experienced discrimination, the most common form of discrimination came in the form of loan products offered by the lender (43%) or that the buyer did not receive a call back from the lender (29%). Realtors who reported that their clients experience discrimination, said the most common reason was race (57%), followed by age (29%), and familial status (21%).
Other common sources of discrimination reported were color, religion and national origin (all at 14% each), as well as sex, disability and sexual orientation (all at 7% each).
Despite experiencing discrimination only 7% of the agents said their clients reported the discrimination to a government agency or legal aid organization.
In the consumer study, roughly one in six prospective buyers reported experiencing discrimination during their home buying process, with more than half of Black, Asian, and Hispanic buyers reporting that this was due to their race or ethnicity. White buyers are equally likely to report discrimination but are more likely than others to say this was based on factors other than race or ethnicity. NAR reported that based on both studies is believes that most of this discrimination goes unreported.
Consumers who experience discrimination reported that this most often manifested in their being steered towards or away from specific neighborhoods and in stricter requirements. Among successful buyers 50% of Hispanic/Latino(a) buyers experienced steering, compared to 29% of white buyers and 12% of African American/Black buyers, while 17% of AAPI buyers, 24% of White buyers and 12% of African American/Black buyers reported stricter requirements.
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New York startup Roam launches assumable mortgage platform
New York-based mortgage platform Roam has secured a $1.25 million seed round, allowing the company to officially launch its services on Wednesday. Roam focuses on a distinctive niche within the mortgage industry: assumable mortgages.
Tech executive and investor Keith Rabois at venture capital firm Founders Fund led the capital injection. It also included Opendoor co-founder Eric Wu, Culdesac CEO Ryan Johnson and #ANGELS founding partner Jana Messerschmidt.
Following the investment, Wu and Rabius will join Roam’s board. Tim Mayopoulos, former CEO of Fannie Mae, who was named CEO of Silicon Valley Bank N.A. in March, is also listed as a senior advisor.
Assumable mortgages, the company’s primary bet, were relatively commonplace a few decades ago. It allows qualified buyers with a government loan to purchase a home by assuming responsibility for the sellers’ mortgage terms, including the current balance and interest rate.
The fees are typically lower than with new loans, and no appraisal is needed. However, the buyer must submit to the application and underwriting process to qualify, just as they would in any new mortgage.
The product has appeal given that most homeowners with low rates mortgages aren’t motivated to sell their homes in the current environment. Moreover, many buyers are waiting on the sidelines, paralyzed by low housing inventory and high rates.
“This wave of immobility has created a once-in-a-lifetime opportunity for Roam to bring a much-needed solution to consumers and the housing market,” Mayopoulos said in a statement.
Roam said it helps homebuyers secure home loans “as low as 2%” through the mortgage assumption process. The product is available in five states: Georgia, Arizona, Colorado, Texas, and Florida.
“Assumable mortgages are one of the most undervalued assets in America,” Raunaq Singh, founder and CEO of Roam, said in a statement.
Specifically, Roam said it helps homeowners with an assumable mortgage by providing personalized marketing material to attract potential buyers and better offers. The platform advertises sellers listing to qualified buyers.
On average, Roam buyers save up to 50% on monthly mortgage payments compared to buying a home with a traditional mortgage at today’s rates, the company claims. All government-backed loans are eligible for assumption by law, comprising about one-third of mortgages in the U.S.
In a paper published by the Urban Institute in October, Ted Tozer, the former head of Ginnie Mae, argued that government changes to assumable loans could benefit the market. So why is this program so rare? In short, because of strict rules and product limitations.
Fannie Mae and Freddie Mac loans – nearly two-thirds of the mortgage market – are not eligible to be assumed.
And there are some significant “infrastructure” updates needed, experts say. Servicers can only charge up to $900 to process, underwrite and close a transaction that includes a loan assumption. That isn’t enough to compensate for their costs, let alone make a reasonable profit, Tozer argued.
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Amazon announces housing affordability pilot program with National Housing Trust
Retail giant Amazon announced on Wednesday the launch of a new pilot program designed to assist moderate-income families in three different U.S. communities with the purchase of up to 800 homes, in partnership with the National Housing Trust (NHT).
The initiative will include $40 million to assist residents in the Puget Sound, Washington, Arlington, Virginia, and Nashville, Tennessee communities, the company said. Amazon says the investment will “help moderate-income residents in these communities to purchase homes as a path to help build generational wealth.”
The nonprofit NHT will use the funds from Amazon’s program to acquire and build affordable homes for sale in partnership with a network of local organizations in across the three communities.
These include Habitat for Humanity Seattle-King & Kittitas Counties serving the Puget Sound region; the African Community Housing & Development (ACHD) and Homestead Community Land Trust both serving King County, Wash., the Douglass Community Land Trust in Washington, D.C. and The Housing Fund serving Nashville.
Additional partnerships through this program are possible in the future, the company said.
Amazon cites data from the National Association of Realtors (NAR) attributing affordability challenges to the “combination of rising interest rates and increasing home prices” in a majority of U.S. metropolitan areas.
“Amazon and NHT will invest in community land trusts, a model where the land itself will be owned and stewarded by nonprofits and community-based organizations, and where residents will own their physical homes,” the company said in its announcement. “Removing the cost of the land from the total cost of the home allows the price of homes to stay affordable, stabilizing families in their communities while combating gentrification.”
Last year, Amazon made a housing investment of $10.6 million into the Nashville area to build and renovate 130 affordable homes, bringing its then-total investment into that community to roughly $100 million.
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The Graystone Company acquires Direct Capital
Florida-based financial services firm The Graystone Company has completed the acquisition of mortgage banker and broker Direct Capital Investment Group through a reverse merger transaction, the companies announced Monday. The financials of the deal were not disclosed.
Direct Capital, through its subsidiary Direct Mortgage, offers residential, commercial and SBA loans, per its website. The company has 98 loan officers and six branches, according to the National Multistate Licensing System (NMLS).
Direct Mortgage oversaw the funding of $119 million in 353 mortgage loans from January through August 2023, per Securities and Exchange Commission (SEC) filings. And, in a shrinking mortgage market, it registered $1.8 million in revenue and delivered a $20,583 loss from January to May.
To compare, in 2022, the company’s total volume was $152 million through approximately 450 mortgage loans. Last year, the company reported $6.3 million in revenues but had a $1.7 million loss (unaudited), the SEC filings show.
The deal with The Graystone Company resulted in a change in control of Direct Capital Investment from Anastasia Shishova to James Anderson.
“Ms. Shishova will transfer 40,951,000 shares of the Class B Common Stock to the shareholders of Direct Capital Investment. Once the acquisition is complete, the shareholders of Direct Capital Investment will own approximately 80% of the voting power of the company and be the sole officers and directors of the Company.”
As part of the transaction, Shishova resigned as company CEO and sole director of Direct Capital. Anderson was appointed president and CEO. Seasoned mortgage professional Glen Gomez will also be a director.
“As a result of the DCIG/DMI acquisition, the Company will focus exclusively on operating and expanding the mortgage lending business and will cease all its existing business operations,” a Graystone’s SEC filings state.
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DataDigest: 25 years of NAR lobbying visualized
The National Association of Realtors (NAR) is navigating turbulent waters as it handles the resignation of its president, which was sparked by allegations of sexual harassment and a culture of fear and retribution, and faces two massive class-action lawsuits that could forever upend the commission structure. It is also fighting a legal battle with the Department of Justice.
Former NAR president Kenny Parcell denies the allegations, and a NAR spokesperson previously told HousingWire that it does not tolerate discrimination, harassment or retaliation.
Some Realtors have called for executives to be fired and a wholesale reform to the structure of the trade group, which has 1.6 million members, the majority of whom are women.
NAR’s struggles are a focal point for the housing industry, as the association is the industry’s top policy advocate and among the biggest lobbying spenders in the nation.
The organization outspent every organization in the country in 2020 and 2022 and came in second behind the U.S. Chamber of Commerce in seven of the last 10 years. It is on pace for another second place finish this year.
No one in the real estate industry comes close to NAR’s lobbying budget. Freddie Mac and Fannie Mae briefly outspent NAR in the early 2000s, but the association has held the industry’s top spot since 2006, according to OpenSecrets data.
Last year, it spent $81.7 million on lobbying, dwarfing the industry’s second highest amount: $6.8 million by the National Multifamily Housing Council.
The association spent more than $23.5 million in the first half of 2023, almost half of the entire industry’s spending.
Legislative priorities
“From its building located steps away from the United States Capitol, NAR advocates for federal policy initiatives that strengthen the ability of Americans to own, buy and sell real property,” NAR says on its website.
Unsurprisingly, housing is NAR’s most lobbied category over the last 25 years, according to OpenSecrets. Taxes, finance, insurance, and consumer product safety round out the top five.
NAR’s website lists its top priorities for 2023 as:
NAR’s disclosures this year cite 36 bills, according to OpenSecrets. Other policy topics include flood insurance, flood mitigation funding, data privacy, investment incentives for downtowns, and electronic notarizations, among others.
Over the last decade, the bills most most cited in the association’s disclosures are as follows:
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The next refi boom’s double-edged sword: EPOs
Shannon Hoff, a California-based branch manager at American Pacific Mortgage (APM), finds herself both enthusiastic and cautious as she assesses the prospects of the mortgage market in the coming year.
After two of the most challenging years in recent history, economists and analysts project a shift in the mortgage market toward the end of 2023, Hoff said.
“Lenders and loan officers right now are just in survival mode,” Hoff said in an interview. “But economists said mortgage rates should be in the 5s in the first or second quarter of 2024.”
Over the past two years, Hoff and her branch have dealt with declining mortgage volume. About 20 loan officers under her leadership produced $116 million in mortgages over the last 12 months, a drop from $223 million in 2022, according to the mortgage tech platform Modex. Roughly 85% of the transactions over the past year were purchase mortgages, the data shows.
When the market turns, more refi opportunities will emerge for Hoff’s team. But it will bring with it different challenges.
Hoff is referring to the need to retain borrowers in a competitive refi environment and to develop strategies to avoid early pay-off (EPO) penalties. Investors impose these fees on lenders whenever a borrower pays off their mortgages usually within up to six months of funding. In turn, lenders charge branches and LOs, sometimes taking their commissions back.
These issues are not affecting the current market, where high rates have reduced the refi mix to about 10% of originations pie. Hoff, however, is taking steps to avoid future problems.
“For my clients, if rates do get into the 5s, we’re going to jump in [to originate refis]. “I’m a relationship maker. And that’s what will help me with EPOs.”
HousingWire spoke to lenders and loan officers to understand their expectations for the mortgage market and, ultimately, their strategies in a refi environment to retain borrowers and mitigate EPO penalties.
When will the market turn?
Let’s start with the good news. The 30-year fixed-rate mortgage, which reached 7.17% on Monday at HousingWire’s Mortgage Rates Center, will decline at some point. This shift mirrors the cyclicality of the mortgage market and the expectations that the Federal Reserve will soon be done with its monetary tightening to combat persistent inflation.
Several housing industry economists believe rates will drop into the 6s sometime in the fall. The latest forecast from the Mortgage Bankers Association (MBA), which is more optimistic, showed the 30-year fixed rate to end this year at 6.2% and the second quarter of 2024 at 5.6%. Meanwhile, economists at Fannie Mae expect rates to end 2023 at 6.7% and 2024 at 6%.
When rates drop, the pipeline of purchase transactions of 2022 and 2023 will be in the money for significant savings through refinancings, mortgage industry leaders say.
“Something I feel like folks do underestimate is: this year, there’ll be $1.5 trillion or $1.7 trillion of mortgages produced, and all those mortgages will be at a higher coupon. And at some point, all those mortgages will be back in the money [for refis]. And people underestimate how much rates have to move to make that beneficial for the clients,” Brian Brown, Rocket Companies chief financial officer, told analysts during an earnings call in August.
Brown added: “We’re originating mortgages every day at these prevailing rates and higher coupons that it only takes a few-basis-point move to be back in the money [for a refi] and make it beneficial for those clients.”
One sign of forthcoming refi opportunities is the encouragement by mortgage originators for borrowers to find the “dream home,” securing a mortgage at higher rates but refinancing in the near future. It follows the popular saying: “Marry the house, date the rate.”
“A lot of mortgage originators are having those conversations: ‘Listen, we’re gonna put you in this home because you found it in this tight inventory market. You find a dream home, let’s lock you into that dream home today, and we can refinance you when that rate comes down.’ So when that happens, ultimately, all those customers that you did transact that purchase will be eligible for refinance,” said Dan Catinella, chief lending officer at Total Expert, a provider of CRM platform to mortgage companies.
Catinella said we will see a trend down in mortgage rates towards the end of 2023, hopefully to the low 6s. However, he pointed out that the longer the heightened rate environment persists, the more opportunities for refis will emerge when rates decline.
“Ultimately, that pipeline of purchase transactions that you did over the last six-to-nine months are all going to be in the money for a significant amount of savings… Typically, from a lender’s standpoint, it’s between half a point to three-quarters of a point when they start to have those conversations about refinancing with borrowers. That’s when it starts to present a real net tangible benefit to the consumer.”
Ready for the EPOs?
However, a refi environment may trigger EPO penalties, loan officers and lenders told HousingWire. After a loan is funded, the lender usually sells it to an investor who pays a price expecting a long-term return. If the borrower pays the loan within a few months, the investor’s return will not materialize.
EPO fees serve as a means for investors to recoup a portion of their initially projected returns. These penalties are usually imposed on lenders when the borrower pays off their loans within four to six months after taking them out, but in some cases it can be up to one year. In turn, lenders charge their branches and/or loan officers with the EPO penalties, depending on the company’s structure.
In this case, lenders need to be careful, attorneys say. “A lot of lenders have to rewrite their compensation arrangements to make clear that you don’t earn the commission when the loan closes; you earn it when the early payoff period ends three to six months after closing,” Richard Andreano, practice leader of Ballard Spahr’s mortgage banking group, said.
Virginia-based lender Alcova Mortgage, which has 75 branches and 178 loan officers, according to Modex data, doesn’t charge loan officers. “But the branches are charged into their profit and losses, so they want to try to avoid it as much as possible,” co-founder Bobby Nicely said.
EPO penalties can easily be up to 3% of the individual loan pricing, translating into thousands of dollars in most cases, Nicely said. Some lenders negotiate these fees with investors when the loan is delivered to them after the refi transaction.
Nicely also pointed out that recent regulatory changes have helped lenders avoid these penalties by requiring borrowers to wait before refinancing their loans. In these seasoning requirements, authorities are concerned about repeated refis – basically, if the lender is helping or hurting borrowers with the transactions.
“One thing that helps a little bit on the government loan products is that Ginnie Mae made a few changes years ago where borrowers have to make six payments before they are eligible [for a refi],” Nicely said.
In the realm of cash-out refis, Fannie Mae and Freddie Mac introduced rule changes in 2023, stipulating that borrowers must wait 12 months to get new cash outs after purchasing a house, getting a rate-and-term, or getting a cash-out refi.
During the last refi boom in 2020 and 2021, there was an elevated level of loan churning, when LOs solicited a borrower to refinance with little to no financial benefit but additional costs and fees. The practice drew the ire of lenders, who went after LOs. Some lenders accused LOs of encouraging faster refinancing than the entire market driven by higher individual compensation plans. Lenders accused LOs of potentially charging the borrower a higher rate initially to set up a refinance later on.
Thus far, EPO penalties haven’t been a pressing concern in a purchasing environment. The Mortgage Market Opportunities Report by TrustEngine, which reviews data from more than 150 residential mortgage lenders, shows that in the second quarter of 2023, only 0.23% of borrowers qualified and could benefit from the current interest rates for a refinance. Regarding the EPO risk, the survey shows that only 1% of customers whose loans closed less than six months ago have shopped with a competitor, which could trigger penalties.
But in the next refi boom, EPO penalties will be top of mind. And many lenders are still recovering from the current depressed market.
Much of the EPO concern can be traced to the industry’s poor retention rate, which is about 20%, according to experts. In a hypothetical scenario, let’s say 300 out of a lender’s 1,000 borrowers refinance with another lender. A typical EPO penalty can cost the lender between 3% to 5% of the loan amount, or about $10,000 on a $340,000 loan, meaning they’re looking at a combined $3 million hit, Catinella said.
Industry experts anticipate that lenders who sold their servicing portfolio during the compressed mortgage market may face greater challenges. That’s because whoever services the borrower has a competitive advantage in terms of retention.
“In the second quarter of 2023, we were profitable as our servicing portfolio helped us tremendously. But, if not managed properly, EPOs can have a tremendous negative effect,” Nicely said. Alcova maintains a portfolio of 11,000 loans in its servicing book, he added.
Blake Bianchi, founder and CEO of Idaho-based lender Future Mortgage, is concerned with EPO penalties. He recently negotiated with investors to exempt his company from these penalties if his company sells more loans to these investors as a preferred partner.
“One of the main concerns for me as a business owner, and also the loan officers, is that everyone’s already living paycheck to paycheck and having a hard time,” Bianchi said. “Imagine me as a business owner having to go back to the loan officer and say: ‘We need your commission back for the last two months or whatever. That puts me in a really bad position. We’re gonna try to increase our business with them because they’re looking out for us as well. It’s a win for everyone.”
Max Slyusarchuk, CEO of the non-QM lender A&D Mortgage, believes that EPOs are not a significant issue because it is rare that a borrower completes a loan and then pays it off in under six months. While mortgage rates can drop, they generally don’t move quickly enough to create an issue within six months, he said.
However, Slyusarchuk said that A&D Mortgage may consider eliminating EPO penalties for preferred partners. “So, if you are a preferred partner, you won’t have to pay. But if you are not, we’re still going to keep EPO [penalties]. It would be part of our loyalty program,” Slyusarchuk said.
What is your retention strategy?
Andreano said rates will drop from the current levels, whether next year or 2025. Lenders should look at their investor policies before applying retention initiatives.
“Some lenders are now telling the consumer: ‘If you come back to me for a refinance, I’ll give you this good deal.’ If you’re going to do that, though, you have to check your master policies because I know some investors call it a pre-arranged refinancing. And Fannie Mae, for example, won’t buy the loan you’re making now until it’s a negotiated deal.”
Andreano also pointed out that usually, investors have in their agreements that lenders are not allowed to solicit the consumer for a refinance for a period because they don’t want to have to keep buying the loans over and over again. If investors start seeing a lot of refis from the same lender, that’s a red flag.
“It’s when rates fall slowly that you have many repeated refinances. That’s where you get many issues with regulators and investors. If rates drop quickly, you may only get one or two refis per borrower. And that’s not going to present the issues as much.”
Hoff, the branch manager at APM, has embarked on a mission to retain her borrowers. She’s rolled out a series of initiatives, including “rate alerts,” which show when her borrowers are eligible for a refi. She is also enrolling borrowers in “opting out” of receiving prescreened offers from other lenders and LOs.
Hoff said borrower retention has been discussed over the past month at APM in Roseville and its community.
“We’re actually in communication with our secondary on what they can do because we have certain investors that the EPO penalties are four months, certain investors that it’s six months, certain investors it’s eight months, so we’re trying to jump on this challenge right now and figure out what we can do. We’re at the forefront in communication with this, trying to find a solution.”
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Home sales dip, but prices are holding steady for now
I read a Wall Street Journal editorial piece that cited a stat to say home prices are 13% below last year. That’s blatantly wrong. Home prices remain just fractionally above where they were a year ago. The point of the editorial seemed to be to scaremonger over government programs to help home buyers and student loan borrowers. If home prices are tanking, that means more borrowers are under water. So, the author tried to use new construction prices from back in April to describe the whole U.S. housing market now.
The fact is that while people who bought homes in May of last year in say, Austin, Texas, are probably underwater a bit, in general home prices across the country are roughly unchanged from last year at this time. That’s frankly surprising given how cold the housing market froze last fall. We have significantly fewer home sales happening. Supply of homes for sale is very low, and most of the year we’ve had more buyers than sellers. There are no signs of any surge in listings, and as a result we’ve seen a floor on home prices.
This week continues that trend. New contracts dipped as affordability is out of reach for so many. Inventory is very low and just inching up now week over week late in the summer. There are no signs in the data of home prices tanking. We stay vigilant watching for either of these trends to materialize.
And the evidence shows that the trends can change quickly. That’s why at Altos Research we track every home for sale in the country every week. Let’s look at the signals for the week of September 11, 2023.
Inventory up slightly
There are now just over 509,000 single-family homes active unsold on the market. That’s up just a hair from last week and 7% fewer than last year at this time. Last year inventory was about to start climbing again with that autumn spike in mortgage rates. Inventory grew in 2022 for the seven weeks from mid-September through the end of October. I don’t anticipate that happening again this year. Last year’s late summer inventory growth was a reaction to a big change in mortgage rates. This year, while mortgage rates are high, they aren’t climbing now. Over the next few weeks, inventory levels will fluctuate a bit down a little, up a little in a given week then start declining reliably for the fall.
In this chart above, each line is a year. You can see last year the light red line did that unusual jump in mid-September with that 150 basis point spike in mortgage rates. Before that change, it looked as though inventory had peaked for the year. The lesson is that consumers are most sensitive to changes in rates. This market is fragile, even though it’s not deteriorating, it could. For example if mortgage rates hit 8%, we’ll definitely see it in the data.
Mortgage rates slow purchase demand
As inventory reaches peak supply for the year, we can see how this year’s high mortgage rates have slowed purchase demand. There are 348,000 single-family homes in contract right now, with only 54,000 new contracts pending in the last week. That’s down from 64,000 in the week prior. It was a holiday week, so it’s always slower, but this year was 14% fewer new sales than Labor Day week last year. In September 2021, when the pandemic frenzy was still underway, there were 80,000 to 90,000 new contracts each week for single-family homes. And we’re at 54,000 now.
There’s no getting around it. Supply is limited, demand is limited. There’s just no sign of sales volume increasing. I keep hoping for it, but it isn’t here yet.
In the chart above, each bar is the total number of single-family homes in contract for a given week. The light portion of the bar are the new contracts that week. At the far right end of the chart, the bars are getting shorter and the light portion is getting shorter. Maybe in October we’ll have year-over-year growth in the new contracts, because last year in the fourth quarter, it was frozen solid. You can see in the middle of this chart how quickly the bars got shorter each week in Q4 last year. Hopefully, this year has a slightly stronger pattern. I keep hoping. If rates tick down, we’ll see an uptick in the offers being made.
Price reductions dip
Price reductions dipped this week to 36.1% of homes on the market from 36.2% last week. That surprised me because price reductions don’t usually peak until October. I suspect what we’re seeing is an increase in withdrawn listings. These are homes that had been on the market, not had offers, had taken a price reduction, still no offers, so now they’re done trying to sell for the year. Where we had 54,000 new contracts, we could see another 20,000 or so be withdrawn from listing.
In this chart each line is a year, with the most homes taking price cuts late in the year, when sellers are trying to get a deal done before the holidays. I expect more price cuts before the month ends. It’s mildly encouraging that price cuts didn’t accelerate this week.
The takeaway here is that, in a market that is deteriorating, price reductions will be climbing. And that’s not happening right now. Last year,this happened twice, first starting in March after rates started climbing, price cuts started climbing very notably. It happened again in September after the last spike from under 6% to 7.5% on the 30-year mortgage. That 150 basis point change in mortgage rates surprised everyone. Offers stopped and sellers cut their prices. You can see the extra jump in September of the light red curve here. It wasn’t until November when the withdrawals started accelerating last year and price cuts as a proportion of the active listings started to reset for the new year.
The takeaway here is that as price reductions are flat right now, over 36% of the homes on the market shows us a slow market, but not a deteriorating market. Like every week for the past couple years, we’re all on the lookout for signals that the market might tank. Can consumers handle mortgages over 7%? Price reductions have been accelerating over the last few weeks when mortgage rates inched up to the multi-decade highs. Rates have inched lower since then and we can see that the slow housing market isn’t deteriorating further. It’s not a repeat of last year. Unless mortgage rates spike to like 8%. Then, we will see that price cuts pattern again.
I’ve been pointing out lately that it is more the change in mortgage rates rather than the absolute levels that consumers are responding to. We can see that in the pattern of home list price reductions across the country.
Median home price is down
The median home price in the US is now $444,990. That’s down about 0.7% from last week. And still up about 1% from last year at this time. The median price of the newly listed cohort is $390,000 now, that’s down from last week and essentially unchanged vs last year. In this chart the dark red line is the market’s price, the light red line is the price of the new listings each week. Prices trend down in the second half of the year and these changes look like totally normal seasonal action.
I mentioned that The Wall Street Journal editorial that is so misinformed. The writer was trying to use New Home Sales prices from April to paint a dire picture of the whole U.S. housing market now.
Here’s what we know about home prices now around the U.S. We’re in a supply-constrained market, and there have been sufficient buyers to support prices all year long. When mortgage rates moved from 7% to 7.5% this summer we can see the damper on buyers. That capped any year-over-year price gains. Affordability matters and consumers adjust quickly. Home prices will end 2023 roughly flat from 2022.
Since inventory isn’t falling and is down just a little from last year, that’s an indication that home prices for 2024 will be roughly flat compared to now. Some firms have been forecasting 5% or more home price gains in 2024. There is nothing in the current data that shows me that much home price strength in the next year. That forecast would be dependent on mortgage rates falling substantially before Q2 2024. At Altos, we don’t forecast mortgage rates, so your guess is as good as mine. But there is nothing in the home price data now that shows me significant gains in 2024. That’s why we expect another year of flat home price changes.
And when we look specifically at the price of the homes heading into contract each week, we see the median price at $379,900. That’s also 1% above last year.
This chart shows contract prices last year versus this year. Early in the year, prices were coming in below 2022, now they’re just a fraction above. Last October, home sales prices took a notable dive with that spike in mortgage rates. We’ll see a seasonal price decline in the next few months but the annual comparison only gets easier from here.
We can see that transaction volume does not show any signs of strength. But because this is such a supply constrained market the limited number of buyers have kept a floor on prices all year. That pattern is still intact.
Mike Simonsen is president of Altos Research.
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Prices finally set to climb again in the West: CoreLogic
U.S. home price gains rose 2.5% year over year in July to mark the 138th straight month of annual growth. The annual acceleration reflects six consecutive monthly gains, which drove prices about 5% higher compared to the February bottom, according to CoreLogic‘s Home Price Index.
“Annual home price growth regained momentum in July, which mostly reflects strong appreciation from earlier this year,” said Selma Hepp, chief economist for CoreLogic. “That said, high mortgage rates have slowed additional price surges, with monthly increases returning to regular seasonal averages. In other words, home prices are still growing but are in line with historic seasonal expectations.”
The 11 states that saw home price declines were all in the West – Idaho (-5.7%), Nevada (-4.2%), Montana (-3.6%), Washington (-3.3%), Arizona (-2.9%), Utah (-2.8%), Oregon (-1.2%), Colorado (-0.6%), Texas (-0.6%), Wyoming (-0.5%) and California (-0.3%).
But since many of those markets continue to struggle with inventory shortages, that trend may be short-lived, and recent buyer competition will cause prices to heat up again.
“The projection of prolonged higher mortgage rates has dampened price forecasts over the next year, particularly in less-affordable markets,” Hepp said.
“But as there is still an extreme inventory shortage in the Western U.S., home prices in some of those markets should see relatively more upward pressure.”
All states that saw year-over-year losses in July will begin posting gains by October, CoreLogic projected.
CoreLogic expects that year-over-year U.S. home price gains will reach 3.5% by July 2024.
Vermont ranked first for annual appreciation in July (up by 8.5%), followed by New Hampshire and New Jersey (both up by 7.3%)
Miami posted the highest year-over-year home price increase of the country’s 20 tracked metro areas in June, at 9%. St. Louis saw the next-highest gain (4.8%), followed by Detroit (4.5%).
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CertifID receives $20 million in Series B funding
Fraud prevention tech firm CertifID just received a funding boost. The company secured $20 million in a Series B funding round, according to an announcement on Tuesday.
The funding round was led by Arthur Ventures, which also led their Series A funding round in May 2022, which produced $12.5 million in funding.
“CertifID is addressing a growing problem in an industry looking for modern solutions,” Patrick Meenan, the general partner at Arthur Ventures, said in a statement. “Despite the challenges posed by a decelerating housing market, CertifID stands out as a technology leader with a mission of utmost importance to the U.S. economy.”
Between 2020 and 2022, the FBI reported that the real estate sector experienced a 72% increase in business email compromise, a key component to most wire fraud attempts.
In 2023, CertifID launched a mortgage payoff fraud protection product, called PayoffProtect, and the firm has entered into multiple enterprise partnerships including one with fintech firm Acrisure. CertifID also reports that it has doubled its customer base this year.
“Since our founding, we have protected billions of dollars from attempted fraud attacks, as well as helped recover over $60M in stolen funds for victims,” Tyler Adams, CertifID’s CEO, said in a statement. “This investment will help us continue to safeguard against the intensifying risks of fraud.” CertifID was recently names the 23rd fastest growing private software company in the U.S. in 2023 by Inc. 5000.
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