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How to Eliminate Your Debt and Start Building Wealth in Two Simple Steps

Some money gurus would have you believe that extreme budgeting, which includes tactics like reducing your grocery bill or car payment, is the key to financial success. While these tactics can be useful for freeing up some extra cash when you need it, the experts are missing the mark when it comes to eliminating the four horsemen that are far more destructive to your wealth-building.

Paying interest on certain debts is one of these four horsemen—but it’s important to recognize that not all interest is the same.

The Dave Ramsey’s of the world want you to believe that paying off all interest rate debt—especially the highest-rate debt—is the best possible decision for your finances. However, interest on debts that you can outsource to someone else—such as with rental real estate—can arguably be a productive expense.

That said, other types of consumer debt, like credit card debt, which typically comes with high interest rates, isn’t quite the same. While passing along the interest costs on a rental property to a tenant can be productive, this other type of interest can’t easily be passed off to someone else to cover. As such, nearly all experts would agree that the interest you pay on consumer debt is generally destructive in nature.

And if all debt and interest charges are not created equal, then you need a smart, math-based approach, like the Cash Flow Index, to help you make a decision on which debt—and interest—to eliminate first. Here’s what you should know about this approach.

The Cash Flow Index: A math-based approach to eliminate interest paid

The Cash Flow Index system, or CFI, which is outlined below, is a scoring system that lets you identify how efficient each of your loans is. This system prompts you to pay off the most inefficient loans first before prioritizing the repayment order for your remaining loans, thus maximizing your results.

This system has grown in popularity over the years due to the sheer practicality of tackling your payables from a cash flow perspective. It has also been touted by many anti-financial advisors, like Garret Gunderson and Chris Miles—and the concepts of this method are long-standing and proven.

Using the Cash Flow Index to tackle your debt in two simple steps

The good thing about the CFI is that you aren’t guessing which interest rate might be best to eliminate. It takes a more scientific approach—and yes, there will be math.

Here is your two-step action plan for eliminating debt using the CFI:

Step 1: Calculate the Cash Flow Index for each debt you carry.

This is where the rubber meets the road with the CFI. You’ll start by calculating the Cash Flow Index for each debt you carry. So, make a list of your debts, note what is currently owed on them, and include the minimum monthly payments required on each.

Once you have that information, you’ll calculate the CFI. To calculate the CFI, the loan balance is divided by the minimum monthly payments you’re required to make.

Cashflow Index = Loan Balance / Minimum Monthly Payments

The resulting number is what indicates how effective that debt is at the given interest rate and term. A high number—anything over 100—indicates that the loan is efficient. A low number—anything under 50—means that the loan is inefficient.

Step 2: Create a plan of attack for your debt.

Look over each debt to determine what to categorize each of your debts as—and, in turn, how to prioritize them.

Start with the destructive debt.

Debts with CFI under 50 are destructive to your wealth, so it’s important to get rid of that debt as quickly as possible. In other words, you’ll want to prioritize it—and the high interest or fees it comes with.

Destructive debt typically includes subscriptions you aren’t using, purchases resulting from overspending, purchases related to abusive practices, like drugs, alcohol, or habitual shopping, and debt that is incurring fees.

Determine what debt you can restructure.

But what if the CFI on your debt is between 50-99? This type of debt is neither efficient nor inefficient, but it is a possible candidate to restructure—and possibly eliminate.

If we’re talking about consumer debt, you’ll want to think about eliminating it. You may have the option to consolidate this type of debt on a credit card that offers a 0% intro APR, or with a loan offering an intro rate of 0% for a certain time frame.

You also have the option to pay it off ASAP. And, if the debt produces good cash flow, you can also renegotiate the interest rate to get the best term possible. For example, you can do this on a real estate loan.

Decide how to handle your efficient debt.

If the CFI on your debt is 100 or higher, the debt is operating pretty efficiently. When it comes to the debt in the most effective tier, you may want to think about leaving it in place until your other debts are eliminated or restructured—especially if it produces good cash flow for you.

You may also choose to outsource some of your effective debt to produce more cash flow for your bottom line—and, in turn, supercharge your wealth. Ideas that I’ve had success with in the past include renting out all or part of a home on AirBNB or VRBO, renting a camper on Outdoorsy, and renting a car on Turo.

Uncover your investing strategy

Everyone knows real estate investing can be a powerful way to build wealth and achieve true financial freedom—but because each person’s journey is different, knowing the first steps to take can be challenging.

Final thoughts on using CFI to eliminate debt

When I started my financial independence journey years ago, I was confused about which debt to eliminate first. I was following the popular debt snowball approach, but I wasn’t making enough headway and was denied a loan—despite having a 680+ credit score.

After learning and implementing the principles above from my mentor, I eliminated all of my consumer debt, restructured my mid-tier debt to free up cash flow, boosted my savings and credit score significantly, and became more attractive to a lender in a matter of just four months.

Paying interest on debt out of your own pocket is a heavy weight on your finances and can drag down your wealth-building potential—which could even keep you from securing your next property loan. What actions will you take to effectively reduce or eliminate this “horseman” from your portfolio?

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Pay later platforms: A superhero for the housing ecosystem?

The controversial author Christopher Booker suggested in a tome-length book, that all narratives belong to one of seven types. In his conception, all of history’s fiction is reducible to seven story typologies. In other words, there are no new stories in the world, only variations on already-worn themes.

The same can be said of business models. Despite the constant talk of innovation and disruption, new companies all hew to some variation of tried and tested business designs. While there are differences in degree and in execution, it is safe to say that “there is nothing new under the sun.”

Fintech is rife with these stories of mimicry. And in fintech, there is no better example than “Buy Now Pay Later” (BNPL) — an idea that has taken the investment world by storm but is in fact a model as old as mankind itself. Whatever the circumstances, BNPL is a huge trend and is spawning tens of billions of dollars of investment; it is also minting new unicorns.

Reality, however, is often (always?) different than advertising slogans. In addition, investors, despite their sophistication in certain aspects, are not immune to the herd mentality. Instead, they love to jump into trends just because they are, well, trends. Even in Tulip mania, mid-stage investors made money, as long as they weren’t left holding the bag (or the flower) at the end.

The power of BNPL

But cracks are appearing. In an excellent story, FinLedger’s Joe Burns quoted an executive at Credit Karma, suggesting that “debt is debt,” even if it’s instigated by BNPL. Ultimately, in the absence of infinite credit and de minimus payment schedules — neither of which exists — the purchase itself triggers a potential avalanche of default and cascading defaults cause financial meltdowns.

With the jury out on BNPL, it is worth exploring if there are ways to make the provision of liquidity sustainable, fair and overall positive for the ecosystem. Here, we can turn to the housing ecosystem as an exemplar both of what is possible but also what possibilities are being missed.

A quick romance with the numbers is called for. In the U.S., the total housing stock is worth a staggering $40 trillion. In fiscal 2021, Q2 alone, total house equity increased a whopping $2.9 trillion. In some states like California and Washington, 2021 saw the average equity per home increase over $100,000. Furthermore, Goldman Sachs predicts that in the last quarter of fiscal 2021, homes will rise another 16% in value.

If we consider the baseline value of $40 trillion, about 55% of that — or $22 trillion — is equity belonging to homeowners. The remaining 45% is mortgage debt. To put the $22 trillion in context, U.S. GDP is $21 trillion. While this number constitutes only about 17% of the total “net worth” of U.S. households, the latter number is skewed by the concentration of wealth at the top.

To understand that, it is worth remembering that the median household net worth in 2020 was $121,000. For the average U.S. household, their home equity is about 75% of their net-worth. A lot to digest indeed, but a very telling picture.

Homeownership in the U.S. is fairly widespread and systemic provisions have been made to ensure it is so. From mortgage debt availability to the favorability of homeownership in the tax code, the majority of U.S. families live in structures they at least partially own. About one-third of Americans fully own their homes.

Still, vast swaths of the U.S. population — even those who “own” their homes — are cash-poor. Atlantic Magazine did a sweeping survey of Americans in 2016 and found that 50% of them suggested that they would not be able to find an extra $400 in an emergency.

Combining all of these into one pithy statement is not easy, but it suffices to say that a vast swath of Americans are “house poor.”

Where’s the money?

Enter the brisk real estate market and we start to see both a conundrum and, in that conundrum, an opportunity. Recent statistics show that more than half (and up to three-quarters) of houses that sell were subject to bidding war price escalations. In some hot markets, the demand outstrips the supply of houses by 2 to 1. It’s a sellers’ paradise in many cities.

Still, despite this imbalance, real estate agents suggest that most of their listings could benefit from upgrades and refurbishments. Tomes of data indicate that upgrades to bathrooms, kitchens, cabinetry and other areas pay off handsomely at sale — not only with higher prices (often at several multiples of the invested money) but also with both increased sales velocity and demand in the house as measured by number of offers.

The conundrum here raises its head. Despite owning equity in their houses, American families are hard-pressed to find the money to hire contractors to make the changes that will result in these benefits. In this conundrum lies an opportunity and a dream — to help homeowners maximize their pay-out when selling houses while not undercutting agents and service professionals who together form a healthy ecosystem.

The question then remains: How does one quickly, easily, securely and fairly help homeowners to get the requisite changes done so that they can successfully sell their houses and realize the potential of their stored equity?

Re-enter BNPL, but with a twist. Can we do the “PL” without the typical “BN?” In other words, can we imagine “UNPL” as Upgrade Now Pay Later?

This way, instead of increasing consumerism and debt burdens, we help families in fact alleviate debt via increased realized equity in their homes. And that with no outlay of precious and scarce cash resources. I

Is UNPL the superhero that American homeowners need? I think so.

This article was first featured in the Dec/Jan HousingWire Magazine issue. To read the full issue, go here.

Romi Mahajan is an expert in the fintech marketing space. His previous roles include serving as CMO at Quantarium.

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

To contact the author of this story:
Romi Mahajan at romi@thekkmgroup.com

To contact the editor responsible for this story:
Brena Nath at bnath@housingwire.com

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As home prices skyrocketed, sellers made killer profits in 2021

U.S. home sellers made a pretty penny in 2021, with the nationwide realized profit growing by 45% year-over-year, according to a new analysis published by real estate data vendor ATTOM this week.

Per ATTOM’s year-end home sales report, on average home sellers raked in a profit of $94,092 on a typical home sale last year, up from $64,931 in 2020.

For comparison sake, in 2019 a home seller’s realized profit averaged out to about $55,000, the report said.

ATTOM noted that rising home prices and profits were driven primarily by a combination of historically low interest rates and a desire by many households to trade congested virus-prone areas for the perceived safety and wider spaces of a single-family home.

(The national median home price also grew by 16.9% in 2021 to $301,000—an annual record, the report added.)

“As [home buyers] chased a tight supply of homes for sale, prices spiked and so did seller profits,” ATTOM said.

Furthermore, the analysis found that the $94,092 profit on the median-priced home sale represented a 45% return on investment compared to the original purchase price, up from 34% in 2020.

“What a year 2021 was for home sellers and the housing market all around the U.S. Prices went through the roof, kicking profits and profit margins up at a pace not seen for at least a decade,” said Todd Teta, chief product officer at ATTOM. “All that happened as the virus pandemic raged on, which actually helped drive the increases instead of stifle them.”

The report added that despite signs that prices could flatten out in 2022 due to declining affordability, lower investor profits and rising foreclosure activity, ATTOM thinks that the current imbalance in demand and supply means that there is room for additional price gains.

Additionally, the report found that sellers in western states reaped the highest profits in 2021.

States with the highest return on investments were Boise, ID (121.8 % return on investment); Spokane, WA (86.5 %); Bremerton, WA (82.7%); Prescott, AZ (81.2%) and Salem, OR (81.2%).

Meanwhile, states with the biggest year-over-year increases in median home prices were Worcester, MA (up 39.6%); Barnstable, MA (up 39.2%); Boston, MA (up 28.8%); Boise, ID (up 27.2%) and Phoenix, AZ (up 26%), the report said.

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Will the 10-year yield send mortgage rates over 4%?

I have been a happy camper lately, particularly with the rise of the 10-year yield as I am seeking balance in the housing market. I love these times in the market and the San Francisco 49ers are making an epic run in the playoffs, so what else can a person ask for? Other people might not be as happy as I am. I retired in 2020 from the mortgage business after 24 years, so I understand how some people who were floating their rate lock might not feel this way.

Between the FOMC meeting and stock market volatility, there is a lot of angst about the market right now so I want to break down what’s happening with the 10-year yield and how that could affect mortgage rates. I am a bond market guy because, to the core, I am an economics person first, so my discussions are more about the 10-year yield and the economic cycle versus mortgage-backed securities.

Let’s look at my 2022 forecast based on the 10-year yield. “For 2022, my range for the 10-year yield is 0.62%-1.94%, similar to 2021. Accordingly, my upper-end range in mortgage rates is 3.375%-3.625%, and the lower-end range is 2.375%-2.50%. This is very similar to what I have done in the past, paying my respects to the downtrend in bond yields since 1981.”

Today, as I write this article, the 10-year yield is at 1.793%. Yes, even with the hottest economic growth and inflation data in decades, the 10-year yield is still below 2%. I understand why people are confused by this because in the previous expansion when the 10-year yield was below 2%, people would be screaming that the bond market is saying we are going into recession. Some of our best economic growth and hotter inflation data have all come with the 10-year yield being in a range of 0.55% – 1.90%.

The simplest and easiest answer I can give you is that the trend is your friend, and the 10-year yield has been in a downtrend since 1981 and in some cases, I can make a case it’s been in a downtrend for thousands of years. Right now, we aren’t close yet to testing that long-term downtrend. The 10-year yield needs to break over 2.70% with conviction and duration to even have that conversation and we aren’t there yet. The chart below is instructive.

In the previous expansion, when I started to incorporate 10-year yield ranges as part of my forecast beginning in 2015, I always said the same thing up until it was apparent that COVID-19 was about to hit us: The 10-year yield would be in a range between 1.60%-3%. In 2018, we tested the higher-end range when the 10-year yield got to 3.25%.

I remember it well as everyone thought mortgage rates and the bond market were headed higher. At a conference that day, I was scolded that I didn’t know what I was talking about. Fifty economists surveyed by the Wall Street Journal all said rates would go higher, but my 2019 forecast spoke about a 10-year yield under 2%. This was based on the long-term downtrend not breaking, and I thought growth would slow, as it did.

Now on to the second portion of the 2022 forecast: “We had a few times in the previous cycle where the 10-year yield was below 1.60% and above 3%. Regarding 4% plus mortgage rates, I can make a case for higher yields, but this would require the world economies functioning all together in a world with no pandemic. For this scenario, Japan and Germany yields need to rise, which would push our 10-year yield toward 2.42% and get mortgage rates over 4%. Current conditions don’t support this.”

So much of my bond market take last year was about the 10-year yield creating a range between 1.33%-1.60%, even though the forecast range was between 0.62%-1.94%. The 1.33%-1.60% premise was a talking point of my America is Back recovery model which I wrote on April 7, 2020. We were able to establish a good period of time between 1.33%-1.60%.

This year, I have said there is a way for the U.S. 10-year yield to get above 1.94%, but it needs help from global yields, particularly in Japan and Germany. As you can see in the charts below, the 10-year yields of both countries have been rising.

This premise that we need Germany and Japan yields to rise is working, but it’s simply not enough yet to get us over the hump. This 1.94% level is very personal to me because I talked about it so much before COVID-19 hit us. On Dec. 28, 2019, I wrote: “Currently, the 10-year yield is at 1.88%. For many months on social media sites, I have talked about how important it is for the bond market to close above 1.94% and get follow-through selling. A yield above 1.94% would mean that the bond market has more confidence that we will have higher growth next year. Until then, I would be skeptical of any story that predicts a higher rate of growth for 2020.”

At the time, COVID-19 wasn’t yet a pressing issue. The rest is history on what happened here and around the world.

I know it seems like a crazy time with stocks falling and bond yields rising. However, if you ignore the noise, everything still looks about right. If our 10-year yields had risen well over 1.94% (3.50% plus) due to inflation and Germany and Japan weren’t increasing, I would be having a different conversation today. However, that isn’t the case.

I understand some people’s confusion because inflation data should send yields much higher. However, that isn’t happening and economic growth is booming. But, the economy’s growth rate can’t sustain itself unless population growth takes off or productivity does. In time, things will moderate to a proper trend, and the supply shortage issues will be gone as demand gets back to normal and the world economies heal. What that means is that we will go back to being a country with slowing population growth in a world that has a lot of economies with slowing population growth.

Now the question is: can yields take mortgage rates over 4%? The key will be Germany and Japan, so keep watching their yields. The longer we go without our 10-year breaking over 1.94%, the higher the risk that the bond market will rally and send yields — and mortgage rates — lower. With housing inventory hitting fresh new all-time lows, sub-4% mortgage rates combined with sub-4% unemployment rates are not what I want to see heading into the spring home-buying season.

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GSEs’ cash window loses some luster

Use of the cash window for delivering mortgages to Fannie Mae and Freddie Mac was disrupted in a big way over the course of last year as lenders reacted to expectations that a cap on cash transactions was slated to go into effect by the start of 2022.

Even though the cap was suspended in September of 2021, the wheels were already set in motion for larger lenders, particularly nonbanks, to convert their agency loan-sale pipelines to favor swap transactions with government-sponsored enterprises (GSEs) Fannie and Freddie.

The volume of mortgage deliveries switching from the cash window to security swaps last year is huge, according to data provided by mortgage-data analytics firm Recursion. And it’s not likely to reverse course any time soon, predict market observers, such Brian Lan dy, managing director of Amherst Pierpont Securities.

As far as implications for the broader mortgage market, Landy said the shift from the cash window to swaps might be an overall plus, given price execution is generally better for larger lenders engaging in swap transactions. He also said lenders utilizing swaps may have more freedom to pursue loan-related innovation.

Landy explained that lenders selling their loans through the cash window can become “reliant on what the GSEs recognize as being worth a pay-up.” By contrast, a lender selling loans to the GSEs via securities swaps has more freedom to “identify collateral they might think will perform better.”

“You just need to find a particular investor that agrees with that and is willing to pay a little bit extra,” Landy said. “So, I think that is where not going to the cash window should be better for innovation.”

Landy added that the cash window still serves as a great loan-delivery platform for many smaller lenders who don’t have the volume to justify setting up the infrastructure to handle securities swaps. It also will continue to serve as a “backstop” liquidity channel for all lenders, he said, in the event of a future market crisis “like we had two years ago” during the onset of the pandemic.

Fannie and Freddie provide two vehicles to lenders for delivering loans to the agencies. They can sell the loans for cash through the so-called cash window, or they can swap the loans for agency securities backed by the loans. The cash window works well for lenders who have not set up the backroom operations to deal with swap transactions and the sale of those securities to investors.

The F ederal Housing Finance Agency (FHFA) last January announced plans to cap the volume of loans sold to the GSEs through the cash window. That cap was set at $1.5 billion per lender over a trailing four-quarter period — or $3 billion on a combined basis across both agencies.

The cap wasn’t supposed to become fully effective until January of this y ear, and it was suspended months prior to that effective date. Still, many larger lenders who feared breaching the pending cap were forced to react well in advance of the announced deadline in order to prepare adequately for the changes required, according to Landy and Ron Hayni e, senior vice president of mortgage finance police for the Independent Community Bankers of America (ICBA).

“The GSEs were pretty aggressive in telling their sellers [the lenders] that they were going to enforce the cap, so they had to put things in motion because it’s not like flipping a switch,” Haynie said. “You’ve got to set up trading lines. If you’re a nonbank, you have to get approvals from your warehouse lender.

“You’ve got to get approvals from the GSEs themselves. You have to get a different kind of contract. There’s a lot of things that go into play when you decide to utilize an MBS [mortgage-backed securities swap] execution versus cash.”

Haynie added that the move away from the cash window as a primary loan-delivery tool can be beneficial for larger lenders “doing over a billion dollars a year in production.” For smaller lenders, however, the price execution may work better via the cash window.

“Bigger producers are going to gravitate toward utilizing swap execution,” he said. “That’s the most efficient for them, and they get the best price execution by doing that,” Haynie explained. FHFA’s announcement of the planned cash-window cap simply accelerated that shift.

“When a [lender] makes an investment like they had to make, to be able to sell securities versus selling loans for cash for the bulk of their pipeline, they’re not going to flip back and forth,” Haynie added.

Although Fannie’s cash-window volume is eclipsed by Freddie’s volume, both GSE’s have experienced similar declines in cash-window use since the cash-window cap was announced by FHFA in January last year and later suspended, according to Landy and Recursion’s analysis.

“Unfortunately, only Freddie releases this information [in full],” said Richard Koss, chief research officer at Recursion. “Fannie does not. …We have some data from Fannie on cash loans, but it is incomplete.”

What the Freddie data shows is clear, however. Mortgage lenders, particularly larger nonbanks whose loan production was likely to exceed the proposed cash-window caps, have retooled their operations and infrastructure to engage in swap transactions.

“We have seen the [overall] cash share [compared with swap transactions] experience a dramatic decline in deliveries from 60% at the end of 2020 to 30% in Q4 2021,” states a January blog post on Recursion’s website.

Recursion’s data reveals that starting around June to July of 2021, the share of loan deliveries through Freddie’s cash window declined drastically, mirrored by a large increase in loans delivered via swap transactions. This trend was most pronounced among nonbanks.

Recursion’s analysis of loan-selling activity across both the cash window and swaps shows that in January 2021, the month the FHFA announced it would be imposing a cash-window cap, the share of deliveries to Freddie Mac by nonbanks via the cash window, versus swaps, was nearly 70%, compared with banks at 39%. As of December 2021, the nonbank cash-window share had plummeted to 29%, while the share of cash window deliveries by banks stood at 27%. — again, compared with the share delivered through swaps.

Nonbanks, by far, are the biggest users of the cash window, though their relative dominance shrank between 2020 and 2021, Recursion’s data shows. In 2020, the top 10 nonbank users of Freddie’s cash window delivered $241.1. billion in loan volume, compared with $44.8 billion in volume for the top 10 bank users. In 2021, the cash-window volume of the top 10 nonbank lenders declined to $199.7 billion, versus the top 10 banks at $30.5. billion.

The nonbank lenders leading the shift away from the cash window included United Wholesale Mortgage, or UWM (previously United Shore Financial Services); AmeriHome Mortgage Co. and Guaranteed Rate.

UWM delivered $58.8 billion in mortgages to Freddie Mac through the cash window in 2020, according to Recursion’s data. That figure dropped to $23.9 billion last year, a $34.9 billion swing. AmeriHome delivered $31.8 billion in mortgages to Freddie through the cash widow in 2020, which dropped to $19.2 billion in 2021, a $12.6 billion decline.

Guaranteed Rate’s 2020 cash window deliveries to Freddie totaled $27.8 billion. Its 2021 cash-window deliveries dropped to $21.6 billion, a $6.2 billion decline. Representatives from UWM, AmeriHome and Guaranteed Rate either failed to reply to requests for comment for this story or declined to comment.

“I think a lot of the smaller lenders still could be pretty heavy cash-window users, like, upwards of 90% of their production might go there,” said Amherst Pierpont’s Landy. “The bigger lenders that built the infrastructure, started selling their own [MBS] pools … and now can get better execution [via swaps], once they were kind of pushed in that direction, then there was really no need to go back to the cash window.

“Probably, in hindsight, they should not have been using the cash window that heavily in the first place.”

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Mortgage Coach and Sales Boomerang snag new investor

Philadelphia-based private equity firm LLR Partners announced Tuesday its investment in Sales Boomerang and Mortgage Coach, two fintechs focused on attracting and retaining mortgage borrowers and making loan originators more efficient. Both firms will maintain their existing brands and teams.

The investment comes at a pivotal time for the mortgage industry, which has seen record refi volume give way to a market dominated by purchase loans. LLR Partners, which led a $26.5 million investment in eOriginal in 2016, said both companies offer solutions that make a difference for lenders facing stiff competition and low margins in a purchase environment.

“What stood out to us with both of these companies was their really exciting growth and the really positive feedback from across the market. Lenders across the board felt that they got truly high ROI from these solutions,” said Sam Ryder, principal at LLR Partners.

Sales Boomerang provides automated borrower intelligence, delivering real-time customer insights to lenders, who can then offer “the right loan to borrowers at the right time,” according to CEO Alex Kutsishin. This is especially important in the current environment, Kutsishin said, where borrowers need fast, flexible solutions as rates are rising.

Mortgage Coach provides an interactive borrower education platform that lets loan officers walk borrowers through a visual presentation of their loan options so that the LO becomes a trusted advisor, Co-founder and CEO Dave Savage said.

“Mortgage professionals are really well-positioned to be the captains of a consumer’s wealth team,” Savage said. “There should be a relationship beyond the transaction. This vision is a big part of why we wanted to put gas on the fire with this investment.”

The two companies’ technology solutions are already tightly integrated and the relationship between their executives was a bonus to LLR Partners, Ryder said.

“The management teams already had a good relationship, they have similar visions for this space, and the existing product integrations — all those things taken together made this a great opportunity to invest in both businesses,” Ryder said.

The go-forward initiatives cited by LLR Partners Include “support for a wider range of financial products and lending institutions,” and the three executives HousingWire interviewed noted that their strategy reaches beyond just mortgage. Kutsishin said the expanded products could include everything from adjustable rate mortgages to reverse loans, but also products such as credit cards, auto loans and personal loans.

“We are building and already know we can deliver the best wallet share acceleration program for banks and credit unions, using the same strategies we’ve done in mortgage,” Kutsishin said.

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Will 2022 be a good year for real estate investors?

This article is part of our HousingWire 2022 forecast series. After the series wraps, join us on February 8 for the HW+ Virtual 2022 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the predictions for this year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.

Experienced real estate investors often say that there are opportunities in every market — whether prices are rising or falling, whether the trends lean towards a buyers’ market or a seller’s market. It’s simply a matter of adjusting your investment strategy to optimize current market conditions.

But what if the market conditions include historically low levels of available inventory for sale, and competing for that limited inventory with institutional investors as well as millions of millennial homebuyers? And what if those market conditions drive home prices up to new price peaks at the same time that mortgage rates are rising and inflation is at levels not seen in 40 years?

That’s the state of the real estate market as we move into the new year, so the answers to those questions will determine the fate of real estate investors in 2022.

2022 Forecast series

What are the drivers of housing demand in 2022?

5 predictions for the 2022 housing market

Here are 7 trends to watch in the 2022 appraisal market

The “Big Four” take on the upstarts in title insurance

The good news: demand isn’t going away

Whether a real estate investor is a developer, a fix-and-flip expert or someone who buys properties to rent, the good news is that demand isn’t going away anytime soon. As HousingWire’s Lead Analyst Logan Mohtashami has pointed out frequently, demographics drive demand, and those demographics definitely suggest that there will be no shortage of homebuyers in 2022.

The largest cohort of millennials — the largest generation in U.S. history — are between the ages of 29-32, and the average age of a first-time homebuyer today is 33. The COVID-19 pandemic has accelerated a trend among millennials to migrate from urban renters to suburban homeowners, in part to move away from the perceived health risks of high-density city environments, and in part to take advantage of having the opportunity to work from home.

Also driving demand are historically low interest rates, which have kept monthly payments relatively affordable despite home prices that have jumped by 18-20% in the past year, and, according to a recent report from RealtyTrac’s parent company ATTOM, have made it less expensive to own a home than to rent in 60% of the markets across the country. Despite that, and despite asking rent prices that soared 14% year-over-year, apartment vacancy rates are also at historically low levels, about 2% according to RealPage.

So opportunities should continue to abound for developers building owner-occupied properties or new rental homes; for fix-and-flippers bringing formerly distressed inventory back to market; and for single-family rental investors offering properties to families who’ve outgrown apartments. All these investors need are properties to sell or rent. And there, of course, lies the rub.

The Bad News: Limited Supply isn’t Going Away Either

According to the Winter 2022 RealtyTrac Investor Sentiment Survey, which tracks the state of the market in the minds of individual investors, 63% of the investors surveyed cited limited inventory as the biggest challenge they face today.

This marks the third consecutive time that “limited inventory” was cited as the biggest challenge, and 57% of the respondents believe that it will still be the biggest issue they face six months from now. Housing industry experts agree: Mike Simonson, CEO of Altos Research, reported on January 17 that the inventory of homes for sale had hit an all-time low of 284,000 properties.

December housing starts and permits increased to annualized rates of 1.7 million and 1.87 million respectively, suggesting that some relief may be on the way, but after a decade of under-building, it will take time before we reach a balanced level of supply and demand.

This unhealthy supply/demand imbalance has had a predictable impact on home prices, which was the second most frequently cited problem by investors (60%) in the RealtyTrac survey. Rising prices affect different types of real estate investors in different ways, of course.

Rental property investors probably have a slightly higher tolerance for rising prices since they can offset costs to a certain extent by charging more for rent; and rental property owners are often more concerned with cash flow than short-term price appreciation. Fix-and-flip investors, on the other hand, have to be more price sensitive, since their business model relies on buying low, managing repair budgets carefully, and making a profit at current market prices.

This has proved to be challenging over the past two quarters — ATTOM reported that while the total number of homes flipped had increased in both the second and third quarter of 2021, gross margins had decreased by over ten percentage points, from 43.8% in 2020 to 33.2% in 2021, the lowest level of gross margin since the first quarter of 2011, during the Great Recession.

Investors are also worried that inflation may make matters worse in 2022. About 88% of survey respondents expressed concerns that inflation would have an impact on their business due to higher material and labor costs, higher interest rates making financing more expensive, or because rising consumer prices might weaken demand from potential home buyers and renters.

Competition remains fierce, and iBuyers are here to stay

Individual investors find themselves competing not just with larger, institutional investors, but with traditional consumer homebuyers as well. Both were cited about 25% of the time as a major impediment by survey respondents in the current market and a likely problem six months from now.

Competition is especially fierce at the low end of the market, which has the lowest level of for sale inventory of any price tier, and where first-time homebuyers (about 31% of the market) are looking for affordable properties, and institutional investors are looking for affordable rental units.

iBuyers were expected to remain in the game, despite the exit of Zillow’s Instant Offers business from the category. Only 16% of the investors surveyed believed that the iBuyer model was intrinsically flawed, and that other major players would exit. More than twice as many believed that Zillow’s Zestimate, used as an integral part of the company’s buying strategy, simply wasn’t accurate enough, and resulted in improperly priced purchase decisions — a fatal flaw in a fix-and-flip model.

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Tech firm Polly bulks up to help modernize mortgage industry

Polly, a software-as-service mortgage-technology firm that operates a loan-trading platform, has raised $37 million through a new funding round, its third since launching in 2019 — bringing the total raised from investors to $57 million.

The prior two Series A funding rounds undertaken in April 2019 and March 2021 raised a total of $20 million, according to the deal-tracking service Crunchbase. Venture capital firm Menlo Ventures led the latest Series B funding round, which also includes investments from title insurance company First American Financial, FinVC as well as participation from existing investors 8VC, Khosla Ventures and Fifth Wall.

Also participating in this latest funding round is Movement Mortgage, which describes itself as the sixth largest retail mortgage lende r in the nation, funding some $30 billion in residential mortgages annually. It operates more than 650 branches nationwide and employs some 4,000 people.

San Francisco-based Polly is a fintech firm focused on fostering data-driven capital markets via its cloud-based technology products and services, which include a product and pricing engine, a loan-trading exchange, an analytics platform, and an integrated vendor platform for its partners. In a press release issued in March 2021, Polly said originators and investors have used its loan-trading platform, launched in late 2019, to buy and sell “over $16 billion of mortgage loans on the exchange.”

The company plans to use the $37 million raised from the latest funding round to advance technology innovation, invest in artificial intelligence and machine learning tools, and to expand its client base.

“Since founding Polly, we’ve been laser focused on providing innovative software solutions to our customers and partners that will enable them to meet the high expectations of today’s consumers while increasing their profitability,” Adam Carmel, founder and CEO of Polly, said in a statement. “We’ve built a world-class platform that is unlike anything in the market, and this new round of financing will help Polly better meet the needs of our customers, improving their workflows and execution through automation.”

Polly’s press statement announcing the capital infusion also notes that the company is expanding rapidly. It has nearly tripled its customer count over the past year, including signing on “several of the country’s top 100 lenders.”

“The goal is that ultimately [Polly’s clients] are able to deliver a lower mortgage price to their consumers or to their customers while increasing their own profitability,” Carmel said in an interview with tech industry publication TechCrunch. “We want to help these lenders move away from spreadsheets and telephony and email as a transaction medium, and instead do everything in the cloud.”

As part of the latest investment round, Tyler Sosin, a partner at Menlo Ventures, will join Polly’s board of directors.

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Housing Market Affordability Has Crossed a Concerning Threshold in the U.S.

In just the last couple of weeks alone, mortgage rates have shot up from about 3.1% to over 3.5%—the highest they have been in over 22 months.

The fact that mortgage rates are starting to rise should come as no surprise. After all, the Fed recently signaled that it would raise rates between two to four times in 2022. And, bond yields and mortgage rates are likely to follow suit.

What is surprising, though, is how quickly rates have risen. It appears that the market is starting to price in future rate hikes well before they happen. And, as a result, housing affordability—which I believe is one of the two most important indicators to watch in 2022—is taking a big hit.

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How housing market affordability is affecting homebuyers

Housing market affordability is a metric that measures the ability of an average homebuyer to afford an average home in the U.S. This metric can be measured a few different ways, but there are generally three primary components:

Median home price
Interest rates
Median income

Median income and interest rates are important metrics when measuring affordability because they help to gauge how much a homebuyer will pay for the median house, presuming that they are using at least some type of financing for their purchase. And, because financing involves paying interest on the money you borrow, when interest rates and home prices go up, affordability goes down.

To fully understand affordability, you also need to take into account the median income in the U.S., as that determines whether homebuyers can reasonably afford the true price of a home purchase. When income goes up, affordability improves.

Right now, all three components are rising. We all know the median home price is up more than 15% compared to last year, which means that homes are less affordable.

And, as I mentioned at the beginning of this article, interest rates rose 45 basis points in the last few weeks. Luckily, wages in the U.S. are also rising, but not enough to counteract the impact of rising home prices and interest rates.

One of the major ways affordability is measured is through the National Association of Realtors First-Time Affordability Index. And, just last week, that index dropped below 100, which means it dipped below a significant threshold.

“This means that first-time homebuyers with the median income don’t have enough income to qualify for a mortgage on a median-priced starter home. Specifically, the median family income of renters in the 25-44-year-old age group is about $57,000, while the qualifying income for a starter home is $62,000,” said Nadia Evangelou, NAR’s Senior Economist and Director of Forecasting,

This is what I mean when I say that the housing market is entering precarious territory when it comes to affordability. Because rates have risen in the last few weeks, the average first-time home buyer can no longer qualify for the loan needed to purchase a median-priced home.

What does this new data mean for the housing market overall?

I don’t want to be an alarmist here because I do not think a crash is imminent. That said, I believe this data represents an important shift in the dynamics of the housing market. As affordability declines, it is likely that demand is going to suffer.

And, when demand drops, the prices can, too. To be clear, though, that’s not necessarily going to happen. Things in this housing market are not that straightforward.

There are a few other factors to consider here. For starters, this analysis is just for first-time homebuyers and for median-priced homes. This doesn’t account for investor activity, repeat buyers, or second-home buyers.

And, demand has actually gone up in recent weeks. According to the Mortgage Bankers Association, people are applying for more purchase mortgages right now than even a few weeks prior. This makes sense, as homebuyers are looking to lock in rates before they increase even more.

That said, it’s unclear how long the fear of rising rates will actually bolster demand, or what the rates will be when they hit a point where demand falls. But as we all know, inventory is severely constrained in this housing market, so it could take a big drop in demand before prices growth slows, or starts to fall.

To me, what happens next is a question of how fast rates rise and what happens with the housing inventory. If rates rise quickly, it will cool the housing market significantly. And, it could even send prices sliding backward—particularly if inventory levels start to climb.

If rates rise slowly, the market will likely adjust to the rising rates. As such, home prices could keep trending upward, albeit at what is likely a slower pace.

How to Analyze Real Estate Markets

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Final thoughts on the current housing market affordability trends

Yes, interest rates are increasing—and yes, we’re no longer seeing record lows. This will put downward pressure on housing prices. But even at 3.5%, mortgage rates are still incredibly low in a historical context.

And despite rising rates and a lot of economic uncertainty, the one thing I have supreme confidence in is that I will be very happy with a 3.5% interest rate in 10, 20, or even 30 years.

This, of course, is just my reading of the data and the economic climate as it stands today. Things are changing rapidly, and I will be continually updating my outlook in the coming months. As I do so, I will be sure to share my thoughts with all of you—especially as we get more economic data to help guide investing decisions.

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Opinion: Don’t shrink the GSEs’ market footprint

The Community Home Lenders Association (CHLA), which represents small and mid-sized IMBs, just sent a letter to the Federal Housing Finance Authority (FHFA), asking for tweaks to FHFA’s recently announced fee hikes on second home and high balance Fannie Mae and Freddie Mac loans. CHLA asked FHFA for targeted adjustments to the fee hikes to protect middle income borrowers.

But a major part of the letter dealt with a broader issue that CHLA believes merits much more public and Congressional discussion than it is getting: What is the proper role of Fannie and Freddie and what authority should FHFA have or exercise to shrink the GSEs’ market footprint?

With the implosion of the Private Label Securities (PLS) market after the subprime fiasco in 2008, Fannie Mae and Freddie Mac (along with FHA) have assumed an increasing market share of the origination of 30-year fixed rate mortgages. In response, both competitors of the GSEs and individuals who want to shrink the government’s role in mortgage markets have argued that FHFA should take actions specifically designed to shrink the GSEs’ footprint. The argument is that “private markets” should have more mortgage market share.

The PSPA caps from a year ago January on loans to underserved borrowers, on investor and second home loans, and on small lender access to the cash window appear to have been designed for precisely that purpose. Fortunately, Acting Director Sandra Thompson suspended those artificial caps last September.

CHLA strongly opposed the PSPA caps. And, in our recent FHFA fee hike letter, CHLA argues that it is never appropriate for the FHFA to take actions whose main objective or impact is to arbitrarily shrink the GSEs’ footprint. The GSEs’ statutory charter directs them to serve the entire mortgage market, including low and moderate income borrowers and underserved communities.

The statute also identifies what loans the GSEs cannot make, such as loans over certain dollar amount and commercial loans. It does not envision FHFA making these sorts of decisions.

In our letter, CHLA noted that we are never happy with GSE fee hikes, but are open to them if they are part of a larger strategy to keep fees down on core GSE loans and loans to underserved borrowers. But we also laid out a strong case against arbitrarily shrinking the GSEs’ footprint.

Let’s unpack the argument that the GSEs’ footprint should shrink in order to facilitate more “private market” loans. Are these proponents referring to banks? This seems ludicrous. Banks should not assume the significant interest rate risk inherent in 30-year fixed rate loans because of the possible interest rate mismatch with deposits, a phenomenon that sunk countless banks and S&Ls in the 1980s.

Fortunately, banks protect against that interest rate risk through Federal Home Loan Bank (FHLB) advances and access to the Fed discount window. Great – but proponents should not argue that this is the “private market” or that taxpayers aren’t on the hook. The FHLB is just as much a GSE as Fannie and Freddie. And the Federal Reserve may not technically be the federal government – but their assistance is hardly the free market.

The other main option for 30-year mortgages is the PLS market. Thirteen years after the subprime crisis, this market is still struggling to find its footing. The simple truth is that the PLS market serves certain areas reasonably well — like low LTV loans and high-income borrowers. But it is not clear if it can ever adequately serve the key mortgage functions of providing affordable higher LTV loans to first-time homebuyers and underserved borrowers.

So, beware when people starting using terms like “private market” and “shrinking the government footprint.” In practice, the main impact of actions to accomplish those objectives is to diminish access to mortgage credit for minorities, underserved borrowers, and first-time homebuyers. At a time of rising prices and a generation of younger families at risk of being shut out of homeownership, this would be precisely the wrong approach.

CHLA thinks Acting FHFA Director Thompson is getting this just about right — suspension of the PSPA caps and pricing policies which focus on core, underserved, and minority borrowers.

Unfortunately, we expect the push to arbitrarily shrink Fannie and Freddie under the guise of “private market” rhetoric to continue, if not accelerate.

So, CHLA is calling on Congress, FHFA and policy holders to thoroughly debate this issue. And we urge policy makers to come down in the end on the side of reaffirming the statutory responsibility of Fannie Mae and Freddie Mac to serve all of the nation’s mortgage markets. At a time of rising home prices and a generation of younger Americans at risk of being locked out of homeownership, this imperative is more critical than ever.

Scott Olson is the Executive Director of the Community Home Lenders Association (CHLA).

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

To contact the author of this story:
Scott Olson at scottolson@communitylender.org

To contact the editor responsible for this story:
Sarah Wheeler at swheeler@housingwire.com

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