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Pav(leen) Thukral

Interest Rates & Origination: Market Insights Q&A

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As noted recently by Deutsche Bank, the market proves quite terrible at predicting interest rate movements, with the first half of 2019 being no exception. And while we are not in the business of predicting interest rates, our team of institutional sales strategists meet weekly to discuss the state of the primary and secondary markets, the current market pressures that our clients face, and what strategic insights we can provide to help them. 

Here are some key insights from our most recent strategy sessionand we look forward to sharing more in the future!

What factors drove the rate drops?
Tony

Slowing economy, weaker-than-expected metrics (GDP,CPI, etc), and projected recession in the next 12-24 months. This allowed the Fed to keep key interest rates flat to lower in order to keep the economy humming. Finally, the treasury curve is greatly influenced by traders along the various tenures which then allows for the deployment of thoughts/policies/projections into the actual marketplace. Markets are bid upwards, thus driving yields down…thus trickling down to lower cost of funds and overall financing rates.

Charles

From my perspective inflation is the key metric that determines the direction of interest rates. The data behind the inflation number such as leading indicators, jobs report, housing and geopolitical events (i.e. China trade talk) all contribute to the direction of inflation. Inflation has yet to consistently remain above the feds 2.00% + mandate since 2008 , despite low unemployment and the best job market In over a decade. The quantitative easing that followed the 2008 financial crisis did little to repair the abuses that took place in the earlier 2000’s. Until the excesses have been eliminated, inflation as well as rates will remain depressed. Recessions have a way of wringing out the excess and creating a hunger to get the economy back on track. It will be painful, for some more than others. In a nutshell, lack of inflation sits as the main cause for rates to decline and remain low. Why inflation remains low despite low unemployment, and what was strong global growth could be debatableHowever, clearly overall supply in the global economy is overshadowing demand.

What impact do you see for residential lenders and originators?
Tony

The lower interest rates in the past few quarters have allowed millions of borrowers to potentially refinance debt from as early as 12-24 months ago. This mini-refinance “boom” will allow independent mortgage originators to utilize their built-in scale as well as redeploy resources that have been shelved in the past 6-12 months. More importantly, this refinancing opportunity will allow smaller, more margin-sensitive participants, to stay a bit longer in the origination game while re-tooling strategies going forward. The refinancing opportunities can take various forms—traditional 1st lien refinances, 2nd lien piggy backs and HELOCs. Finally, given the rise in property valuations over the past few years, this rate market is poised to add “fuel to the flame” to the housing market. A positive housing market is only beneficial to the independent mortgage originator.      

How would traditional banks and credit unions look at this environment, particularly as it relates to their securities versus loan investment decisions?
Charles

They are not excited about it. I’m sure every ALM (Asset Liability Management Committee) lookvery closely at all aspects of their business lines and the level of risk each dollar is exposeto, versus the return that dollar brings in. Both banks and the surviving credit unions have become very healthy over the past 10 years and protecting that recovery is priority number one. They will continue to take some risk out on the curve depending on the market they serve. They will take advantage of unique opportunities that arise (i.e. e-commerce economy). But their investment portfolio will be considerably shorter and fees will be increased where possible. Their cash run-off will also pick up and finding reinvestment opportunities will be tricky. Most will take a bullet and buy way more treasuries than they would have or payoff debt, even if it is a non-revenue generating asset and quite frankly, pray the recession lasts a traditional (6 to 18 months) duration. 

What opportunities do you see in the secondary market to leverage the current rate environment?
Tony

Portfolios will run off—especially residential mortgages. PMs will need to replace with like-kind (albeit at lower coups, longer duration). PMs may look at alternatives that better fit their duration and yield bogies. Originators will write more traditional loans but also leverage lower rates to write 2nds as well as HELOCs. Banks should be better buyers of assets in general as residential portfolios may run off and/or prepay and thus will/should look at other assets. Banks may become sellers of higher yielding assets given new and lower rate environment (this will be a hard pitch) but correct in theory. Banks may want to look at non-QM given higher yields and to address their residential portfolio needs.

Charles

On the investment side Float-to-fixed, adjustable rates, and variable rate products would be in play. Quality fixed rates are all expensive. As of this morning:

15-YRFIXED   3.500 

10-YIELD          2.060

30-YIELD         2.562
Corporate bonds historically have a spread between + 50 to 100 over treasuries, Agencies +25 to 40 and those spreads have tightened dramatically over the past two years. The 15 year fixed mortgage (new) has +94 over the 30 year treasury and +144 over the 10 year treasury. When comparing investment choices to compliment your loan portfolio, fixed residential/commercial whole loans continue to be cheaper on a relative basis to securitized loans backed by Fannie, Freddie or Treasuries. Either writing mortgages or participating in loans should remain robust given overnight or term rates that are currently available.
Tony Mun is a consultative executive with varied experiences within the whole loan spectrum. Tony is able to employ a unique view point as a result of his deep-rooted understanding of the legacy brokerage models. It is his goal to help frame an illiquid, non-transparent and misunderstood marketplace via a unique technology platform.
Stackfolio is an online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.

Why HELOCs Should Be On Your Radar

By | Mortgage | No Comments
In a market with rising home values, increasing interest rates, and homeowners reluctant to refinance or sell, many homeowners turn to home equity lines of credit (HELOCs) to meet their financing needs.
This means HELOCs should continue to be an attractive and growing loan product offered by originators.
Why are borrowers using HELOCs?
  1. Cheaper. HELOCs can be a cheaper alternative than other common forms of borrowing such as credit cards or unsecured personal loans.
  2. Versatile. HELOCs give borrowers a lot of options for how to use the funds. Whether it’s paying off credit cards, debts, or making home improvements, they allow homeowners to borrow smart.
  3. Not The Same as it Used to be. Many recall a very different borrowing and lending structure of HELOCs from prior to the financial crisis of 2008. Today, however, lenders have become far stricter in their underwriting; thus, borrowers have much higher credit scores and borrow less of the available equity in their homes.
7 Reasons Why Consumers are Tapping into their home equity

Why Should Residential Mortgage Owners Care?

As noted by Fort Schuyler Advisors, a look at recent Google trends shows an increase in HELOCs searches with the search index at it’s highest in five years. This, coupled with a recent TD Bank survey which found 35% of millennial customers willing to consider a HELOC product, shows a clear segment of borrowers in the market that can help drive loan growth via HELOCs. Additionally, given the overall interest rate pullback, growing HELOCs origination can offset the drop in mortgage activity many originators have faced so far in 2019.
Secondary Market Considerations

1. Buying HELOCs
Since many originators have limited experience with HELOCs, but have nonetheless acknowledged the value in the product, many have shifted to buying HELOCs via loan trading. Buying via an online marketplace, such as Stackfolio, for loan trading can be a very cost-effective and time-saving solution. Stackfolio’s online loan marketplace allows the buyer to avoid the costs of origination and the potential challenges of setting up and operating the underwriting process. In addition, it can be far easier to strategically target the loan growth by specified geography, credit box, size of the loan, etc.

2. Selling HELOCs
On the other side of the spectrum, many originators of HELOCs have kept the loan origination in their portfolio but are in need of liquidity. Selling via an online marketplace for loan trading has shown to be an efficient and profitable solution. As an example, In a recent large HELOC trade on Stackfolio, the seller earned almost a 2% premium on the traded balance. This sale allowed the originator to book the non-interest income from the premium while freeing up capital and capacity for new origination and loan growth.
Sellers also have the ability to retain their servicing during a loan sale. So while sellers benefit from the added liquidity, they do not lose their valuable customer relationships during the process.

Tony Mun is a consultative executive with varied experiences within the whole loan spectrum. Tony is able to employ a unique view point as a result of his deep-rooted understanding of the legacy brokerage models. It is his goal to help frame an illiquid, non-transparent and misunderstood marketplace via a unique technology platform.
Stackfolio is an online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.

What is the Manufactured Housing Market?

By | Mortgage | No Comments

Traditionally seen as undesirable, could manufactured housing be making a comeback?

Different from the pre-fab homes that dotted the landscape post-WW2, manufactured home assembly now predominantly takes place on factory lines rather than on-site. 
However, the notion that manufactured homes, or mobile homes, remain undesirable may be shifting in the new market. 
Here’s why:

As young people struggle to afford new construction houses or secondary market houses, the number of renters in the United States hits new records. An alternative to renting could be found in manufactured housing. 

Distribution of Renter in the U.S. by Age
By allowing new upgrades and the option of modular housing — manufactured housing has expanded to meet a new customer base. Beyond the ‘trailer park’ connotation, companies have begun producing models with upgrades such as french doors and granite countertops. 

In fact, the industry appears on track to produce more than 100,000 units in 2019, the highest in a decade. 

Manufactured Home Shipments Per Year

The industry could continue to improve for manufactured housing makers due to the Department of Housing and Urban Development’s announcement of plans to review regulations on manufactured houses. While no official changes have been made, the Trump administration’s previous records of removing regulations show promise that HUD will act the same. 

The advantage of regulation reform mainly presents itself in the ability to add new amenities to manufactured housing. The real test of manufactured housing lies in its ability to integrate itself into ‘acceptable’ housing for the majority of Americans. Mobile home parks are typically viewed negatively and zoning can often be difficult — which falls under state zoning laws. If zoning laws were more favorable, manufactured housing could reach beyond its traditional customer. 

What does this mean for banks and borrowers?

Another key area of development in relation to manufactured housing lies in Fannie Mae and Freddie Mac’s commitment to expand their loan purchases to include chattel loans. Chattel loans are key because many manufactured homes reside on leased land and classify as personal property rather than real estate. 

Chattel loans are typically more expensive to acquire than a traditional home mortgage due to higher rates and shorter terms. The industry-wide failure rate of non-mortgage mobile homes sits at around 28%, while the current delinquency rate of single-family mortgages sits at 3.4%. 

This suggests that borrowers financing manufactured homes are more likely to default than traditional single-family house borrowers. An additional concern that should be noted lies in the lack of secondary market value for manufactured homes. However, as credit boxes continue to expand, and the manufactured customer base changes, this may change as well; particularly for non-depositories. Within banks, manufactured housing loans help fulfill CRA requirements which makes them an asset. As banks prep for upcoming exams, they may begin to look at manufactured housing loans as potential areas to meet their mandatory CRA requirements. 

“Insufficient information and lack of access to manufactured home financing options are two negative factors that still affect the manufactured housing industry. To offset their impact, well-established industry participants, such as MHI, FHFA, CFPB and specialized lenders, will continue to develop buyer education programs and bring more financing solutions to the manufactured housing market. Considering that the secondary market for manufactured home loans is still limited, the success in meeting these objectives should have a notable positive effect on the entire industry”  – Triad

Pav(leen) Thukral serves as the Chief Executive Officer of Stackfolio. His experience stems from over 6 years of technical experience with the NSA, Bloomberg, and pattern recognition research with Thad Starner, the father of Wearables. Pav is a co-founder of Stackfolio and has steered it’s vision of transparency and market access since inception. He marries the deep technical talent at the company with the deep capital markets talent, and acts as the bridge that helps make that special magic work.
Stackfolio is an online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.

A Letter From the CEO of Stackfolio

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Here at Stackfolio, we are tackling a BIG capital markets problem. We are taking the manual, inefficient, and humanbrokered loan trading market online. But why tackle this capital markets issue by building a technology company that partners with bankers? 

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At the start

It took a meeting in early 2015 with Bartow Morgan, the CEO of The Brand Banking Company (since merged with Renasant Bank) to discover and truly understand this massive, but inefficient market. Over 20,000 institutions participated in an almost $1 trillion annually transacted market, primarily OVER THE PHONE. This reality left bankers facing two major problems.

First, Bartow, like many bankers, faced a problem that almost every financial institution faces in some shape or another: liquidity. As he noted then, “For Brand, when we originate large numbers of loans in a given month, our machinery can stop if we don’t find proper exit liquidity on those loans.”

Second, the lack of efficiency in trading…

As engineers that grew up in the age of the internet, we were awestruck.

The market was almost 100% human brokered and operated as a limited circle of contacts that sourced liquidity by calling up bankers to trade. And the vehicle for these transactions was a phone and snail-mail. The most state of the art operation that we could find was sending a physical hard drive of loan docs via FedEx.

Our team knew there was no way that this market wouldn’t move online. So we got busy building. 

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The New Marketplace

However, we just weren’t doing the best we could for our clients to be able to find and explore these opportunities.

So we’ve built a system for putting the right opportunities in front of the right institutions, at the right time. And we’ve understood that we have to combine a great Marketplace product, extremely integrated customer service, data, and an obsession on experience and speed

You can now find what you’re looking for on Stackfolio in seconds. We put the most important Stip criteria right at your fingertips. Every asset and demand is geographically qualified. The most important portfolio level information is not only available up front, but there is also no pay wall or sign up wall in front of it. The experience is completely optimized on all devices. 

 

“… there is also no pay wall or sign up wall in front of it.”

 

And we’re not going to stop there. We’re building tools to increase historical pricing transparency, a full suite of due diligence products, and a communication infrastructure that will make trading more and more seamless

As we continue our journey here at Stackfolio, I have only one request: please enjoy our new Marketplace and provide your feedback at the bottom right of every page of the product, to a real team member. 

Sincerely,

Pav(leen) Thukral

Founder/CEO @ Stackfolio

What we built

In December of 2016, Stackfolio launched publicly to the market. The response was better than we could have hoped for. In just under a year, we had almost 500 institutions sign on to the Stackfolio platform, had almost $1 billion in listings, and were on our way to creating true liquidity. We raised a round of capital around this growth at the end of 2017 and started to ramp up as a company. We’re pretty proud of where we landed. 

Today, we have nearly 800 institutions from all 50 states and almost $3 billion of listings on our marketplace, with loans listed across every major asset category and across every geography.

 

“… $3 Billion of listings on our marketplace, nearly 800 institutions from all 50 states…”

 

That growth led to a problem; our favorite kind of problem. Our Marketplace product wasn’t keeping up with the growth. We were constantly getting support questions from our customers being overwhelmed with the number of listings they were seeing and that searching through them wasn’t easy. We were very grateful to have this problem, but we had to fix it. 

The team went back to the whiteboard because it didn’t view this as a simple matter of creating more filters or separating things into categories. Stackfolio is not an e-commerce platform for mugs not that that’s not a great business! We’re an online marketplace for very complicated financial asset transactions

There is a lot of nuance in the loan trading business with our customers facing unique challenges, such as qualifying credit underwriting guides, building unique investment strategies around borrower information, managing different investment timelines, and balancing regulatory requirements. Stackfolio has and continues to help financial institutions with these challenges. 

For example, many institutions come to the Marketplace to help meet Community Reinvestment Act (CRA) lending requirements. Many come to strategically fill gaps in their loan growth/origination goals. While others utilize Stackfolio to appease regulators when they hit liquidity constrains like their CRE/Cap thresholds. 

Our institutional buy side clients have their own unique struggles as well. There is massive pressure for asset class diversification, while at the same time they are being hit with fee compression from all sides. Stackfolio is helping solve for this.

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