Episode Transcript
[00:00:00] Speaker A: And here we are live again on Mike Dupp. And of course we are always broadcasting this show for the mortgage industry every Thursday at 11am Pacific and at 2pm Eastern. Today we have a special time in order to accommodate our very special guests, John Tuig over at Raymond James and Mike Kelleher who is normally our host and well traveled host as he's traveling the New England conference, the Housing Water conference and the MBA conference conference is not able to come, wasn't even able to be there at the NBA. Why? Because his wife is in labor right now. So if you have a chance to give him a shout out of congratulations when the baby comes, comes out because he's, he's out at the hospital right now or so I've been told. So you know, go ahead and give him a shout out because I think, I think he'd definitely appreciate it. Today we, you know, we have a special guest, John Tube. I met him at the credit union conference about a year and a half ago and I've always appreciated his content on LinkedIn talking about main street economics as well as Wall street economics, on what is being done as far as whole loans and mortgages and automobile loans, credit cards and such. Always been intrigued because a lot of us who are in mortgage land don't necessarily understand actually outside of the mortgage world we don't necessarily understand that there is a, there's another world of traded debt securities and we're going to be talking about that later today. So I'd like to be able to introduce our guest John over at Raymond James. John, thanks for joining us today. Definitely appreciate you coming on board and giving us a rundown not only on mortgages but we're going to be talking about debt, debt securities and everything related.
[00:01:52] Speaker B: To debt and Happy Halloween.
[00:01:54] Speaker A: Oh yes, there you go now.
[00:01:57] Speaker B: Glad to be on here. It's funny, I remember the time we met in the lobby in San Diego running between conferences and had that conversation. And now here we are several months later following up the world is small.
[00:02:09] Speaker A: The world is small. And speaking of small, next week we're going to see the Federal Reserve dropping rates, or at least we hope. But actually as I do my own economic research, I think it's even possible they may not even do anything at all. We don't know.
Yeah, I mean a year and a half ago we were talking about how much they're going to raise rates and are they going to drop rates, are they going to do nothing? We actually don't really know because with everything that's been going on the Federal Reserve is always a day late and a dollar short.
[00:02:45] Speaker B: They have been consistent at that. Yeah, I was caught off guard, I don't know about you, by the 50 basis point cut. I had pontificated the 25 basis points was in the cards for us. And then 50, I think caught us all off guard. And then that jobs number came out and then inflationary numbers came out and everybody was like, ooh, maybe 50 was too much. And if you remember, even a month before that, there were some people were calling for an emergency 100 basis point cut. So I mean, the market has been so desperate for the pivot. I mean they have just been hunting and praying for the pivot all year long. So I would guess we get a quarter next week and then probably another quarter in December. I wouldn't be surprised though if we saw a pause at one of those two meetings.
[00:03:25] Speaker A: Sure. Well, yeah, maybe we can hit that later in the show. I want to ask you a few questions about you right now. And this is for some context for people who might not know loans are bought and sold either in tranches, either wholly or even partially at times. So John, can you give our listeners who may not understand what is a whole loan?
[00:03:49] Speaker B: Right.
[00:03:50] Speaker A: Yeah. Because not everybody knows that.
[00:03:53] Speaker B: Yeah, no, I appreciate the question. I mean, even folks in capital markets ask, you know, why do, why do we call it a whole loan? It's essentially anything that's not in a bond. So what my desk is responsible for is the raw credit, the raw whole loan. You could chop the loan up, you could do a participation or a syndication, 90, 10 and 80, 20. But it hasn't been put into a cusip is maybe the quickest and the easiest way. You call it just loan trading, but they say they generally call it whole loan trading. So a very, very common question, but nothing more exotic than just trading the raw loan asset. I would say to people, you know, if you're, if you're familiar with RMBS or cmbs, just chop the S off. It's just not a security out of bond. I know that's, it's, it's silly but it, it, it kind of illuminates the, the topic.
[00:04:45] Speaker A: So then it, the CMBS or whatever, I mean like, so again for our, for our audience that is out there right now. So does that mean that you're literally buying one at a time, two at a time, ten at a time, versus an entire bond which has already been packaged, pre, underwritten, post underwritten and now inside of a bond and collateralized?
[00:05:05] Speaker B: It can go a couple of ways. It's rare. I mean, if you're talking about a commercial real estate, I mean sometimes those can be a $30 million individual loan and that might be one loan in a, in a new issue or in a syndication. If you're talking about more like a pool of residential mortgages or a pool of automobile loans, it's usually more of a bulk transaction where they say you have 1000 auto loans or 100 jumbo mortgages all sold in one particular moment. Not structured, not at a trust, not rated, but still diligence, still underwritten. Has a purchase and sale agreement as a servicing agreement that kind of governs the transaction, but is, is done in a more private setting as opposed to, you know, a 140 or even a public deal.
[00:05:53] Speaker A: So then what do you do then? I mean, I'm sure you have people that are under you right now. So what is it? As the head of the whole loan trading desk, what is your responsibility over at Raymond James so that people know exactly what is it you do versus your team?
[00:06:07] Speaker B: Sure. You know, the head of the desk is, has all of the luxuries of the administrative side of the business, you know, the hiring and firing of people, the payroll, the compliance strategy associated with running a desk, new products, new services that are associated with it. I still get my hands dirty with the day to day trading of packages and pools. But it's the managerial role that the quote desk head also carries on top of the day to day trading responsibilities that go along with it. So the team very specifically here at Ray J is about 35 people strong. It has underwriters, analysts, collateral specialists, servicing specialists, legal experts, a robust sales team and a calling effort, a tech group that helps kind of automation and some of our data driven exercises. We have a large analytical platform also looking at over a trillion dollars of loans in a year. So it's a collective kind of scrum, if you will, kind of everybody moving one direction to one, analyze the portfolios, two, trade the portfolios, three, track portfolios over their life. So it takes a village to kind of get everything done.
[00:07:28] Speaker A: Is your team only buying then from hedge funds, private family offices, or are you also purchasing from only banks or even independent mortgage bankers? I mean, I know that last week, or actually this week, you were at the, just back from Denver. Yeah. And so was that period of time also so that you could get, talk to capital market guys over at the independent mortgage bankers or are you only talking to the, to the FDIC insured banks? I mean, what, what what, what do you do when you're at the, when you're at either the trade shows, either on the national or even at the credit union shows? What is your role there in networking?
[00:08:10] Speaker B: You know, the business changes. I mean, if you look back to when we started this desk was founded in 1991, you still had savings and loans. You know, the buying and selling of residential mortgages from snls, right. And packaging those up and putting them into Fannie and Freddie bonds and selling them that way, you know, today or fast forward to say 2008 and Fannie and Freddie collapse and they're no longer a buyer of conforming balance loans in bulk. They'll only do flow. Then you see kind of the evolution, evolution in 2014 of non QM lending. You start talking about Jumbo 2.0 non QM bank statement asset depletion. I tend. And that's just resi. You know, then you factor on autos and credit cards and unsecured loans helocs of late. So the counterparties that we deal with are really just either the buyers and sellers of those assets. We're making a market in raw loans just like broker dealers make a market in bonds. We are finding sellers of auto loans and we're finding buyers of auto loans and we're facilitating that transaction. Same thing for mortgage, same thing for credit cards, same thing for commercial, same thing for cni. All of those different assets that are out there, we likely have traded in some way, shape or form.
And that's kind of the effort that happens between sales and trading. Sales is out making a calling effort, dialing hedge funds, family offices, banks, credit unions, insurance companies, money managers, hedge funds, whomever it may be. And those conversations generate demand. That demand then turns into action as we can find and source those particular pools of loans.
[00:09:49] Speaker A: So when you're, when you're out, when your team is out there, I mean, I think, you know, when you're in, when somebody is in a sales position, they tend to work with the devil they know. In other words, like they have their regular people, their regular, regular customers they like. And so, and realtors work with loan officers. And then, and then your sales team or your origination team is going to be working with the, with banks and stuff as well. But as far as not to get too much into the weeds. But I want to know, do you have a preference on what the preference of underwriting whole loans are, whether it's automobiles or mortgages or even credit cards? I think, isn't credit cards kind of a whole loan Debt as well?
[00:10:31] Speaker B: Sure, yeah. No, I mean the underwriting of a loan takes a lot of different forms. Like as a residential mortgage or a commercial real estate loan, you're probably doing full due diligence, manual re underwrite of that particular credit and trying to ascertain whether or not that borrower or that property is going to be money good over the life of that loan. When you get into more consumer lending, personal loans, auto loans, credit cards, there's a certain acceptance that you can't be 100% right on credit. Too many loans by count, smaller balance loans. You can't underwrite every single loan in the secondary market. It's just time and cost and expense. So you make assumptions as to historical performance. You look at prepayment speeds, you look at delinquencies, you look at charge offs and you factor that into your forecasting and you say okay, this particular pool of auto loans with a 720fico score is going to experience 88 basis points of annual charge offs with a two year average life. And so I'm solving for a risk adjusted yield after factoring in those credit parameters based on the pool of loans. Your assumptions are as good as the historical information is behind you and then whatever the economy might bring to you in the coming months over the life of the loan. But each asset classes diligence is slightly different based on the product and the, you know, the comfort level and the diligence of the loans.
[00:12:02] Speaker A: You find that it, that when trading whole loans, whether it's mortgages or credit cars or automobile loans, does it become like, does, does one become a leading indicator? And then, you know, oh, two years later it looks like, you know, automobiles is doing this. Maybe this is going to be the leading indicator or housing is going here. Oh, this is going to be the eating indicator.
And do you find that what may be a lead indicator or a lagging indicator in one period of time might be different as you're, as you're making whole loan trades and trying to determine what to make a purchase of 100%.
[00:12:36] Speaker B: I think what's interesting for us, we trade all of these assets that we've talked about and the trading part is the sexy side of what we do every once to hear about the trade. And the analytics are really what's fascinating to us is when you look at a trillion dollars in loans, 1600 portfolios over the course of a calendar year, you spot trends in the consumer and the raw asset long before it makes it into the economic forecast. I mean we're really talking About a month by month, boots on the ground feel as to how the consumer's doing. And as I talk to some of my, you know, bond brethren, they usually get that three, six months later as it hits the remittance reports and it hits the Moody's reports or S and P reports. But we're getting it right there, raw and real. So it is always interesting to us to kind of see and feel things in the economy and at the loan level where the rubber meets the road. That gives us a little bit of an insight to that.
[00:13:38] Speaker A: Does it look like that when you're doing this type of inflation? Have you ever had an. For example, like since you've been doing this.
Well, let's go back in time. Let's go back to like how did you. And I'm going to. Because I want to get into this. But how did you start in the industry, as we're getting into being the head of whole loan trades, can you get a little bit of a history of how you went from beginning to end so that our listeners who are in here right now, you know, they don't necessarily know how you got here and even how all these economic pieces of data, not only does it interest us, but also we want to know how did you get there? So that we can extrapolate. Hey, you know what? This is how he started. This is how he got there. And then when he uses that data, he uses his experience in doing so. Can you give us a little bit of history of how you started?
[00:14:26] Speaker B: Yeah, I won't put everybody to sleep and I'll give you the Cliff node version. I started in retail. So a stockbroker, a wealth management for Wells Fargo for a couple of years. So dialing for dollars and calling on customers about their stock portfolio and their 401k. And that was right around the dot com bust. I went back and got my master's degree, joined a group that securitizing automobile loans as an analyst.
[00:14:52] Speaker A: Wow.
[00:14:52] Speaker B: I got to know cash flows really, really well. I can back into cash flows and model loans.
I had a fabulous teacher in that particular mentor even. That really broke me down and got me down into the Fabozzi books to understand principal and interest and delay days and cash flows and yields and prices and all of the inverse relationships of those.
Was then kind of fortunate to move over to Morgan Keegan at the time and eventually Raymond James Bond Morgan Keegan 2012, but came under a tutelage of a fellow named Rick Spell. And those people who have been in the loan market know him, he's a bit of a legend in starting the private whole loan market back even in the 80s. And I was able to kind of work under him as a trader from 2008, 2009 all the way up to 2019 when he retired.
He retired and handed the desk over to myself. And so since 2019 to today, I've been the head of the desk and just have watched that market evolve from all the way back in the early 2000s to today. It's obviously a very different market from the great financial crisis to where we are in 2024.
[00:16:06] Speaker A: So between 2019-21, there was some volatility and so.
[00:16:11] Speaker B: Hold on a little bit. Yeah, a little bit.
Yeah. A lot of cash too.
[00:16:16] Speaker A: A lot of cash, absolutely.
Prior to actually going live on the air, we had talked a little bit about what Raymond James does as far as whole loan trading. Can we talk a little bit about the non QM space? Is that okay?
[00:16:32] Speaker B: Sure, yeah, please.
[00:16:33] Speaker A: Okay.
How long has Raymond James been trading in the non QM space?
[00:16:38] Speaker B: So I joke about this. I was even talking, we were on a panel at the MBA talking about HELOCs just in Denver. A lot of our customers don't call them non QM loans, they just call them mortgages. Because banks and credit unions, more regional and community institutions, QM matters more to a bond issuer than it does just a portfolio lender, if you will. So whether it's a asset depletion loan or a debt service coverage ratio loan or foreign national or an i10 or a jumbo 2.0, just a relationship to the bank. Now that underwriting fits certain buckets for certain aggregators who are looking to create cusips. So you'll often hear me write and talk about Main street, which is the customer or the bank or the credit union that's making the loan, versus Wall street, which is trying to fill a certain bucket so they can get to a certain par balance to put it into a CUSIP and ultimately sell it. So to watch, really 2014, which is when those regulations kind of broke us between just, you know, non QM and QM lending, and they've even evolved even further. Still, quantifying the underwriting guidelines is important for some and not important for others. But that's part of knowing buyer and seller market and what's important to others. You've seen the rise of these third party due diligence firms, the Claytons, the AMC's digital risks, the infinities, all of these. Candidly, if I should have started A business, it probably should have been that five or six years ago, seven or eight years ago, charge $400 alone for diligence. I mean, it's remarkable the expense. And we often find that, you know, they don't catch all of the errors or they go through a fifteen hundred dollar mortgage or fifteen hundred page mortgage document. It's on page 72. It's just their underwriters skipped over it. So often when we're working with Main street and Wall street, we bridge that gap by having our own in house underwriters find those missing documents. And then when we actually get to the root issue with the loan, work to kind of cure it if we can or not. But QM and non QM lending has been the hot topic at all of these mortgage conferences. And everybody's kind of hunting for scale. We're at ABS East, ABS west, not too long ago, Miami and Vegas. You know, everybody's hoping that one of these verticals eventually takes off. Unfortunately, mortgage rates that start with a seven make that kind of difficult. So it is interesting to watch how the QM and the non QM businesses kind of evolved over time.
[00:19:19] Speaker A: Do those loans, do they, I mean, with the popularity of them, do they trade often? For example, is it possible that maybe you'll be the third holder of that or even the second?
[00:19:30] Speaker B: We don't see that as that was very much 2008. God, when we looked at assignments back in 2008 and then the chain of assignments, I mean it could be 15, 16 institutions long. We don't see that as much anymore. It's certainly there and MERS has helped out a little bit to a degree also. But I think what the market is wrestling with right now is the lack of loan origination and the fact that volumes are down 21 and 22 when we had $4 trillion mortgage years, I mean they were glorious, right? And all you had to do was pick up the phone and trade things. Today, the hunt, the lack of supply in loans is a real challenge. And finding $30 million of loans here and $10 million of loans there, you can get anything in the hundred million dollar size. You'll certainly see institutions bid up for that.
And that's just because there aren't as many loans being made. We have an affordability problem. And as those origination volumes remain depressed due to higher coupons and lack of, you know, homes for sale, that's created a bit of a scrum for that, for all of those different assets.
[00:20:36] Speaker A: You just mentioned affordability and you mentioned that actually in Your Lex Talks loans newsletter briefly as well in your last one.
[00:20:45] Speaker B: Yep.
[00:20:45] Speaker A: What do you think that when you guys are going through your underwrites, when, whether it's by the way, are you also trading cmbs as well as on your whole loan on, on the agency side or are you doing mortgages?
[00:21:00] Speaker B: Yeah, to be clear, again, chopping the S off commercial real estate. Yes, we are trading. I personally don't trade the cmbs. Raymond James obviously does. But we are trading commercial real estate loans. Yes.
[00:21:12] Speaker A: Okay, so then do you find that if there's not that many loans being originated, does the underwriting get tougher during the trade?
[00:21:21] Speaker B: Well, specific to commercial. Yeah, commercial, yeah, commercials still what I would call the wild west. It's very bespoke, it's very unique to each individual originator. It's very negotiated. What I mean is it is not Fannie and Freddie. If I tell you a Fannie Mae 30 year fixed rate residential loan, you know that box. It's pretty well defined. Right. As you get into commercial real estate, maybe multifamily is somewhat homogenous, particularly if it's agency multifamily, it's somewhat homogenous. But as you get into ret hospitality, mixed use, industrial warehouse, self storage, one originating lender can be wildly different in their kind of credit appetite. You get into recourse, non recourse. You get into, you know, all kinds of different covenants in the loan agreements. We see in our due diligence on those deals the highest level of fallout in commercial real estate, generally speaking, one out of four loans doesn't make it through due diligence.
Whereas in a mortgage transaction, residential transaction, probably 95% of the pool makes its way through due diligence. So there's a half of the battle in trading. CRE is matching not just the price and the yield, which is obviously important, but the credit cultures of the two institution, the buyer and the seller. And you can very quickly find out when you do not have a match the moment they open up a loan file and go, oh God, I would never have extended credit to this particular.
[00:23:00] Speaker A: Borrower sponsor when the Federal Reserve dropped 50 basis points half ago. And that was a little bit surprising. Did you see your volume pick up not just for mortgages and also for automobile sales and also for credit card debt purchases as well.
[00:23:16] Speaker B: Well, I mean the problem we had is, you know, while prime rate dropped, the 10 year jumped 40 basis points, the two year jumped 40 basis points. So while we got a quote rate cut, real yields popped. So I think that's Interesting. I wonder a little bit about if that's just a lot of uncertainty in the election. I know there's a number of our customers right now who are just purely on the sidelines. They want to get to Thursday of next week. They want to know what's going to happen on the other side of this mess that we find ourselves in and do we know the outcome and then once we know the outcome, how does the market respond? So I would actually say if anything, there's a little bit more of a wait and see happening in the market today. A lot of people on pause and on the sidelines waiting for next week.
[00:24:06] Speaker A: Yeah.
Do you think that then, does the job report make a difference then and do you think the job report makes a difference to the Federal Reserve and are they also watching the television for the election as well, saying, well, you know, PC this week, job report this week and then election, let's just see what the election does?
[00:24:27] Speaker B: Yeah. I mean obviously, you know, the Fed is wildly important and has been for the last three years. This might be the first time in, you know, 36 to 48 months that maybe they're the number two most watched something.
[00:24:39] Speaker A: Yeah.
[00:24:40] Speaker B: Out there. But yeah, no, that jobs number is going to be enormously important. I mean if you remember the last one that caught us kind of everybody off guard and caused yields to spike because you know, that was the one thing Powell was, I mean he felt that inflation was dropping but if jobs were weakening and we had seen jobs maybe take a bit of a, of a wobble and then all of a sudden came roaring back and now even inflation has been, you know, flat, just slightly up.
I think that's what's taken away some of that 50 basis point conversation. And we're probably back to a quarter point drop if anything. Again, months ago I made the statement, I think the Fed probably in the month of November specifically because of the election, takes a pause just to appear to be non political now that we've done the 50 basis point, maybe that was him front loading some cuts so that we could kind of see and figure out where we are today. And, and here we are with, you know, the market and I think kind of trying to figure out what, what we're going to see here in a couple weeks.
[00:25:41] Speaker A: I'm trying to tiptoe around certain questions but I want to be a little bit direct on this one. So did you happen to, when loans are traded, you know, they might, you know, you don't see as many loans being traded right now, but do you see a spike in inventory as far, not in necessarily mortgages, but at least maybe in credit cards or automobile loans. Because if the economy in theory is not doing as well, then in theory credit card spending should be increasing.
[00:26:06] Speaker B: Yeah, I mean we're in earnings season for banks. Right. So always a good indicator for loan demand. Right. And most all of the public filers so far have said flat loan growth. Credit cards seem to be the exception, although they are slowing. There's strange to me this year on how particularly the big six credit card issuers are really kind of pushing all in on credit card lending. And that felt counterintuitive to me when we were seeing delinquencies kind of rise and balances rise.
But autos, flat mortgages flat, commercial lending down, HELOCs are up, but helocs up makes a lot of sense in light of the housing market and the cash out refi business just being dead, dead, dead, dead, dead.
So I think this is just a function of higher rates. So the consumer can only stand 7% mortgages, 10% auto loans, 22% credit cards, you know, 7%, 8%, 9% commercial loans.
It takes a toll over time.
[00:27:15] Speaker A: So then I mean if you have increased spending or the Federal Reserve is still watching for inflation, right. So you have all the stuff. So then why isn't there more of a demand than to go and buy debt securities? Because of the.
[00:27:30] Speaker B: Oh there are. Yeah, yeah, the demand is strong. So a couple things going on.
We made a ton an avalanche record of 3% 30 year fixed rate mortgage. To all the listeners out there. If you have a 4% mortgage or higher or lower, raise your hand and you know, you guys are all the problem. It's the joke I usually tell on a panel. And that's why we haven't seen mortgage demand kind of spike since all of that lack of supply, that 3% loan, that borrower who's loan locked, that depository that owns that loan, Those loans are 85 cents on the dollar. It's just bond math. Right. If current coupons are 7 and 3% mortgage, I mean it's a fairly deep discount. The depositories doesn't want to destroy capital. They don't want to sell that loan today at a 15 point loss. So that's just a loan that's stuck on someone's balance sheet. It's not going to go anywhere. The negative to that is okay, if we want to sell loans at or near par or better, we need to have a seven handle coupon, a six handle coupon, a high Five handle coupon. And that's only really seen about a trillion dollars of originations in the last 12 months. Right. So as loan volumes have dropped, there's just not as much inventory out there to sell. So you have a bit of a, of a mishmash in the market where you have a whole, a barbell if you will, a whole bunch of underwater mortgages. We kind of skipped the 4, 5 and 6% coupons and went straight to the sevens because rates rose so quickly. So again, it goes back to my lack of supply comment.
[00:29:07] Speaker A: Yeah, can you go back when you say underwater coupon, for the listeners that are out there, underwater coupon in consumer land means that they think that the house is now underwater. So can you explain what underwater coupon?
[00:29:18] Speaker B: Right, sorry. From a, from a pricing standpoint. Yeah. Let's just for grins and giggles, say that today is six and a half. If you were to buy or sell loans as par, thinking of it like a bond, a 3% coupon is obviously less than six and a half. So the price of that fixed income instrument is lower. And just quick math, don't quote me 85 cents. So you're talking about a 15 point discount in pricing based on the lower coupon today, meaning it is underwater from a pricing standpoint.
[00:29:52] Speaker A: Got it. And for our listeners out there, as interest rates go down, prices go up.
And as interest rates go up, prices go down when it comes to a fixed income. Right. And so fully knowing that, as if we see the Federal Reserve go next week with 25 basis points, a further 25 basis points, that's what Wall Street's kind of pricing in right now.
Do you think that those prices of the loans that are originated from three, four years ago, those 3% mortgages, those 4% mortgages, are those loans going to start to come back onto the market fully knowing that some banks need to get more liquid.
[00:30:32] Speaker B: So there's a couple of arguments here. One, if we have a Trump win, the idea of higher deficits, higher spending, a bit of a sovereign kind of question, that inflation will rise, we may have a no landing situation, meaning that growth will persist, but so too will deficit spending. More so say than maybe the Harris candidacy. And this is not coming from John Tuaga, Raymond James, this is just coming from some of the pundits and economists that I read the argument to that is higher real yields due to deficit spending and the like. That's the current kind of talk track as to why has tenure jumped 40 basis points despite the fact that the Fed cut rates by 50bps. So I think if we aren't seeing another 50 basis point cut or another 25 basis point cut, I would guess that's pretty priced in at the moment.
And depending upon which way again the presidency happens, is it a quick transfer of power and is it a decisive victory or are we in a dangling chad kind of moment like we were in 2000 where we have to wait a week or two? I think that's kind of what's got the market spooked and why you're also kind of seeing yields pop a little bit in the short term.
[00:31:51] Speaker A: Right. So for our listeners out there, we're at the bottom of the hour right now and of course we're talking to John Tuig over at Raymond James. He's the head of whole loan trade trading over there. We're talking about the markets. What has had happened in the past. And I want to lead into the next question is, you know, with Chairman Powell shifting to where he was six to eight months ago and he's headed now toward reducing the overnight lending rate, where do you think the outlook is for mortgage rates and mortgage securities? Whether it's, whether it's in the mortgage. You call them mortgages, but I'm going to call them non QM or whether it's in the agency space. With Fannie and Freddie, where is your outlook on actual mortgage rates over the next year? We're not even Thanksgiving. We're already talking about next year's interest rate.
[00:32:38] Speaker B: 2025. Yeah, I think it'll be a better year. I mean again, I think in the near term we have some volatility on where rates are going. But long term, by the end of 2025, rates should be down.
You know, Fannie, Freddie would tell you we're going to start with something that's around a 5% coupon. 595, 75 kind of context for a, for an agency eligible loan.
I think that makes sense. I think long term trends was the Fed starts to cut rates, rates should fall.
Obviously in the short term we haven't felt that. And that means we're probably talking about a $2 trillion mortgage market. For context, this year has been around 1.6, $1.7 trillion market. So growth nothing like 2021. And again, to give context, that was a $4.4 trillion market. So roughly half of the good old days. And that's certainly been a pain point for mortgage originators.
[00:33:37] Speaker A: When you say those numbers in 1.7 or $2 trillion worth of originations, does that include all mortgages whether it's a HELOC or a non QM or No.
[00:33:48] Speaker B: I don't know if it includes HELOCs. I would consider that a second LIEN. Generally speaking. Obviously there are first LIEN HELOCs. I'm assuming what you would traditionally think of a Fannie or Freddie or non.
[00:33:58] Speaker A: Qml, non QM included.
[00:34:00] Speaker B: Correct.
[00:34:00] Speaker A: What do you think? I mean what percentage do you think of of those of the non QM loans that are out there right now? Do you think that. I mean there's so much demand for it and I think it's still a very uninformed, I'm not going to say uneducated, but I'm informed, I'm going to say it's an uninformed public out there right now when it comes.
Do you think that there's just, there's a large appetite for that right now in the whole loan trading space?
[00:34:28] Speaker B: That was literally the panel that I was on, you know, opportunities in the market for kind of non standard products.
We talked about that in Denver at the Mortgage Bankers association. And you know, hila locks are certainly a hot topic. Non QM lending, certainly a hot topic. Again, you raise a great question. Uniformity. Does everybody call it debt service coverage ratio loan that. Does everybody call an asset depletion loan that? And then who is the standard if Fannie and Freddie are not the standard of that is verif. The standard is deep Haven. The standard is redwood the standard spring eq the standard. I mean pick whoever your specialty lender might be.
And then again can we scale that? And is there enough at the loan officer level the really where the front lines are? Do they understand all of the different programs out there so that when they're in front of their customer they have the ability to get the information into them quickly and close loan and have confidence loan will close. Right. And that they don't waste their customers time.
So there's a lot of education that has to go along with that. And that was one of the challenges we talked about implementing, you know, those type programs from a tech standpoint, from a literature standpoint, from a customer standpoint to achieve scale.
[00:35:42] Speaker A: You mentioned previously about that the commercial market is a little bit of the wild west still when it comes to underwriting and things like that. Do you think it's because of the lack of originations, because the general public is uninformed? Do you think that it's a little bit of wild west and non QM lending?
[00:36:00] Speaker B: They're bigger loans, right? I mean a commercial real estate loan could be 200 grand, but it's not uncommon them to be two and a half million dollars in a single loan. I mean jumbo mortgages can get into that as well. But 5 million, 10 million, $50 million single loans. And of course real estate is just a different animal. I mean lending to the Empire State Building is a little different than lending to the strip mall on County Road 1, right?
And those standards between those two very different markets and different lending types, where you're talking about mass syndications and cmbs lenders versus Main street and relationship and deposit based lenders, different goals for each of those investors as they evaluate those risks.
[00:36:46] Speaker A: There's less documentation in a non QM loan, right? Maybe it's 24 months bank statements versus two years of tax returns, but it's still looser than agency.
And so given those looser types of guidelines, you know, 20 years ago we saw looser guidelines and that led to a collapse of mortgage loans. And then recently in the last 10 years there's a rise of non QM. They're not stated income anymore, but they are DSCR debt service coverage where you might prove it based upon current market conditions on an error DNA or market conditions based upon a rent schedule. But do you foresee some type of possible economic downturn in the next three to six years as a result of this type of lending? Or do you still think it's treated as responsible lending?
[00:37:38] Speaker B: RESI is too tight. Resi's been too tight for a decade.
I don't think anybody's going to argue with that.
We still feel the pain inflicted upon us from the great financial crisis. And underwriting has been exceptionally sound and credit has been by and large I would argue the best consumer product out there has been residential mortgage. Better than auto, better than credit card. Better than. Well, HELOC has been really, really strong, certainly better than unsecured lending. There's tremendous equity and property values having continued to rise as well. You also have to remember in 2006, 2005 you mentioned stated income. There was no income, no asset. There were all kind kinds of really wild things. But there was also a ton of speculative building. The builders out there were just throwing up curbs and gutters and betting on the bar, were taking down that property and buying that property. The builders got wiped out and we don't have enough supply out there. So as long as we have a unit housing crisis, I continue to think the mortgage market will be very robust and property values will hold. They've been surprisingly strong. Face of 8% mortgages. We've still seen property values trickle up. I think I just saw the case Shiller number came out at up 4.6% today. So still even in the face of six and a half, 7% mortgage still rising and inventories are still quite low. So non QM lending is nothing like what we saw in 06 debt service coverage ratio loans which are a little bit more commercial in nature. You're not necessarily underwriting the borrower as much as you're underwriting the cash flow of the property. Bank statement being really the backbone, candidly of the United States. It's meant more for small business owners. And you're looking at someone's bank statements, not their W2. And maybe it's 24 months and you're trying to see, okay, there's is making 30$500 a month. Some of that's business money, some of that's personal money. We can't tell the difference. But it's consistent. Right. And understanding how that cash flow works, you know, you starting to see some i10 loans. Those are, you know, tax identification to illegal immigrants. At least they have a tax ID associated with them. I think that's a product that could be very good under the Harris administration. Maybe a little challenged under the Trump administration, but asset depletion is another one that's out there for national. They're all again, very diverse and serving very specific niches. Niches or for those consumers and borrowers.
[00:40:21] Speaker A: Does affordability still become an issue with those small niches as well? And affordability becomes an issue with the average homeowner that's out there right now.
How does affordability become an issue when serving the alternative type of borrowers? And I'm going to niche the ITIN and the dscr. How does affordability? Because like right now, rents are still going up too, by the way.
[00:40:47] Speaker B: Sure. So this was in my last episode of let's Talk Loans, and this is a quote from Fannie Mae and this one blows my mind. I'm a numbers person. So to kind of put it into context from Fannie, a quote. According to Fannie Mae calculations, it would take one of three things or a combination of them for affordability to only return to 2016-2019 levels. One, median price for a single home would need to fall 38%, $257,000 from September's 414,002, medium home household income would need to rise 60% to $134,500. Or 3, mortgage rates would need to fall to 2 and 3, 8 from roughly six and a half.
I'm not sure which any one of those things could happen first, let alone some combination of the three of them.
If that gives you a feel for just how blown out we are on affordability.
Again, we need more units, we need more inventory to kind of help get some of these, you know, prices, maybe get a little bit of a relief in rates and hopefully the recession never comes.
[00:42:00] Speaker A: Logan Motashami, who's an economist with Housing Wire, love him.
[00:42:03] Speaker B: Great guy. Yep.
[00:42:05] Speaker A: Yeah. When he, when, when builders build, they build for profit. They're not, they're not looking that they're not looking to satisfy actually the supply of the United States. They're looking to build for profit. And so you know, do you foresee, I mean, you know, you get to see the permits that are being issued from new construction. It doesn't. And you also get to see demand deposits increasing. I mean when I'm looking at the M1, I'm looking at demand posits increasing. So I see that going up. I don't see very much inventory being built to actually satisfy the demand. And as we have kids being, you know, post, if you're born past 1992 and you're now entering into, hey, you know what, I didn't get my first house, but I put enough for 20% down on my next house, you know, they're, they've got enough for the 20% down, they've got enough to buy. But yet, you know, it is affordability really an issue coming up in this, in the current, in the current next two to four years of inventory. That's, that's coming around when it comes to mortgage loans.
[00:43:10] Speaker B: I mean it has to be right. I mean that's where a lot of people have the majority of their wealth. Obviously you had a pretty tough go of that in 2006-2012. But you know, if you've owned your home or boat today in the, on Bloomberg over the last, I think 2019 now you've made about 170 grand. So you've done well in property value appreciation and those first time homebuyers, minority purchasers, you know, getting into the housing market has been long term a good way for wealth generation.
That's just a part that if we start to see less and less of that will be a challenge for that younger generation. So that continues I think to be a focus for everybody.
[00:43:55] Speaker A: Do you think that, that there is, I don't, I don't know if you've ever seen this before, but you know, they're talking about, like, home equity sharing. Have you ever seen that being?
[00:44:05] Speaker B: It's coming back. We talked about this on the panel as well. So this was a thing back in 2008, and I don't want to splash cold water on it. And I certainly respect that.
Big data is smarter today than it was in 2006, 2007, 2008. And we have a better understanding of property values and kind of, you know, where the trends are and where good properties are and bad properties are and what additions and whatnot have been done.
Condos are an example when condo unit might not be identical, you know, door to door, as opposed to a single family residence, which, you know, can be much more bespoke.
I worry about that just because that story did not end well in 2008. And in 2008, if we remember, property value values only ever went up and FICO scores only ever went up. That was the joke with all of the agency models. It is a little different this time. We don't have the supply. There hasn't been the speculative building.
Home values have held in despite, you know, really challenging rates. A lot of my readers are quick to point out that we've had a very resilient economy and a very positive job market. So, hey, John, you're saying property values are doing well. What happens when we get to a 6 or 7% unemployment rate? Are they holding up as well? It's a fair comment, but I think those are coming back. And those are coming back because it's difficult for down payments to be made. It's difficult for people to kind of ride the wave of equity on the way up. And I think you're going to see more of that in the next 12 to 24 months.
[00:45:42] Speaker A: The ultimate negative amortization loan is the reverse mortgage then, right?
[00:45:46] Speaker B: Yep.
[00:45:47] Speaker A: And do you think that since there's so much equity that's out there, we don't necessarily see a silver tsunami at all in that generation selling houses, but do you see then the reverse mortgage industry increasing? You know, they're going, you know what? We don't, you know, because we can. And education, you know, they don't foreclose on, on our mortgage just because somebody dies. You know, there's a, there's actually a process with education that comes behind that. So do you think that the reverse mortgage market also has some, has some legs on that?
[00:46:21] Speaker B: Kristen from Finance of America, she's the president of Finance of America. She was on the panel with me. I just keep referring to this MBA panel And sorry, it's just fresh in my mind. It was just, yeah, just the other day and she mentioned, I mean that's obviously a specific demographic that's kind of 55 plus. It's retirement. You know, it's not necessarily a first time homeowner that's going to be looking at a reverse mortgage. Not always. I mean there can be some hand me down things, but it is certainly a tool. It does require some education. You know, it's, it does and in some cases carry a stigma. But with education and the right use case, it can be a great retirement planning tool for, for borrowers. And again, kind of going back to that educating, whether it be HELOCs or non QM or bank statement or asset depletion, a reverse mortgage can easily fit in that toolkit.
[00:47:10] Speaker A: Yeah. We have a question from the audience and by the way, for those, for our listeners that are on the podcast, anytime we do have a guest, you're more than welcome to pop onto LinkedIn. Ask a Question doesn't mean necessarily it's going to get answered. But anybody that's on our program right now, if you're live, you're more than welcome to put any questions. Right now we're beginning to wind down a little bit. But this is an interesting question. Any housing supply thoughts between the political regimes? And before you get to that specific question, I think you kind of addressed it when you talked about a Trump administration versus a Harris administration.
But remember, if builders build for profit, what about the existing economic landscape with existing construct or existing housing supplies right now? I mean there's been somewhat of a stagnant market. You know, if you have a 2% mortgage, you know, why sell when you can just go rent? You know, you might be able to rent for a more expensive. But you know, if you, if you rent out your house, you might be able to make up that differential just by keeping it and taking advantage of any home appreciation that we see coming across that. And so when, when we see the political regimes that are becoming across. Do you mind answering this question?
[00:48:25] Speaker B: No, I'd be glad. Happy to. I mean, not either Trump nor Harris. I did see Harris specifically mentioned trying to stimulate the builders, but on the bottom and as you mentioned, what does a builder want to do? They want to go build the house. The house that's going to make them the best profit margin. Right. So I think she's stimulating the wrong side. I like the idea that she's trying to stimulate builders. I think that's a smart move. I think she's Got to stimulate the top end and then the top end will push down to the bottom end as people kind of, you know, move. That's one thing we've seen is the top end of housing has still done reasonably well. Wealthy have still been able, and I've been a bit more mobile throughout all of this.
Getting builders to be excited about doing, you know, lower income housing, which usually is lower margin housing, I think is going to be a challenge without some sort of a tax credit to, to really incent them to do that. So I'm curious to see how that works. I think the changing of zoning also is super important. Kind of like what they're doing in California where, you know, if you have an au pair kind of home in the backyard or you have a, you know, a mother in law suite, whatever you want to call it, and you can, you know, use that, rent that, sell that. I know there's some regulation moving through very specifically California there that could be interesting to see how that could free up supply. And again, number of units I think is important. You know, zoning two more into, you know, one to four family multifamily areas, you know, five unit plus, I think is a, is a positive statement. Although, you know, a lot of fight from communities not necessarily wanting to have multifamily in their residential zoned areas. So it's going to take a little bit of consumer acceptance of that also. But anything that you could do to stimulate those kind of ideas I think will be a positive for the supply side of the conversation.
[00:50:21] Speaker A: So do you also trade construction loans as well at Raymond James?
[00:50:26] Speaker B: I do, yep. A harder loan to sell right now because it seems to be that's a bit more of a community bank driven product. Usually they lock the rate at the construction window, which was about 18 months ago.
That coupon is a little below market and they probably didn't hedge, which. Yeah, that's the right look on your face. So we've had a couple of tough conversations about why a four or four and a quarter coupon is not a market rate today and why that might be at a discount. So we are seeing a smidge of a challenge in that construction loan market.
[00:51:05] Speaker A: What about presently? Do you see an increase in originations on construction loans? Because if they're today's market. Right. Everybody wants the construction loan at today's rates, at least as an investor. And so do you see very much of that as a leading indicator for supply to come to see a lot.
[00:51:23] Speaker B: Of folks still trying to clear the deck, trying to get rid of their existing portfolio to make room for more. They're probably not going to compound a problem with. They already have an existing underwater portfolio. So sometimes that comes down to warehouse lending. And you know, how big of a line do they have and you know, have they been able to move that paper other it's a balance sheet issue. Right. Do they have a concentration limit on that particular product and do they need to do something for it? So I would say it's consistent. We're seeing it kind of, kind of across the board.
[00:51:53] Speaker A: Is a warehouse line considered a whole loan?
[00:51:56] Speaker B: The loans on the line, you could sell the entirety of line. We don't see that often. But usually you clean the loans off of the line, sell those loans off to somebody else to make more room for that particular line.
[00:52:10] Speaker A: Okay. So you won't see the lines themselves being traded.
[00:52:13] Speaker B: You could in theory. I personally haven't traded much of that, but in theory it's possible.
[00:52:19] Speaker A: Was there very much of that a year, a year and a half ago at the onset, trying to think, you know what, maybe this independent mortgage banker is going to not do as hot because they see the cash in front of them in their balance sheet, but then they look at their actual loans, they're thinking, oh, do we really want to burn the cash that we have for the losses on that thing?
[00:52:41] Speaker B: Yeah, there was a window there where people were trying to clean off those warehouse lines pretty quick and de leverage in that freak out moment and say, oh, what was that? June of 2020 when the world was still coming to a collapse. We hadn't quite announced the vaccine and figured out which way was up. That was a certainly a strangled moment.
[00:53:05] Speaker A: Over the course of the last four years have been unprecedentedly crazy. I mean it was crazy 15, 20 years ago, but it was even, I think it was even crazier over the course of the last four years. In the next four years, there's a few economic indicators we're looking at. We still see supply being somewhat limited. We still see affordability being an issue. We. And so knowing that affordability is an issue, but supply is still limited, is there potential still demand. Is there still going to be increasing demand with rising, with rising home prices? Or is it going to be like a, like a minor speed bump? Or are we going to see mountainous increases even in spite of the economy potentially going down and inflation and not deflation but inflation decreasing over the course of the next few years?
[00:54:02] Speaker B: Those who survived 2009 in the Great financial crisis, you probably can't watch the big short, right? The MICHAEL Lewis BOOK that was a very interesting time to watch a lot of institutions massively de leverage. I remember those days very vividly. We would get 2, 3, $4 billion bid lists, we'd pick the 50 million best loans off and sell them at discounts. And that was because there was a forced liquidation of the market. This time we threw $5 trillion at the market and there was a minute there when people were shrinking and liquidating, but it didn't last. And it wasn't as deep and as painful as 2009 to 2011.
It did happen, but it was brief. And then also the banking crisis never really hit us. We had a couple of fatalities there with an SVB and a signature and those kind of names, First Republic but it was very shallow and short lived. So I don't think, I think 2009 for mortgages was a lot worse than 2020 to 2021. I think right now what we're just fighting is liquidity and higher rates. So I think again we have an origination challenge that's a problem for the loan officers on the phone. They want us to get back to the $4 trillion market so they can just kind of keep making and churning loans. Unfortunately, you know, almost 50% of all homeowners have a 4 1/2, 5% rate or below. So I mean volumes unfortunately are going to be constrained I think for the next two, three, four years. It's going to be a minute before we get back to, you know, $3 trillion mortgage market.
[00:55:40] Speaker A: NARA recently put out a stat that said that the inventory has increased over the last 30, 40 days or so.
[00:55:45] Speaker B: Yeah, yeah.
[00:55:47] Speaker A: And so do you think that there could be, with that inventory coming aboard, coming into the wintertime, that there still could be even demand for and with, and I'm going to couple that with Goldman Sachs coming out with a, with a news blurb saying, hey, you know what? Bonds are going to be more exciting than equities out there. And so I want to be able to ask you if there's, is there going to be more demand causing potentially lower interest rates in the, in the short term over the next say six months?
[00:56:16] Speaker B: I would say, I would say spreads should tighten. Right? A lack of supply, still strong demand should cause mortgage spreads to tighten. And now the Fed used to be the largest mortgage buyer in the country. They've stopped. Banks were the number two mortgage buyer in the country. They're kind of fat on 3%, 30 year fixed rate mortgages. You've seen insurance companies step into that, you've seen Private credit step into that. They like the juicier stuff though. They like the non QM paper. They want to have a little bit more yield on their paper. So it should, due to the lack of supply, cause spreads to tighten in. And I suspect we might see that in the next six to nine months.
[00:57:00] Speaker A: Wow. I mean, I'm still excited for housing over the course of the next year.
[00:57:05] Speaker B: Sure. Yes.
[00:57:06] Speaker A: Right. Even in spite of affordability. Even in spite of whoever is going to become the next President of the United States. And let's see here. Oh, we have one file from our LinkedIn user.
This may be outside the scope of primary secondary training, but some chatter on opening tracks of federal land for housing development. Is there significant tracts available to supply? Supply? I don't know.
No. And I, and that's not my, that isn't my wheelhouse either. But for our, for our listeners and for those who watch us live, we appreciate the questions nonetheless. Of course, Appreciate that.
[00:57:47] Speaker B: Of course.
One thing I would love to jump into before we do close. HELOCs have been a rager. And that was another thing we talked about on that panel. If we do have all of this trapped equity and there are loan officers on this particular call, pulling out that trapped equity has been a godsend for those who rely very heavily on the refi mortgage transaction. So 10 year IO 20 year draw. 10 year IO 20 year am. Excuse me. Very, very common seeing those trade. Our best year ever in HELOC transactions closed in seconds. Freddie Mac was on the panel. They have a pilot now delivering in second liens. There's a path to be able to do that. Read the fine print on what that path is. But we are seeing seconds really come back conservatively underwritten, very strong credits, very conservative loan to values. But definitely seeing those loans have their.
[00:58:42] Speaker A: Moment and you're and your analysts are looking at those portfolios right now as well.
[00:58:47] Speaker B: Then probably the most in demand loan we have on the balance sheet today. From a secondary market standpoint. From a secondary market. From a trading standpoint.
[00:58:57] Speaker A: Wow.
Even more popular than the non qm, huh?
[00:59:02] Speaker B: It's right there with it. Yep, it's right there with it.
[00:59:05] Speaker A: Okay, John, thank you so much for coming up on our show.
This is an interview that I've been looking forward to for a long over a year and a half. Right. We've been trying to get you on here, so definitely appreciate you coming on. We'd love to have you again maybe next year, of course, talk about this interview and also what has happened since the election that would be a lot of fun.
[00:59:28] Speaker B: Grab your popcorn. Should be interesting to watch in the next seven days that's for sure.
[00:59:33] Speaker A: Of course for our listeners that are out there right now, of course we are typically on here every week every Thursday from 11am Pacific to 2pm Eastern. Of course we had a special time to accommodate John today at the 12:12 and 3 hour. But for those of you thanks for listening. Remember to like share and subscribe to Miked up so that you can get more of our content. Not only talking to gentlemen like John but also talking to the C suite executives that are out in the mortgage space as we explore how to create not only more business for your independent mortgage bank but also for the independent mortgage bankers loan officers, teaching them and giving them the education of the mortgage industry. John, thanks so much for joining us today. We appreciate that.
[01:00:20] Speaker B: Appreciate you having us. Glad we finally got to connect.
[01:00:22] Speaker A: Absolutely.
