Vision, Value, Velocity : The Essentials ft. Steve Thomas

[00:00:00] Speaker A: Hello, and welcome to season four of the mic'd up show, where every mortgage has a story. This is the ultimate hub where hidden stories behind the mortgage industry come to life. I am Michael Kelleher. [00:00:13] Speaker B: And I am Michael Zhao. [00:00:14] Speaker A: And in every episode, we dive deep into the entrepreneurial spirit, the strategic insights and the breakthrough innovations that built the world's greatest mortgage companies. So whether you're advancing your career or. Or scouting for industry leaders, and we have a great one here today in Steve Thomas or you're in fintech prop tech and you're looking for a way to get into the mortgage industry, you're in the right spot. So get ready to unlock the story behind every mortgage. Let's dive in today with Steve Thomas, who has over, I think, 30 years now of residential mortgage experience. And he's really done it all. And you'll hear about it today. We will jump in. But he has worked with Lu Veneri. He has been at the countrywide bank of America. He has been at Fannie Mae. He has been with the fhlb. He has been on the board. And now he is taking us into the future. Before we hop in and really get into future wave, can you tell us, I thought what was really cool, Steve, you enlisted as a naval officer and you were stationed in Pearl Harbor, Hawaii, which my father always loved and was fascinated with and was able to go to the museum when he was out there, also served for us. So thank you for serving. But you also have a degree, ironically, in Japanese studies. So I like to just maybe we could start with, can you take us into the first time you're in Hawaii and you're looking around and you really understood the impact of what Pearl harbor was that day? [00:01:56] Speaker C: Well, yes. Good afternoon. And you jump right into it. So, yeah, let me try to just set the stage, put a little context to this question. So I went to school, Navy rotc. And you get to fill out a dream sheet of where you want to be stationed as a naval officer or coming out of the Naval Academy or midshipman. And everybody puts Hawaii. No one wants to go to Adak, Alaska, or Keflavic, Iceland. Most people go to Norfolk or San Diego. And I was one of the three folks in my class. I got selected as an ensign as a new officer for Hawaii. So everybody was sort of mad at me or jealous of me. I want to go to Yokosuka, Japan. My sport was karate. I was teaching karate, speaking some Japanese in high school, doing that. And then that, that went on to become my. My minor Japanese in college at Penn. So I want to go to Yokosuka, Japan. I got Hawaii. And I was like lamenting, why did I get Hawaii? But anyway, I was excited, so I, I figured I can keep using my Japanese in Hawaii, the way, shape or form. And I raised my hand early on when I, When I arrived in Pearl harbor to, to be the. We call Pearl harbor liaison to the Japanese Kaigo, and that's Japanese word for navy, which is the sdf, the Japanese Self Defense Forces, which is simple job. I thought it'd be fun to practice Japanese and greet them when they come in to. When the ships come in to dock in Pearl Harbor. And this is my naivete at 22 years old, I thought it would just be a fun job. And the first time I did it, I was shocked. And I was sitting there trying to figure out what do I do right now? Because there were lines and lines of people protesting, you know, the arrival of the Japanese Navy in Pearl Harbor. It seems like a pretty simple common sense idea now, but at the time I never thought of it, right. I never thought there'd be people outrage or protest that the Japanese fleet was pulling into Pearl Harbor. And, you know, quick lesson learned on how to sort of improvise because I hadn't prepared anything, but I had to really get through a protest line of people that are well meaning, right. Their grandparents, grandfathers might have died in Pearl Harbor. Right. They had real reasons why they didn't want the Japanese to be in Pearl Harbor. On the flip side, my job was really what do it was given to me was to greet the commanding officers or the ships come in and the Japanese, we call honorifics, you have to basically genu flag, but all in front of the words, certain words. And. And I had prepared that way to greet the Japanese naval officers properly, with respect. That's a big part of Japanese culture. So, you know, I was sort of conflicted on how to manage the conflict, if you will, that I was facing and that this was my really my first job, my first sort of lesson in trying to figure out how to adjust on the fly, if you will. Kind of like trading, okay, the market's going against me now. What do I do? So that was a great kind of trial by fire to being a naval officer in Pearl Harbor, Hawaii. And that wasn't my main job, but that was what we call a collateral billet to be the Pearl harbor liaison to Japanese SDF forces. So there's a little bit of diversity and inclusion there because I had to take in a lot of different diverse viewpoints just to make that kind of make it successful. And at the end of the day, it was fine. Most of the protesters were respectful and let me walk through the protest line and greet the Navy as they. As they came into Pearl Harbor. And I had to apologize to them. Sumi missed is the Japanese word I remember using a lot of sumi missed. And I apologize. Please come in. Welcome. Wow. Yeah, it's a great question, really. My dad, you know, probably like a lot of. A lot of people, their parents push them. My dad was a Bruce Lee fan. You know, this is 1970s, that Bruce Lee died in 73. My dad, I don't think he ever got over that. And Okinawan Goju Ru karate dojo opened up literally right across the street from our house. And at nine years old, my dad, you know, put me in there. And that's all I did until I was 18. So I had a black belt when I was 14. Okinawa and Goju Ru gouru means hard. Soft is really. It's kind of Miyagi san. What you see in the movie Karate Kid. Jojo Miyagi was the founder of Okinawa. And Gojuru, that movie has some authenticity. But anyway, Okinawan gojirou. And once I got my life out, I was an instructor. I was a sensei. And, you know, part of the teaching, I spoke. We spoke in Japanese, right? And you go to tortics and, you know, they award points, you know, shiroi and akai, red and white based on your belt. Anyway, so I picked up Japanese words throughout my karate, you know, time or tenure. And then when I went to Penn, I was looking for something exciting as a major, a minor. My major was economics. And I just thought, everyone's studying French and Spanish. And you remember in the late 80s, early 90s, the Japanese kaisha, if you will, the Japanese companies and keiretsu system was a big topic, sort of. They were going to take over the business world. And so I thought it would be interesting to study Japanese and became Japanese studies. And it was a great. It was a great experience for me to learn the language and the culture and the people, et cetera. So have a lot of Japanese friends and I can. I'll end on this note. Don't ever walk into Benihana and try to talk Japanese. I've tried too many times. It doesn't work. Unfortunately, most of the workers there are not Japanese speakers. And I usually look like a fool trying to speak Japanese when I get there. [00:07:40] Speaker A: So that's a great example of trial by fire. You don't learn it till you're in it. You came out obviously great education from UPenn. You had the experience as a naval officer and how discipline or how just details works but nothing can prepare you like trial by fire, like experience. I learned somewhere during my journey about this name, Lou Re and how important he was as the godfather of the mbs. You actually were able to work in an environment I don't know directly with him, but in an environment I believe in a building in a firm in the 90s that you were able to learn just by osmosis. Can you talk to some of the new school people so the, the legacy continues about this gentleman and about the firm he had. [00:08:29] Speaker C: Yeah, I guess, you know there's some gray hairs. I'm tall, I'm 64 so most people can't see them but they're there. You know I started in 94. Renary, you know is the founder of a Thousand Brothers of the Mortgage back Security. His department every everybody's wearing liars poker. Read chapter nine the Fat man and the Marvelous Money Machine that was the founding of the U.S. mBS Market. I read the. When I came outta the Navy I wanted to work on Wall street and I was resigned to the fact I wanted to work in mortgages and ideally worked for renary. In 94 there was a huge mortgage market blow up, right? Rates have rallied in 93, sold off in 94 and GE which is one of the biggest at the time. Trading desk, excuse me, Kidder Peabody owned by GE Capital. They were blowing up anyway. There were very few jobs on the sell side. And so it kind of worked out for me. I said well I want to work on the buy side anyway. And at the time the two biggest, really the only two big buy size shops and mortgages were Hyperion Capital Management, Ranieri Shop and actually the other one was blackrock Larry Fink Shop or those are cs. There were, those are First Boston before it became Credit Suisse First Boston guys, Robert Capito and Larry Fink and I applied to both and there's a long story there but you know, lucky break. I got hired at Hyperion. It's a small shop, I think about 40 people. You know a lot of them were the. Some of the first guys and the first traders in the MBS market from Solomon and from First Boston and I was just an analyst, you know I was a portfolio analyst just learning just being in that environment. I mean it, this was the 90s early they were punching bags and people. It was just a great place to Learn from some of these really smart folks. I can name all the names. Dave Ritchie, John Dunleavy, Cliff Lye, Ken Weiss, Trish Bata. I don't know. I don't know how many are still out here working. I think Dunleavy's the only one. Everybody else has made their money and retired, but I'm still out here. But yeah, it was. It was a great start to the business, and I'm probably going to extend here a little bit. But it led me to Countrywide, which really opened up my eyes to the broader mortgage market. And the reason I say that is because that Hyperion. You got to think about this. In 1990, 1995, 96, now we were starting to segment TBAs, pools that we were buying by prepayment characteristics. So we were buying a low loan balance loan or pools from all of New York properties that prepaid slower. And I thought that was super exciting. We. Ranieri used to say that he created this market to be liquid and compete with Treasuries and other bond products. And so it was a TBA market. That's what we still have today. But in order to find value and make money, you have to customize and carve it up. And so that's what we started to do at Hyperion and I started to do that at Countrywide and part of the group at Countrywide Securities. That helped, I think, create specify pool market. We used to call it PPCI at Countrywide. Product price customization and information. Wow. This is 1996, 1997, early days. [00:11:40] Speaker B: There was a lot of transition, Steve, you know, from you going from that desk to Countrywide securities and then eventually to bank of America. And in between, you had experience at the Federal Home Loan bank of Chicago. So can you tell me a little bit about your transition from Countrywide or Federal Home Loan bank to Countrywide to bank of America and how you had to build out products at the beginning. Exp. For those of you who don't remember, there was prior to the subprime meltdown, there was expanded level 1, 2 and 3. And then as we got into the. As we moved into the meltdown of the late 2008 to 2012, there was expansion into, you know, further products which we needed, like the Community Reinvestment act product. What was the transition like going. Going from product to product and as you transition to each organization? [00:12:35] Speaker C: Yeah, it's a good question. We're going to use some words that are bad words, at least at certain firms at the time. You know, subprime and alt A and Alt B and all these different expanded approval for folks that were in the market then let me kind of characterize what was happening, right. So I was at Country Ride and we thought we were the biggest and baddest mortgage shop on the planet. And a lot, a lot of the work that I was doing, that we were doing were, was around product development. It was a big part of the mortgage market, right? That's how you grow. And, and I, and I got, then I got a job offer at Fannie Mae to be director of new products pricing, which to me was the only kind of suitable job to go on the other side and be the buyer on these products. And that came about because In I guess 1997 through 1999 roughly the GSA's Fannie and Freddie both signed, started to sign alliance agreements with all of the big sellers to them, right. Fannie signed with what bank of America were Countrywide. Freddie signed with Wells Fargo. Anyway, so in the alliance agreements there was this agreement to develop products, co co develop products. And Fanny needed help with that. So they asked me to join them in the portfolio to help price and buy some products. So it was really the heydays, the last heydays that we've seen in this whole industry around product development. In my portfolio at the time we did a lot of things that never made it to the light of day industry wide. But we did fixed rate convertible modifiable mortgages. We did timely payment rewards which was a product for borrowers who were sort of marginal credit right outside the normal underwriting of Fannie Freddie. So we raised the g fee to 140. After two years of timely payments, the G fee was stepped down to 40. They get 100 basis point credit refi the baseline. And we can get into some technical stuff, I'm trying not to, but TPR was set up to mirror a big part of how the private label market was structured than what called shift in interest mechanisms on subordinate bots or the step down test. So anyway, we kind of brought some of that Wall street capital markets expertise, my role at Fannie to design these products. So that was tpr. But EA was the sort of base underlying underwriting criteria. So EA was expanded approval level one, two, three, you know, one is kind of marginal refer with caution loans that didn't meet the Fannie guidelines. And then three was a little bit, you know, more risky product. And anyway and that, that became probably one of the biggest products that Fannie Mae and you know this is probably now 1999 to 2002, 2003 expanded approval loans. Wall Street, I think started to compete against, you know, the GSEs doing EA loans and that eventually became subprime. And you know, I think everybody knows what happened from there. So we also did interest only mortgages, we did 40 year mortgages. We did a lot of the stuff that Fannie, that Wall street adopted in the subprime or in other products. And anyway, it all blew up and we haven't seen any of that product development really since then, unfortunately. [00:15:47] Speaker A: Was going to touch on change management with you as you've gone through the Countrywide, the Bank of America. I've heard some stories there where LOS is involved and technology change. But maybe you could talk about changing of times as well where this industry seems to be a little obsessed with technology. Maybe it's because I write about it and has forgotten what makes it so great, which is the ability to create product and guidelines and, and what you were just speaking about. Could you maybe just talk about the change you've seen over the years, whether it's people, organizations or product to technology? [00:16:25] Speaker C: Yeah, and I just want. I heard you guys say B of A. I was never at B of A. I just want to be clear. It was Countrywide which got acquired by B of A. But I went from Countrywide to Fannie Mae to the home Loan bank system. Yeah, I, I've. There's a lot of different, I call it sort of corporate disciplines, right? Technology, operational excellence, sales or customer intimacy and then product development. Most of my effort and career has been in a product development side. I just think the mortgage market lifeblood is products, right? I mean if you think about the mortgage market compared to any other part of financial services, we really just have one product that's pretty unique. We have a 30 year fixed rate mortgage. Like that's pretty limiting, right? I mean when I was at Fannie, Frank Raines used to say he was on the board of Pepsi Frito Lay. And Frito Lay took a pretty staple product called a potato and sliced and dice it into more than 50 products and potato chips and all the different salt and vinegar and barbecue. Right. And we just have one product 15 year. And we've expanded that to 15, 30 years. Expanded to 15 year, 20 years. So there's certainly potential to develop more products in the mortgage market. I'm jumping ahead a little bit, but that's why I set up Future Wave is to try to bring back some of that spirit around product development to get more people into homes. But even as important is to give investors more Alternatives of what to buy. Right. Investors benefit if there's more choices for them to buy versus, you know, I spent most of my career, especially the latter half, as an investor. You don't want to buy a product that everyone else is buying. All right? It's more competition, right? The less spread and, you know, the liquidity comes out of a sacrifice. So I'm a product development guy. That's what the industry needs to continue to grow, especially in this market right now. [00:18:18] Speaker B: Was. Was there very much product development change in the difference in working between Fannie Mae and then the Federal Home Loan bank of Chicago? [00:18:27] Speaker C: Yeah, it's a great question. So I'll just start with saying product development has been shut down since 2004. Right? So product development in the mortgage market used to be led by the gfcs PRIM primarily. All right? And if you remember, they went into accounting restatement and a fail. Led accounting restatement, 2004, no new product development. And then that bled into 2008 conservatorship. Right. July 2008. So that's a long time. We're talking 20 years. No real product development coming from the GSEs. The next natural investor base to develop products would be then Wall Street. Wall street got his hand slapped after 2008. There's really been beyond NAV, QM and RTL and some product development. There hasn't been that much product development from Wall street either. So we're sort of in this dry period of product development now for 20 years. It's a long time for me to just witness this lack of creativity and innovation in the market. So when I went to the Home Loan bank, it was because someone said this to me, which I'll never forget. They said the only entity that can compete with Fannie and Freddie is another gse. Right? Pretty simple. And home loan banks are sort of not as well known or not certainly not as well understood as a GSE in a mortgage market. Right? But the GSE, but the home loan banks are the oldest GSC and frankly, the largest. Right? I mean, there's today 6,900 members. You look at Fannie, Freddie, best case, they always have maybe 2,000 customers, right? Seller servicers. So I said, this is really interesting, like an arbitrage opportunity. The home loan banks are much bigger, much older. They've been around since 1932. Fannie in 1938, Freddie in 1970. Really strong customer base. What can we build for the. What can I help build for the home loan banks in the mortgage market? And so that's what I try to do. I spent 14 years home loan Bank Chicago managing first pricing and then all the mortgage capital markets to help increase the mortgage market share. For the home loan bank system and its members versus Fannie and Freddie, it was certainly David versus Goliath type of career choice. I have no regrets. I mean the home loan banks, when I left in 2023, we had in the MPF program we had about 7, 800 sellers of mortgages, at least selling one loan per year. And a couple of the home loan banks that didn't participate in our MPF program, you know, I had a hundred there Indianapolis. Anyway, we had maybe about 900 to 1000 sellers. So not quite right there with Fannie and Freddie, who each year has maybe 1100, 1200 active seller servicers. But we were kind of right there. So we built up a sizable program, correspondent program, effectively buying closed loans from community banks. [00:21:19] Speaker A: My view of Wall street from the movies at least is very stressful lifestyle, head down, always working up, up with the market and then at night, different tweaking and staying ahead. So I think you've been able to transition to at least take a step back, take a breath and look at things. As we were preparing, one of the interesting conversations we had was your view of world income, which I didn't even think about. And you're really helping me reflect that. This is something that wouldn't hurt any industry, but especially our industry to think about as we're coming up with new product. Can you talk about your personal journey from those days, let's say, to where you are now with a future wave and your, your process? [00:22:05] Speaker C: Yeah, it's a good question. I mean, I, you know, by hook or crook, I mean, I just been working hard for a long time. I don't know school and then karate every day, you know, during my teenage years and you know, I won the New Jersey State AAU Karate championship for four, four times. So I put a lot of time and effort into karate and school that led to Penn. And it all kind of feeds on itself, you know. But before I went to Penn, I went through a Navy program called Boost, which was this is 1987, 88. There were virtually no minority naval officers in America, right. So I was part of second class. It was 146 of us selected nationwide to train as naval officers out in San Diego, California. And it was a great carrot. If you graduate from the program, you were guaranteed admission to the U.S. naval Academy or awarding a naval ROTC scholarship. So my parents told Me, you got to take that offer. You got to take that scholarship. The reason I'm bringing that up is if you've ever seen the movie Officer and a Gentleman. That was Aviation ocs, Officer Candidate School. That was only for three to four months, but I went through that for a year. Every day was, you know, brutal. Like, literally, you know, 5:00am Wake up, you know, barrister inspection, you know, go out pt, physical training, drill. Anyway, I got brutalized kind of for enduring karate, you know, getting my black belt and all that for many years. And then in that program in the Navy, and then four years in Navy rotc. You know, Roche was great. They paid all my tuition, all my books at ivy League school, $100 a month stipend. But I had an extra naval science class every semester. You don't get credit for that at Penn. And Thursday morning, 6:00am, 8:00am drill. Like, I just got used to working pretty hard, you know, and, you know, when first job in the Navy, I mean, I'm sitting on a gray hall in Pearl harbor, and I remember asking my boss as a supply officer, oh, you know, first day, what are the work hours? And he's like, you gotta let. You're on a ship, it's 24 7. You know, I'm like, all right, that makes sense. Like, people don't go home at night. You're on the ship. Like, you work 24 7. And so I kind of just kind of went through this form in these formative years. A lot of hard work, a lot of training. And, you know, the life in the military is. I'll say this, and hopefully it doesn't come across wrong. It pales in comparison to life. Wall street mortgage industry, meaning it's a lot harder to me. I mean, military doesn't get enough credit. But, you know, I mean, the things that we had to do in peacetime, the things that I had to do. I had a relatively easy job. I wasn't shooting guns at people or any missiles. But I'm sitting on the back of a guided missile frigate, the fantail of the ship. And I was a helo control officer, and I got to land a helicopter as the ship is pitching, rolling on the back of the ship using my glide scope indicator. And if I make a miscalculation and tell them to touch down now on the one MC and the ship is pitch and roll, and he flies off the back of the fantail, goes into the ocean, he dies. Like, it's life and death, right? And so there's more examples of that underway replenishments So I learned right away in the Navy I got to take my job really seriously. I got to be really good at it, you know, this life and death kind of situation. So I kind of just, you know, had this great, you know, fortunate background where I was able to take a lot of things. I had to take a lot of things seriously. Right. And I didn't want to lose my neighbor RT scholarship. I mean, we had Operation Golden Flow unannounced. Once a semester you got to take a test to make sure there's no marijuana in your system. So I never partied that much at Penn because it was like, I don't know what Operation Golden Flow was going to be up on our board. And I got to take a, use a terminology, a pitch test. And if I fail it, I'm going to lose the scholarship. Right. So always kind of serious minded. And I think that's, you know, all those formative years Karate Navy kind of really helped me. When I got to Wall Street, I was serious minded at that point. Wall street was like, let's just get through this and try to figure out how to make money. And that's kind of what I've been doing, I guess, ever since. I don't know if I answer your question. [00:26:16] Speaker A: You did, but the making the money ingrained in you. At some point something changed where you looked at bigger picture items like you do now with Journeys and Global Income. [00:26:28] Speaker C: Yeah. [00:26:28] Speaker A: If you just want to talk about the now, that was a really. [00:26:32] Speaker C: Yeah, yeah. I, I had done so much in terms of trying to figure out how to make Money that in 2014 I rejoined a home loan bank. I'd been gone for eight years and they asked me to come back. And when I came back, I took on a lot of additional roles. One was the co director of the Office of Minority Women Inclusion. And there I was just trying to help the bank, you know, improve its culture, frankly, feel that more minorities would be interested in working in the home bank system. Right. And there are very few in the Home Loan bank system. And I did that for four years. And it was a night job. It became a day job and daytime job and a lot of work. And we hired a full time chief diversity officer and I took a, I took a break for a couple months, but then I said there's stuff that I need to do or need to learn. I need to give back outside of just trading and making money. Right. And so I, I asked the Home Loan bank to help me. And so the, the Homeworld bank system, no excuse Me Homo Bank Chicago board first nominated me to be on the board of Mercy Housing which is in America the largest affordable housing nonprofit developer. And so I'm still on that board. I'm treasurer of that board in Mercy Housing Lakefront, that's the Midwest board. And then I joined the board of Quantic bank which was at the time the largest DDFI community development mortgage lender, $800 million bank that's serving low to my income populations. I joined that board and then the Homeworld Bank System nominated to be their representative to the National Housing Conference which is the largest umbrella affordable housing trade association in America. And I kind of rose up there pretty aggressively. My trading instincts. I joined and then I became chair of the Affordable Homeownership Working Group and I joined the National Advisory Council. And then for two years, 2021 to 2023, I was at the helm of the organization as a national co chair of the National Advisory Council. They're just trying to figure out affordable housing policy and how we can design solutions nationwide. With WAS and politicians around, affordable housing so kind of expanded. Yeah. Well beyond capital markets, diversity and inclusion, affordable housing, there's certainly no shortage of topics to work on in this industry. [00:29:00] Speaker A: That's true. And I think we're going to get into a little bit more of what you're doing today after this commercial break and maybe even get into some questions where everybody thinks they have an answer for affordable housing and yet nobody has an answer for affordable housing. But we'll see this on thanks to our great sp this would not be possible. And yes, we're always looking for new sponsors. So if you are a potential one or you're listening and you know one, please have them reach out to us. We'll be back in about a minute. Want to take your business to the next level? 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[00:32:02] Speaker A: I mean that's just a great opportunity for any lender partner to get in front and in have it there. So speaking of opportunities, we have cut back as an industry severely as the rates took a U turn out of nowhere and companies have too many employees and had to figure out how to cut back to where it is today. At some point they will grow again. What do you think should be the balance Steve? Traditionally Sales first Org industry between sales and capital markets and product offering as IMBs or community banks grow. And maybe how does future wave help in in some of that as well? [00:32:44] Speaker C: Yeah, this is one of my, my favorite topics and why I Changed my career from corporate to entrepreneurship. You know I. But you just said something Michael, that it came out of nowhere and I'm going to beg to differ. I mean we in the mortgage industry were in sweet spot, a comfort zone for four decades, 40 years. Call the refinance boom. It happened since 1984. Rates, if you just track Chennai or Treasury, pretty simple rates rallied bell for almost 40 years. It really from 1984 through Covid in 2020. Right. And so you had this incredible trade for 40 year. Trade like that doesn't exist. Name another entry. You can do one thing over and over again for 40 years and keep making money doing it. That's unprecedented. Like it's an embarrassment of riches, right? So the people who are resisting that and say oh, rates are going to go back down. I'm like, guys like you're getting greedy. Like it's 40 year trade. Like that's a great. I'm trying not to swear because I'm a trader guy, Navy guy. Like that's a great market trade. Like what are you talking about? It was a great run. And on top of that, on top of the rate rally which bottomed out in Covid in 2020, you had buyers of mortgages. So I'm trying not to be too technical as a trader, but the mortgage rate is a combination of rates in spreads, right? Spreads versus Treasuries. The spread effect is based off of the buyers of mortgages. Right? So you had Annie and Freddie buying mortgages until they went in conservatorship in 2008. They were prevented from buying mortgages on balance sheet. And then the treasury stepped in first and bought in 2009, 235 billion. I was on that contract. And then the Fed stepped in through quantitative easing 1, 2, 3, 4 and ended up through QE4 buying about $2.3 trillion of mortgages. Like it doesn't get any easier than this. Like you know what an incredible cycle that is. Like it. There's no other industry that has that level of help or support. So you had a 10 year treasury rallying for four years to GFCs buying mortgages, the Fed buying mortgages. All that's done, the trade is done. Like be thankful, look back and say that was a great trade, but don't look forward and expect another handout. That's like welfare to me. Like to me I'm like, are you greedy? Like the trade is over. So when I say that I talked to a lot of people in the industry back in 2021, 2022, after QE4, quantitative easing 4 ended, I was like, the Fed is out, the GCs are out the 10 years, not rallying anymore. What's next? And when I started future waves, because I was so shocked, honestly, and surprised that people didn't have an answer. People were sort of still looking for the past, right? They were kind of looking for, oh, we might get another rally. When I'm like, no, that trade is done, right? It's almost mathematically impossible to get back there, right? You need a really bad economic situation to get the 10 year treasury down 2,3%. And there's no buyer of mortgages, no government buyer, no gc, no Fed buyer to come in and collapse spread. So like the trade is done, so move on, right? The next trade is we're in a purchase market and not a refi based market. All right? So that's when I started to think about, think about it and look and say, okay, well there's an opportunity because people aren't really seeing this, right? So if you're in a purchase market. Well, I like to take this way. If you're in a refi market, rates matter, you're in a purchase market, products matter, right? I mean you got to get people into homes, right? And all the demographic numbers that have been out there in conferences for the last five, 10 years, it's pretty clear what the marginal who the marginal homebuyer is, right? Like baby boomers, 70 million baby boomers. And I look at it, if I boil it down, 28% were diverse and now you have millennials and there's 80 million of them and 45% of them are diverse. And then it's like, wow, that's a pretty sizable increase. We're talking like 15 to 20 million more diverse minority home buyers in the future. So like who's serving that population and when I say who's serving both the origination side and the investment side, there's no origination without an investor for that loan. And that's why I set up put just to advance that conversation because I just thought people were. Most people in the industry were not looking at it quite that clearly and not quite that proactively to try to like figure out how to get ahead of what's next in the industry. So I don't know if I answered the question, but that's the way I look at it. [00:37:37] Speaker B: You know, Future wave purchases a full suite of, of GSC loans, government, you know, itin all kind at some non qm I think from the, for the mortgage originators that are out there right now, out of the entire suite that you have seen, based off, you know, based upon the, the late 90s, early 2000s to today's environment, products have changed as far as qualifying is concerned. But out of everything that you have seen for the purpose of home ownership, which one, which products do you think will have the largest impact so that originators can not only chase after that, but also encourage home ownership for those who may have been disenfranchised or feel disenfranchised, even though they might not? [00:38:25] Speaker C: Yeah. Thank you, Michael. The other Michael. Right. Michael Zhao. So we're not playing much in agency space hands down because we can't add as much value in the agency world, right. I mean, everybody's kind of selling to the same investor, right. Same servicing fee. It's not a lot of value to add. So we're playing in both the, where the growth is, which is non qm, and then on the outskirts of where the growth might come from, which is first itin, Sharia compliant mortgages, et cetera. Right. So the, what's the word I'm looking for? I guess the, the best way I can sort of, you know, tell originators is to, you know, there's, there's, if you look at statistics and data, there's markets that are markets not, you know, there's markets that are growing and there's markets that are shrinking. Right? So baby boomer refinancing with a 740 FICO. Yeah, that market is probably shrinking, Right. Like Hispanic family that wants to get in their home first time, that market is probably growing, Right. It's just simple. Right. So you can't attach yourself, unless you're really good at what you do in sales to a shrinking market and do well. Right. You want to attach yourself to a growing market. Right. So that's kind of the way we look at the future wave. Like we want to be involved in the growth markets and help support that growth and help originators and thus homeowners grow their business. Right. So we're playing a big, a big part in the ITIN marketplace. I can talk about some of the details there, but suffice to say, ITIN has been a backwaters product. Right. I mean, I was looking at ITIN loans from the Hispanic National Mortgage association, hanie Mae in 2009. Right. David Fontanilla, Deutsche bank was a buyer. It's not a new product. It's been out there for a while. But has it ever gone mainstream? No. Is it under duress today? Because of the. Frankly, politics, probably, yes. Right. Does it math beer out the politics? In my view, no. Right. I mean, ITIN borrowers are typically Hispanic families. And a lot of people are saying, well, they might get deported. Let's do a little math like this. Think about it, right? So you're coming in, you're trying to get a mortgage, trying to buy a house, probably you need a job to do that, right. Need some documentation. Is there a high deportation risk for the people who are raising a hand saying, I want to buy a house? Probably not, right? The people who are afraid to be deported, you know, they're keeping their hand out, right? They're hiding from ICE and whomever. But I. I think it's kind of overblown that itin. A lot of people are saying, we need to back away from itin. I just think the performance history has been stellar, Right? These borrowers are. They consider themselves fortunate when they can achieve the American dream and they get their first home. They don't default and they don't prepay. That's what the history, the data. You can look up the data, the data shown incredible convexity, prepayment convexity and default performance. So it's a great class of borrowers. When I look at the risk and when I look at the growth, the growth is much bigger to me than the risk, right? So I see it as a great opportunity. And hopefully originators aren't shying away and worrying about deportation risk, because you have literally tens of millions of Hispanic and other, you know, immigrant families without a Social Security number who would take an ITIN mortgage to help put them in their first home and stay in America, you know, and, you know, just be a part of the American homeownership dream. So look at as an opportunity, not as a fear of something I need to avoid right now. [00:42:09] Speaker A: Can you just tell the viewers what the ITIN represents? For those that don't know the acronym. [00:42:15] Speaker C: ITIN is just for. If you apply for a mortgage and you don't have a Social Security number, you get an ITIN number. I'm not an expert on this from the irs. And so a lot of these are folks who pay taxes, and these are folks who, you know, file with the irs, but they're not naturalized citizens. Right. They don't have the actual Social Security number. [00:42:38] Speaker B: So you also mentioned Sharia law. I mean, typically that means that they don't want to pay interest. Those who are part of that faith. Is that something that you see as an expanding marketplace as well? [00:42:48] Speaker C: Yeah, I guess this is like a late breaking news announcement. I mean we've been working for six months now to create the first Sharia compliant non agency mortgage. So Sharia compliant ariba free, which Islamic word for interest? Riba. Islamic. Islamic Sharia. Excuse me. Sharia compliant Islamic mortgage has been around again since my days at Fannie Mae. We were looking at trying to buy these loans in the late 90s, so not a new product, but they've only been within the GSC realm. Well, now I'm going to say something publicly. You know, we have Bill Pulte at the helm of the fhfa. You know, a nice guy, but you know, he's already publicly said things di's nonsense. And anyway, it takes a stroke of a pen for him to eliminate the ability for Fannie Freddie to buy Sharia compliant or Islamic mortgages. So we are working with five or six, you know, originators of that product exclusively in America today. We're working with them to come up with, from a defensive standpoint, an alternative so that if the GCs are prevented from buying Sharia compliant mortgages, they still have liquidity beyond their portfolios. If they're bank, they still have another alternative. So we're, we're out there every day talking to one investor in particular has done a great job and kind of, you know, being, becoming educated and say we can buy these as a non agency alternative and then working with these originators to help them develop alternatives. But it's a big deal. This is one of the things, things where you, you're trying to bring people to the American homeownership space. And these are good families. They're, they, you know, they don't break laws, they pay their taxes. They're just devout Muslims. Right. I mean, what, what's, what's the problem here? Like they're devout Muslims. They pay, they're actually very conservative people. They, they move their religion into their finances. They don't pay interest through Islamic law. Do I want to penalize that guy? No, I probably want to reward him. The history has shown again, performance like itin stellar. They're very conservative. They don't mess up, they don't default. Right. So we want to help them. We want to give them an opportunity to get a mortgage. Right. These are things that to me, some cultural sensitivity goes a long way. Right. From a business standpoint and from a financial standpoint. [00:45:12] Speaker B: Yeah. I mean in my world, in the private money space, there's a number of Islamic borrowers that we have. They typically will pay cash and they want to do some kind refinance out. And their biggest hesitation is I don't want to pay interest because of their faith. And so you know, for, for the you to be spearheading that is. Is very powerful. But you know, bank. I look at how banks are yielding 70, 80% of the market share away from community banks. And, and of course there's a resurgence of brokers that are out there right now. So what do you think as future wave leader? What are you doing to. To solve that? I. I don't want to say take away from the market share of the banks, but really to solve this issue. How do you think? [00:45:55] Speaker C: Let me give a shout out to Eric Bluequist who just sent a message. He was with me and Fannie Mae and I mean with the team. Really. Excuse me, not with me. If Fannie Mae and developing products in the, in the late 90s. And he just put the definition of itin out there. Individual taxpayer identification. I'm sorry, I didn't say it. Eric. Eric's been out there. Some of us, this has been our livelihood or just been our passion for 20, 30 years. Literally trying to develop products and increase. Help grow. Excuse me, increase products and help grow the industry. So good to see you, Eric. Yeah, sorry, sorry. So Michael, so your question was a little bit around the Solving. [00:46:37] Speaker B: Yeah, taking away. Yeah, solving the problem of major FDSE insure banks. Taking. [00:46:44] Speaker C: Yeah, the banks. Okay, let me say it this way. The Home Loan bank System set up MPF program in 1992, Devin. And at the time, you know, Countrywide and all of the largest mortgage lenders had a dominant market share. And Home Loan bank said these are our members and we want to increase their market share mortgages. And I'm trying not to go into the history. People remember thrifts or SNL used to be the primary lenders and mortgages. And then they all kind of died off, fell off to the RTC crisis, savings alone crisis. So the Home Loan bank set up a program to bring, you know, these community banks back into the mortgage space. I was, you know, when I joined the Home Loan bank of Chicago in 2003, the math of this boiled down was really simple. Right. The G fee in the cash window was 24 and a half. I think I can say this at Fanny. At Fanny and I think Freddie was similar. And at countrywide our GFE was 10bps. Right. So a community bank, you know, start off with an eighth roughly disadvantaged compared to any other, any kind of big seller to Fannie and Freddie. Right. Because community banks were selling the cash window. And that's one of the reasons I went to the home loan bank to say, ah, we can fix this. So in 2003, fast forward to today. Has a lot changed? Not really. Right. There's not as much volume based pricing, but when you look at the market share with IMBs at 70% and banks maybe 30%, that's probably a problem, right? I mean banks have a lot of advantages. They can put loans on balance sheet, they can sell just like an imb. So why is your market share so low? I call it the three fees. When we talked to our clients today, I said, well, there's a lot of compliance risk, okay. There's a lot of complexity to mortgages, prepayment risk, et cetera. And then probably the biggest thing, there's a lot of costs, right? It costs about 8,007, 8,000 to originate a loan. So a lot of community banks, you'd have to hold a sizable mortgage department to come up to cover the do enough mortgages to cover that fixed, you know, fixed costs. And so, and we tried, you know, we worked on this and it's not unsuccessful. But the Home Loan bank of Chicago and the other home loan banks in the MPF program and in the MPP programs work to make sure community banks have a good execution in the mortgage space. But it really hasn't gone up, right? It's kind of gone down or level leveled off at best right around 30%. And so that's one of the things that we're working on, we're trying to figure out. I'm trying to figure out, okay, I know what the home loan banks have done and I won't go through all these details. What can we do additionally to help bring or you know, attract community banks into residential lending? And I'll start with one. You know, homeowner banks, you know, by charter are only allowed to play in the agency space, right? So you know, MPF program is a great program for a community bank to participate in agency mortgages. There's no G fee and there's no llpas. That's incredible. Right? That gives them a price advantage, right? So they a rate advantage to the borrowers so they can compete. But if you're not playing in non qm, you're not playing in itin, right? As a community bank, you're kind of falling behind because that's where the growth is like we talked about earlier. So that's what we're working on is I want to be complimentary to the home loan banks and Say you guys take the agency space and we're going to help from a non agency standpoint. Community banks play or be competitive in mortgages, do itin non QM, etc. [00:50:35] Speaker A: To piggyback on that and maybe to catch some of our listeners up. In order to succeed in the future, you're going to need to play in the new purchase game, which means you're going to have to come up with products to get people into homes. It's that simple. And if you look at the data, as you get more diverse, you'll open up more opportunities because that demographic is growing. That demographic, that diverse demographic we've had represented multiple times now on the show and often that comes up is the lack of trust of the bank, especially older generations in, in some of the, the ethnicity groups that are going to be a large portion of the, the purchase market. So I would think that a selling point for you to work with these banks is if they already don't trust and then you don't have programs for them, you're actually driving away depository dollars too, I'm sure. Can, can you? [00:51:47] Speaker C: Yeah, it's a big problem. I mean, the community banks are the most well positioned to thrive in today's mortgage market. Right? Because like we talked about, it's a purchase market, not a refi market. A purchase market is a relationship market. Right. A refi market, for lack of a better term is a factory. Right. You want to process a lot of loans efficiently. Rocket is great at that. Big IMBs are great at that. Slow down purchase market is you're gonna walk in and it's your first home and you wanna figure out how to qualify and get approved to buy a home. Right? So in my view, community banks are sort of right at the table for where the mortgage market is at and where it's going, right? They're sort of well positioned. But if you don't have competitive products, you don't have competitive rate and the borrower's gonna walk into your branch or your office and, and they're going to look around and say, well, I can go to Chase and buy online and apply online and say 50 basis points, right? So that's the kind of the piece that we're, we're working on is community banks. You just, you can't do portfolio lending, right? You've got to use a secondary mortgage market. You've got to be competitive from a guideline perspective in a rate perspective with Chase and B of A and Citi and anybody else, right? You in Rocket? Right. And really? IMVs. Right. And with brokers. Right. So that's where a lot of our work is. This is trying to make sure that they can compete at today's levels from an underwriting perspective and from a rate perspective. The, you know, I don't know, Michael, if I answer your question, but was there another piece to it? I just want to make sure I covered it fully. Okay. Okay, I'll take that. Yeah. I mean, let me summarize. I think we're probably going to run out of time soon. The main theme is that the market has shifted, Right. And the industry has shifted. And you don't want to be caught flat footed. Right. It's frustrating to me after more than 30 years in this business to see so many firms potentially flat footed. Meaning they're still looking backward at the mortgage market of the past. Right. And that's not to say you're saying I'm only doing agency, I'm not doing. No, I know a lot of people do a non qm, et cetera. But my point is it's such a big shift, right? I said it earlier. Rates have shifted dramatically toward a flat to upward sloping rate curve, you know, through spreads and through rates. So we're not going to go through refinance ways. Right. Demographics have shifted dramatically. The baby boomers are not buying homes, Right. They're retiring or they're dying. Sorry to be so, you know, morbid. But like, they're not home buyers. Like, what are you talking about? That was a trade from the 90s and 2000s, like the refi wave of baby boomers. Like, the trade is long gone. Like, you got to move on. And the way to move on, I think, are through products. And product development has been shut down because the GCs are in conservatorship. They can't develop new products. Wall street got his wrist slapped by the federal government, right? Lawsuits, billions of dollars of fees paid that they can't do. All these innovative mortgage products. Boom. So stop right there and think. So now what do I do? Okay, we're in a whole new marketplace. That's my message. That's why I set up the company. So we're in a whole new market. How do you make money? How do you do well in this market? And you've got to figure out, okay, who's coming in my door, who's. Or who's most likely to come into my door, who needs a home and I can help them with it. And that's going to be a different, I mean, not, you know, it might be 2 out of 10. It might be 7 out of 10. Depends on where you're set up at geographically. But there's a different profile out there. I'm not a liberal, but it could be a, you know, I'm making up some crazy stuff, but a lesbian, two women come in the door and they want to buy a house together, right? It might be an Asian family, right. And that doesn't speak English perfectly. I don't know. But you've got to be ready for that scenario. More than ready. You've got to be their go to solution, right? To get them in a home, that means you're comfortable with them culturally and that means you have the right products and you have the right price. If you can do that, I think you can make a lot of money. If you can't do that, I think you're looking backward, you're not looking forward or as we say in future wave, you're not part of the wave of the future. [00:56:39] Speaker B: Do you think that we have to go a little bit? My opinion is that I think you have to go a little bit backwards to move forward. Because I think if we go back, if you talk about, if you talk about 40 years of a refinance boom, we've entered into a new, different type of economic reality where ADU income, gig economies and it used to be where you rent everything on du, which is sort of AI right. And you set it and forget it and then you, you package it, sell it off. However, I remember when I first started, I was at a thrift alone back in the 90s. And I remember I collected like 15, 10, 99, three W2s or. And you know, and, and, and I. And, and some cats for bank statements to put everything together. It was a, it would be make sense deals, 30, 40% down payment, but it wouldn't. There was no way it would get accepted on DU approve eligible today, even though they have the credit, the collateral and capacity to pay. So is there something that's. Do you think that could be developed for the newer gig economy and those who are taking advantage of today's economic futures so that that could be packaged up as makes sense either at the community bank level or on the non QM level. And is that something future wave has explored? [00:57:58] Speaker C: Oh, tough question. I mean I almost thought about a line back in the old days. Michael, you might remember this. You make them, you collect them kind of mentality, right? So the loan officer. This is something I talk about, I talked about during my 14 years with the home loan bank System. A borrower walks in a door and the loan officer. Their kids are in soccer practice together on Wednesday and they're in the pews on Sunday. That's a. That's relationship banking. I think that's where the industry is going to end up at, frankly. Or that's where it's going. You know, the factory refinance refi process. I keep saying it over and over again. That's kind of like not as popular, right? So it's. Yeah. I don't know how to answer your question directly, except that's it's a relationship business, right? It just is a whole. A home purchases the biggest, most sensitive, financially sensitive transaction in people's lives, right. And so. Or mostly sensitive, right? It's like, oh, we want to get our home. You know, we want to get a bigger home. Like, people are really invested in that. And so I just don't want to deemphasize that relationship piece. And let me talk about the cultural stuff, because I think you alluded to it a little bit, Michael. This is the way I look at it. No racism, okay? I'm a black guy. I've been doing this for 30 years. No racism. However, I'll put it this way. And I'll say very politely but truly, the way I think about it, if somebody asked me, Steve, if B of A call says, steve, you have a great background. We want you to lead our Vietnamese homeownership initiative. We think there's a lot of growth in Vietnamese home lending. I'm going to pause. Do I have anything against Vietnamese people? No. Do I understand Vietnamese people and what they need and how to serve that borrower population? No. So I'm kind of. Yeah, I appreciate how much was the pay. It's a great offer. But I'm probably not your guy to lead Vietnamese, you know, homeownership, Vietnamese lending. And I think that's kind of where we're at in this industry. Somewhat like if people are here, minority and they're not minorities, right? It's. They're in minority home ownership and they're like. Is a little hesitation, right? And I don't know how to address that because we don't have a lot of minorities in the industry in leadership roles, right. And so I think that's kind of the rub of where we're at is sort of people aren't stepping up and say, okay, this is something I can do. I can be successful at it. Vietnamese homeownership. I'm the first to say I'm not your guy. I Hate to say this because I'm not a racist guy, but I do speak very dramatic. I mean, you know, honestly, as a trader, like, yeah, white guys and you being. You hear minority home ownership. Yeah. I don't know if that's really what I'm well suited to lead. You know, I get it. I would be in the same place. Right. So all I say is we don't have a lot of minority leaders. We don't. I mean, minorities are black, Hispanic, whatever, whoever the home buyers are out there, Asian. We don't have a lot of leaders in mortgage space and the firms who are trying to lead. I'm trying to lead across any kind of demographic group. Please try to help us, support us because there's only a few of us out here. Right. And it's necessary for the industry to grow for us to get comfortable, if not successful at this. I mean, we're sort of running out of time to figure this out. [01:01:35] Speaker A: Yes. And we're also, I suppose, running out of time on this show where you bring up one of the most powerful points. But I do think something to talk about on a future episode, the Voice and the message has definitely outpaced the action of our industry's ability to build a pipeline with a diverse group of leaders to match. How much the talking points at conferences and on POD and everywhere and it. You just fear that it's going to way outpace it and it just loses its authenticity at that point. But actions speak louder than words. Certainly opportunity to reach out to Steve or anyone to help their leadership continue to grow in our industry. As Steve said many times, as we believe one great bright spot about this industry is relationships are now as important as ever. We appreciate you coming on the show, Steve. Thank you for joining us on this journey into the heart of mortgage innovation. Remember, every mortgage has a story and we're here to help you write yours. If you enjoyed today's insights, please subscribe, share with your network and connect with us on social media. Until next time, keep pushing the boundaries and uncovering the stories that drive our industry forward.