A Conversation with Beth O’Brien, Encore Finance

A Conversation with Beth O’Brien, Encore Finance

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Beth O’Brien, a dynamic leader and innovator in the private lending industry, joins Kevin Kim on this episode of Lender Lounge. With her rich background in law, real estate, and securitization, Beth currently spearheads Encore Finance Capital. Her journey encompasses an impressive trajectory from working at renowned institutions like Goldman Sachs and Citi to pioneering her own private lending ventures. Beth’s strategic insight and deep understanding of the residential and commercial real estate sectors empower her vision at Encore. This conversation expands on the nuances of private lending, the challenges of market volatility, and the evolution of securitization in private lending.

Beth O’Brien is the founder and CEO of Encore Finance.  She has over 30 years of experience in almost every aspect of the mortgage industry, as both a principal and an advisor. She has overseen more than $25 billion in transactions and has won numerous industry awards. Beth previously founded CoreVest, serving as CEO and growing the company into the nation’s premier private real estate lender. Before that, Beth was Executive Vice President at Auction.com, where she ran residential capital markets, and was President and Co-Founder of AuctionFinance.com. Beth also held prior positions in RMBS trading and securitization at Citigroup and in Real Estate Private Equity at Goldman Sachs. Beth holds degrees from the University of Pennsylvania and Georgetown University Law Center.

Episode Transcript

Kevin Kim: You are listening to Lender Lounge with Kevin Kim, a podcast dedicated to helping those in the private lending industry grow, improve, and streamline their business. I’m Kevin Kim, partner at Geraci LLP, the nation’s largest private lending law firm. Join me as we chat with the best and brightest in private lending who are eager to share their years of wisdom and best practices with lenders, borrowers, brokers, investors, and more. Subscribe to Lender Lounge on your favorite podcast platform and learn more about Geraci and how we can work with you at Geraci Law Firm. Check out the episode summary for other valuable resources.

Kevin Kim: Hey everyone, welcome to another episode of Lender Lounge with yours truly, Kevin Kim. We are at the tail end of season four, and I have another repeat guest, a friend of the firm and someone I really enjoy talking to, uh, my friend, Beth, Beth O’Brien. Thank you for joining us today. Please tell our audience about your wonderful self, and let’s get started with this.

Beth O’Brien: Kevin. I’m so happy to be back. As you may remember, I am one of the few people who may, who’s had a career that looks like it leads up to being, uh, the head of a private lender organization. Um, And that I did it on purpose. I, I will tell you, I did not do it on purpose, but it did actually, my background does actually blend to kind of just the right spot. I was a lawyer for a very short period of time. And then I went, um, in, in house at, um, Goldman in the real estate principal area. And there I really spent most of my time working on commercial real estate and did that kind of almost around the world. When I came back through a series of different things, wound up at Citi doing residential mortgages.

And so by the time I had evolved in the crisis to starting my first private lender, which was auctionfinance. com, I had been in a great position where I had done both commercial real estate. And residential real estate and mortgages and some securitization along the way as well, um, in both areas. So it looked like it was kind of a nonlinear career, but once I wound up in private lending, um, the combination of the commercial, the residential, the securitization expertise, it made me able to produce the type of loans and the type of assets that the market could really digest taking advantage of what was going on in the residential market, but through the commercial loan structure. And I think that’s really been what has been driving me even in the past iterations. And in the brand new company, like, how do we take advantage of what is going on in the residential market, do it in a commercial structure, and then somehow be able to back lever the whole thing?

Like, is it securitization? Is it other things? What’s going on? And particularly because we’re in this Um, challenging rate environment. Some people look at me, and they’re like, are you crazy? What are you doing starting another, um, you know, private lender in this market? And I would say it’s actually kind of a, I think a really great time to lean in. There are things going on in the market that are particularly positive, even though obviously rates have moved in a historic way, uh, in the past couple of years. But we should be able to, especially without any, um, legacy issues, Really take advantage of leaning into this market.

Kevin Kim: We had you on the show last, and one of the big takeaways I had was you have, you were one of the pioneers of the institutionalization of hard money into private lending. And right now we are at this really strange evolutionary stage. Um, yet to your point, there are new businesses that are being stood up. There are new institutional businesses being stood up and we’ve interviewed some of the new C, uh, some of the CEOs that have come now in their third iteration, fourth iteration. Now you’re in your new, your new company, Encore Finance Capital. Love the name. Can you tell us more about Encore? Tell us more about the mission statement. What, what is it that Encore is going to be doing in private lending?

Beth O’Brien: So,we’re looking at both bridge lending and perm lending and across the business purpose space. I would say one of the things that really drove me this time, other than making sure that the strategy of the loan product is something that addresses what the market needs, is also understanding how to find the right capital per loan. I think in the past, it’s been easier to find kind of a one stop shop for capital or that when capital was really flowing, that it was flowing kind of equally into all the different nuanced asset classes.

We’re at a position now where the, each of the different products really has a best source of capital. And so the, one of the important things I think to do now for the, to make sure that the clients are getting the access to the type of products they need is to knit together. different buckets of capital for different types of product, which may seem a little harder, but I think anyone who’s ever been creative and flexible in this market has always relied on more than one outlet.

And I think it’s just become more important now to make sure that you’re looking for literally the best source of capital for each one, because people are, you know, the clients don’t have as much room. There just isn’t as much spread. You actually have to match. Uh, the right source with the right outcome. And so I think, I think combining the front end and the capital markets has become even more important than usual. It was never unimportant by any means, uh, but there was just a little more room.

Kevin Kim: I tend to agree with that. And that’s definitely been a trend as you’ve seen life coach up in more this diversification at the institutional level. I want to spend time on that, but I want to get, I want to get on the more retail front. Okay. For a lot of our listeners are originators. A lot of our listeners are folks that sell loans. Tell me more about Encore’s, uh, I guess, uh, main street side of things when it comes to lending, is it going to be a wholesale outfit? Is it going to be a retail outfit? Is it be all of the above? What, what is the mission for when it comes to originate origination as it pertains to Encore?

Beth O’Brien: So, we are predominantly a direct originator, and that also includes, um, brokers, it, it might include some white label. Um, but I think the, the, the dominant DNA is really direct originations. So either direct to sponsors or direct to brokers who, um, are, are deep in this market. Um, certainly we have a lot of broker and direct business, um, but we are, um, Not at this time, buying loans from the market. We are creating the loans.

Kevin Kim: Last time you were on the show, you really impressed me with this. I always use it these days. The burgers, fries and shakes analogy. Now, are you bringing that same level of discipline and consistency to, to Encore with the different sources of capital? Right?

Beth O’Brien: Now, you really need to, or you cannot be efficient. Right? Like the, the important thing, particularly when you’re starting from scratch again, is Not only are you building the right product that the market needs, but can you build it at scale and profitably, right?

Otherwise, like why bother? You know, it’s not, um, you can’t make it up in volume if you’re not building the right, the right product that people need. And in this space in particular, again, it’s, this is the combination of residential and commercial, but it has both the benefits and the negatives of both.

So what I mean by that is you can do residential loans. They’re really a commoditized product and you can build out all the technology and you can run it through on a, um, almost on a conveyor belt type process, right? Now, a commercial loan can be much more lucrative, but it is in general a bespoke product.

So how do you marry this, you know, the residential aspect with the bespoke aspect of a commercial loan? But do it in a way that’s both scalable and profitable, and that’s where you, you have to have technology, you have to have an approach, and that’s where the burger fries and shakes come in. It’s not, it’s not like you’re telling people they can never do it, it’s not just a simple box that you’re just turning into like you can, um, with a consumer loan, but, not that they’re simple, but they’re, they’re commoditized at this point.

Kevin Kim: They’re all remarkably very similar, right? They’re either on the conventional side, especially it’s all, all within one particular narrow subset. So you’re saying that it’s not necessarily the parameters of the loan themselves. The loans will be customized.

Beth O’Brien: The loans are still going to be at somewhat bestow. They have to be to address the client’s needs. But have we built a process, a due diligence process, an underwriting process? The technology even around ordering appraisals can be something that gives you this very efficient lift. Um, so that you’re not, you know, dropping and dragging and doing everything in email and Excel. Because otherwise you can’t, you can’t do, um, you know, it’s funny, people look at my loans and they’re like, wow, Beth, your average loan size is nice and large if they’re doing, you know, single asset. Whereas a commercial originator looks at me and says, how do you do loans that are so small? Right? And so that’s, that’s where I’m comfortable is somewhere between where everybody else is comfortable.

Kevin Kim: And I just got back from a commercial show, commercial real estate show. We have that part of our practice group on the security side. And it’s fascinating because you’re seeing a ton of the guys that were just, we did multi industrial retail and office. These guys that were in the major four food groups.

In commercial now coming to the table and say, we would rather have those, what they call small balance built to rent deals where they’re realizing, Hey, there’s a lot of room here and there’s a lot of opportunity here. And so that actually raises an interesting question for you is, will Encore be also be participating in construction lending? Because it seems to be a big trend in the market.

Beth O’Brien: Yes. And in particular, in the bill to rent space, I think, um, there’s really a strong appetite for it. Um, they’re both at the construction lending piece and then the lease up piece, which are, it’s only a different product because of what I said earlier, because it’s a really different bucket of capital that’s interested in both of them, right?

Like a lease up loan takes a different risk weighting. At a life co then a construction loan. A construction loan is probably not suited for life co-balance sheet. And so the, in this kind of bringing the two ideas together, if you, if you’re knitting together the right capital source for each product, you probably have two different capital sources.

Even though as the lender, you wanna be the transitional lender, you wanna be the lifecycle lender for that particular client, regardless of where they are in the cycle. And that could be the construction loan, it could be their lease up time period, which. Interestingly, the banks have it like each, each of these laws has a slightly different friction point for certain types of capital in the market.

And then at some point you want the fully stabilized permanent loan and does, you know, could be an agency loan on some of the bill to rent, but it’s not always agency, agency eligible or not always the best loan for that particular client for a variety of reasons. And as I’m sure people mentioned, you know, sometimes the bill to rent is single tax parcel, which makes the commercial group feel really comfortable.

And sometimes it’s individually parceled, which makes the more residential investor feel really comfortable. And again, somewhere in between, and is it amenitized? Is it not amenitized? These are all different flavors of bill to rent. Um, they can affect not just your product set, but again, your source of capital or your best source of capital.

Kevin Kim: I noticed a very, I mean, what used to be pretty much SFR-driven was now becoming a more diversified conversation. Like the products that they were, a lot of brokers were at this event and we’re looking at all these different. The different, I guess, terms because they’re also looking for LPs and I’m like, this is very interesting because what used to be just, you know, what looked like a smaller version of a master plan is now, you know, townhome development, condos, SFR, small multi, a lot of this stuff is being brought over to built to rent as opposed to, you know, you start, you saw a lot of that kind of bank style loan before.

So, It’s great to be a private lender right now. And what was the thing I was there, the sentiment was, it’s great to be in resi and it’s great to be in private lending right now. If you’re in real estate.

Beth O’Brien: Well, I mean, look, there’s a bunch of things driving it. And like you said, it’s not all like, I think people’s vision of Build to Run is kind of the bungalow style community, maybe, which is just, it’s everything now. It’s anything that you think of in either residential or multifamily could be considered Build to Run.

Kevin Kim: Unless someone’s living in the property at the end of the day. Yeah,

Beth O’Brien: yeah. But also, as you, as you know, there’s a, just a dearth of housing, of affordable housing in the U. S. right now. Like,, we don’t have enough homes for the household formation numbers. And it’s not like the, um, scattered site, there’s not enough home transactions. Off the MLS to provide it either. And so if you don’t start creating homes, you don’t start creating someplace for people to live. And not everyone wants to live in a city in a large multifamily. Some people wanna live where the jobs are and in these suburbs. And that’s why I think the build to run is seeing such a, um, it’s, it’s, this is a strong season for it.

Kevin Kim: I’ve done multiple interviews this season of, I guess, new iteration, new business for a seasoned veteran. And the question still remains, why? Right? Cause this is, it’s been, it’s been a tough year. Last year was pretty tough. And the year before that was pretty tough and it’s getting tougher and tougher. And, and the sentiment seems to be, you’re looking at it the wrong way. Are you in the same camp? Like, why did you start up again and consider it? You didn’t have to come back. Right? You didn’t have to come back. Yeah. You obviously did not need to come back.

Beth O’Brien: Yeah, I didn’t have to, but I was getting inquiry from my, from the clients, like, what are you doing? Like, when are you back? Like, what’s going on? Because the truth is, um, the clients are doing things and there’s actually a need to have an impact on the space. This piece is, this piece has, you know, come light years from ten years ago. Um, but there’s still, I think, a lot of room to go to make this its own asset class and to really finish the institutionalization.

Kevin Kim: Well, please expand because I, I don’t necessarily know. I don’t, I don’t see where, what, what, what more can we do? I mean, the space is, like, it’s become, this asset class has become, The darling of institutional investors. It’s the only finance class that seems to be doing very, very well, you know, in volume, right? There’s still a lot of, which I mean, the proof is in the pudding. You see a ton of conventional and non-QM guys jumping into the space. So there seems to be a lot of interest, but yet at the same time. No volume.

Beth O’Brien: There’s no volume there. It’s interesting. The private lender volume at some shops is down a decent amount, but at others it’s not. And I, what I think you are seeing is, um, not really consolidation cause there hasn’t been much M and A, but you’re seeing market share being driven to some of the, um, really strong players. And it’s mostly due to what kind of capital they have behind them.

Kevin Kim: That’s a good point, right? So consistency in capital sourcing diversification capital, but at the same time, volumes are down. You know, even in our sector, at least low double digits, right? In the teens, they’re down.

Beth O’Brien: They’re down to pass support, but not everyone’s down.

Kevin Kim: Not everybody’s down. There are, there are teams that are just out there kicking ass and taking names. But at the same time. Market sentiment was, man, it’s, it’s, it’s, it’s rough out there. There are some opportunities; there are pockets of opportunities for an institutional operation to get stood up. I mean, first of all, there had to have been concerns on your part, right? Like what we have to make sure we have these things in place before I’m confident that we’re going to come out here and win because everyone’s watching, right?

Beth O’Brien: Yeah, no, it came down to two things, strategy and capital. If I had the right capital and the right strategy. I really wanted to do it again, without both of those things, it’s not worth it.

Kevin Kim:  And so let’s go to the capital side. The capital side, one of the biggest complaints of last year was with rate volatility and capital being inconsistent. You saw folks, like you said, they made the right choices in their capital partners and they did quite well. Other folks struggled and other folks shuddered, right? And so with that in mind. Can you give me more color on what you’re talking about in this right capital, the right loan, right?

Beth O’Brien: Yeah, you want to start one of these, you have to decide how much control do I need versus what type of capital do I want? There are a bunch of different trade-offs that you have to decide. And there’s also the other thing that’s interesting, and I’ve spoken to a couple other people that have been, um, you know, relaunching in the past 12 months, and I think there’s, there’s a little, like, you know, coffee clash that gets together once in a while, and I think one of the kind of common themes is There are all kinds of people who want to invest in the operating entity.

There are lots of people who want to invest in the assets at any given time. And there’s another theory where you find an investor who wants to do both. Um, which is actually kind of the hardest of the three different. Um, approaches and be also have the least flexibility. It depends on, it depends on what your goals are and how you manage the guy. And there are definitely pluses and minuses of each of the three approaches. You don’t have to, I mean, anybody can sell assets, right?

Kevin Kim: I mean, ultimately, you can, I mean, if you really hustle hard enough, you can find a buyer for these loans, but whether you make money or not is the question, right?

Beth O’Brien: Look, if even if you’re someone who does have a capital source that is interested in assets and the entity, which is not always the same person, right?

Because the entity is not a fixed-income instrument, right? Like it’s actually understandable that people aren’t necessarily interested in both. Um, but even when you find that person or that, you know, that capital source. You may also have other things that you do. You may still be selling loans. Like I was always a fan in, in any of the companies that I’ve run, making sure that I was securitizing and doing whole loan sales.

And maybe it’s a different percentage of one versus the other based on how the market’s doing. But you don’t, you don’t get five basis points smart and don’t do whole loan sales because the securitization market is inside. You need your pipes open to the different types of capital at all times. And so you have to, you do have to manage how you deal with the outside world.

Kevin Kim: So for you, for the capital side, what were the goals when you’re, when you’re laying the foundation and getting ready to gear up, what were the goals in the right kind of partners for you? Because this is not going to be a small business. This is going to, you’re going national.

Beth O’Brien: Yeah, I know. I’ve always been more. I’ve always tended more towards having somebody who’s both in the entity and who likes the assets. I have found that to be an easier partner for me. I have seen other people do incredibly well without doing that because they, they may have more control that way, or they may be dealing with somebody Like I said, it’s not always, a fixed income investor is not always a natural private equity investor, um, and vice versa, but being able to at least have some combination of that has been very positive for me.

It also just cuts down on the, like, it’s great to have a partner who actually understands the space and is interested in the space, not just in other things. I mean, it just depends. I mean, there’s, again, there are, Real benefits, um, to each of the different models, but for me, that’s always worked the best.

Kevin Kim: Okay, so I want to pivot to more of an entrepreneurial conversation. We kind of touched on it a second ago. You didn’t have to come back. You could have rode off into the sunset.

Beth O’Brien: I know, okay, Kevin, I surprised myself. I kind of surprised myself. I just, I knew I just wasn’t done.

Kevin Kim: So expand on that because from an entrepreneur standpoint, the audience is filled with entrepreneurs and it’s always, we always miss out on that piece of the conversation. What was driving you?

Beth O’Brien: I guess one of the things I also figured out, I mean, this may be like, I mean, you know, we, I’m very transparent, like this may be too much transparency, but like one of the things I figured out about myself was I actually am an entrepreneur who knew. Um, in that this is what I drive my satisfaction from is the build.

I really, and I, I will tell you one of the other things that was incredibly satisfying for me, um, last year before Alcor launched was a lot of the conversations I had with other people in the market. And around the institutionalization of capital and around how much impact different things have had on the space. And I realized how much pleasure and how much satisfaction I derive from having an impact on the space and on the items that we’ve been talking about. Like it. It didn’t, it felt better to me to want to come back and say, okay, look, I have this, I do have an idea on how to get, um, the securitization market functioning for this particular asset class.

And I want to do it. I don’t want to just have the idea. I actually want to do it. And, uh, surprised myself actually a little bit in the risk I was willing to take from the beginning. Um, but that is what you’re supposed to do as an entrepreneur. Take some risk, a measured risk, you want to do it the right way, but it’s where I’m deriving my satisfaction and so it made sense to come back.

Kevin Kim: So the itch came calling again and you know, and then you saw a need and lo and behold, here we are. I love it. That seems to be a common trend.

Beth O’Brien: Yeah, I just can’t say like, look, like I have to both, I have to both feel the need and have the, you know, have the right partner. And I think getting both of those things right is, um, is what makes it satisfying.

Kevin Kim: Right. And a lot of our audience are kind of at that stage where they’re having discussions. They had or are having discussions with partnering with either an institutional quasi institutional business where they’re, where they’re pursuing the same kind of structure you’re talking about, right? They’re an investor that understands the enterprise value of the operating company, but also likes the asset class and is interested in purchasing them.

These kinds of things are happening a lot. For The less seasoned operator, right? The newer, the newer operator, the, the, the young entrepreneur who’s in his thirties and forties and really out there killing it, but just doesn’t have the experience, give me advice for them on what to think about and what to watch out for when it comes to having these conversations or even preparing for them, those term sheets can get. They can get kind of intimidating and also quite tempting.

Beth O’Brien: Yeah. And look, you’re going to wind up giving up a lot of control no matter what. And you have to be comfortable with that. And so what I, what I normally tell people is don’t fight so hard for control because it’s asymmetric. They actually have the money. You don’t. Okay. You’re probably not going to get control. Like no one is going to give you the money and say you have a 50 percent vote when they’re putting up whatever capital that you don’t have. But what you can get is alignment. And I believe alignment goes further sometimes than, you know, some contractual minority voting right is going to go. Because if you’re really getting to the docks, you actually don’t have a partnership anyway. And so the, the, but if you focus on building, um, a partnership where you have alignment, where it makes sense, if you’re growing. They benefit and you benefit. Are you benefiting the same way? Is, if there’s a promote structure in place, is your promote and their promote The same or different, like, could there, what you really need to focus on is not whether, you know, you control something, but whether if you perform what you’re doing and you hit your numbers and you produce the right type of assets.

Is there alignment between you and the capital source? And I think that’s, what’s going to carry the day because to think that you have, um, symmetric negotiating ability. I mean, you may have great ability, but the fact that you think you’re going to negotiate with somebody who’s got a couple billion or trillion in assets. And you’re me, you’re crazy, right? And yet I’ve been successful at building partnerships where I feel like the alignment works for me, if that makes more sense than the tar sheet.

Kevin Kim: No, that makes sense. Cause I, it’s one of those, it’s a very challenging concept for, especially for the, the, the regional originators turn direct lenders whose volume has gotten to a certain place when they’re not now in the position or privileged to have those conversations. The entrepreneur in them is saying, I’ll never give up control. But in reality, what you’re saying, and it makes sense, right? Because literally, you have no leverage. You have to figure out what kind of alignment, and alignment meaning also runway to do what you do best. Because I think that’s what a lot of people overlook that. It’s like, they concentrate on the numbers too much, and they don’t realize, wait a minute, wait a minute. Am I going to be allowed to do what I am very, very good at?

Beth O’Brien: And if you’re not, maybe it’s not the right deal. Right? Like, it’s not necessarily about how much are you taking into the company. It’s, is, can the company grow or develop in the structure? Cause you remember you always had the option to not sell to somebody. No one is saying you have to do that deal. Um, you’re, and if you’re in the position where the deal’s in front of you, you probably are being pretty successful at what you’re doing. And so maybe the right answer is just continue what you’re doing and bootstrap it a little more. You may be not, maybe you won’t be as big, but you yourself will get more satisfaction and have more, more in the game.

Kevin Kim: Yeah. And we’ve had clients walk away from tables telling us that, like, listen, this is cool, but this will be probably really, really good for us, but it doesn’t align with my values and what my goals are. And they just, and they decide to keep it private.

Beth O’Brien: It may be good for my bank account for the next six months, but is it really good for me for over the next five years, seven years? Right.

Kevin Kim: It’s probably gonna give me an ulcer. That’s true. Yeah, alignment is so important there. And then there’s that trust issue as well. It sounds like you’ve been able to find partnerships that you’ve been able to build that level of trust within that alignment concept, but ultimately, I mean, institutional or not, you’re still, there still needs to be a level of business trust there.

Beth O’Brien: I agree with that. And in fact, in fact, several times my capital source has wound up being somebody that I had a trading relationship with prior to or some other type of business relationship where you know how the person behaves in a certain situation. Now, you’ll never know exactly what it’s like to be at the board table with them until you are, but having prior trading relationships or other types of, um, You know, economic relationships really does help, right?

Kevin Kim: And building that level of trust with them and that level of almost courtship right beforehand Before the marriage actually happens seems to be an imperative feature Like you can’t just jump into something that you don’t know from Adam.

Beth O’Brien: It doesn’t make any sense It’s in can’t underestimate this notion that not everyone really understands the space that well and even in this space We all have kind of a slightly different bet And if you’re spending so much time educating that as to what you do, um, it’s going to take a long time to get that investment across the finish line and it may or may not work.

Kevin Kim: Right. If they’re referring to this as a noncumulative investment, you probably want to think twice. I want to ask, I want to pick your brain on where we’re going on capital because the market is, has had some strange, strange phenomena as it pertains to capital sourcing. You know, the. I mean, I did not expect LifeCo to be jumping in this hard into the space.

Beth O’Brien: Isn’t it amazing? Isn’t it amazing? That is the word of the day, right? For capitalists, definitely LifeCo. That is where most of the attractive assets are.

Kevin Kim: We saw always scatterings of it, but the fact that they’re picking up the vast majority of volume right now is fascinating to me. But the question becomes, everyone is kind of waiting, just waiting for the other shoe to drop. Like where, where are we headed? Where, where? And, and, you know, we’re having conversations about securitization and ratings and, and new institutions coming in and buying spreads. What, what, what do you, where are you seeing things? What do you think is coming? Cause our audience is kind of waiting to figure it out. Right. And they’ll jump on it when it comes.

Beth O’Brien: I literally had a meeting today with someone on the security, who’s deep in the securitization market, has a couple of deals coming out next week, had one closed, you know, already this month, securitization, particularly in RTL. is coming back. It’s back. I mean, it is back like it’s and it’s executing fairly well. It’s not executing at the tights, but it is a creative to what people are doing in the business and it’s getting even probably better. Um, and the good news is, I think the vibe session may be over, um, in that people’s sentiment is actually coming in line much more positive than it has been. Yeah. And so, like, even if you think about, like, last, this past December, this is the December before, the December before, there was nothing happening.

Transactions came to a grinding halt because people were so unsure. Of where rates were going, what was going to happen, it was the sentiment was just played. I’m going to wait and see. I’m going to finish out the year. I’m done. I’m not touching a thing. This December, there were some green shoots and there was a little bit going on, not a ton, but all of a sudden. The sentiment has moved, which is causing transactions to happen. Once you start having more transactions, which I’m seeing people kind of getting to the right numbers, then you’re going to see more capital come back in. I think it’s amazing and great that the Lifeco’s has been, have been as strong as they have been this year. They certainly have a real appetite for the type of asset we’re producing, uh, because it’s, it matches their balance sheet so well. Uh, but it’s not every bucket, like we mentioned earlier. And so we need other transactions to start happening for other types of capital to still come back in. I mean, I mean, if you recall a few years ago, the notion on bill to rent was that, you know, first the headlines were 30 billion of equity raised for bill to rent.

And then it was like, you know, 50 billion of equity raised for bill to rent. If you leverage that. You couldn’t build that many houses, right? And so then all of a sudden things weren’t happening, but now you’re really starting to see again that the The transactions are happening, the things, the people who had capital during this period of time continue to build and now you’re seeing, uh, lease up activity and these communities starting to really happen and I think that’s generating more activity. We’re even starting to see scattered site again.

Kevin Kim: Which would explain the volume that we saw recently in this commercial event. Like I had not, not expect to see this much built-to-rent volume. And it seems the capital is back asking for it. But the, the, the, the, the question that I always ask is, we haven’t had any meaningful change in the rates. Just yet and feels like people are still kind of like it’s a sentiment. It’s just kind of a it feels like we’re headed in the right direction.

Beth O’Brien: Yes, I believe it’s sentiment driven and I’ve always felt and I think I’ve said in you know in past Panels that it’s not so much the absolute rate. It’s not that different on a spread plus base rate Then it was even when we started 10 years ago and some of these loans, the combination is not that different. But the sentiment was such that everyone was on the sidelines.

Kevin Kim: So basically the bonds weren’t, the bonds wouldn’t sell. They wouldn’t, they wouldn’t get, it’s not a pricing issues that the one was interested in buying because People were dumb.

Beth O’Brien: Yeah. They were waiting because the problem was that if they bought, it would look like an attractive yield based on their models. Three weeks would go by and then be wrong. It was too, it was too volatile, too fast, right? They, you can’t be, you can’t be that wrong, that fast. And continue to buy bonds, right?

Kevin Kim: And being wrong that fast makes the people that are on the trading desk look really bad. And then their jobs are at risk. Yeah, yeah, yeah, yeah. I get it.

Beth O’Brien: They need to stabilize so that they can actually put a trade on.

Kevin Kim: Right. Now here’s another thing is that one thing that we got our ears on middle of last year and we started getting Intel from our friends at, you know, doing the securitizations, talking about this rating, rating possibility. And listen, I work with, I work with the lenders of all shapes and sizes and everyone’s, it’s still on everyone’s lips. They’re asking about these rating rated securitizations and they have this, they have this bug in their brain. This is going to be. This huge boon for the industry. Some have said, critics have said that’s a, that’s actually a bad thing for the industry because it might overflow the capital over for the market with too much capital. I always, I mean, you were, I mean, to me, you’re one of the pioneers of securitization in our sector. You don’t, you were one of the, the very first few, this is not something that’s well understood. Can you educate our, and also a lot of people don’t want to talk about it for some reason. Can you educate our audience? Oh, what’s going on here?

Beth O’Brien: Yeah. A rated deal will happen. I think it will happen this quarter. Um, I think it’s a positive thing, uh, because again, more outlets are better than fewer outlets, but I do not, it’s not a panacea. The first couple deals of anything don’t price at the tight, like the, the, the bondholders are taking, um, the first mover and they’re going to be paid for it. So don’t, people shouldn’t be disappointed if it’s not, it’ll be inside of the unrated deals, but. Does it have to be significantly inside of it for it to be a success?

Kevin Kim: No, getting done as a success here explains why some of the institutional guys who are doing a lot of these securitizations saying we don’t want to be the first one to the door because they don’t expect the pricing to be that accretive to them.

Beth O’Brien: It’s expensive. Like, I applaud the people that are doing it first because they are taking, um, expense risk and then other people will just copy. There’s no intellectual property in the securitization once it’s done. The first time it takes a boatload of effort.

Kevin Kim: But the question remains on the operator side because it’s just, the parameters are so thorough that it, when I was reading the guidelines, I was wondering, like, I don’t know many landers that can actually Fulfill all of these evaluation parameters underneath the guidelines for ratings. These are very, very, these, these feel like something I would see in conventional or in a CLO.

Beth O’Brien: The original box is going to be tight, which is also understandable for a new asset class. It will loosen over time.

Kevin Kim: But the quality of the operator seems to be a much more in question as well. Like the, the financial health of the operator, of the issuer, financial health of the, of the, of the originators too, seems to be. A significant conversation started and that never used to be something we talked about.

Beth O’Brien: I think they’re probably looking at the buyback risk, um, on the reps and warranties. If the operator’s not there, obviously it doesn’t make the reps and warranties worth anything. Um, and so if you’re rating it, that I’m sure that’s where that’s coming from.

But again, it’s the always start out strict and loosen as the market begins to understand and the bonds have some history. Remember, there’s no history on it yet. That is now we have history because we generally know what’s in the unrated deals and how they’ve been doing. But the, the, the overall market can’t see those.

Kevin Kim:  So they’ll happen. They’ll be the first of the doors. That’s going to be paying with it, no matter what. And it’ll shape future conversations.

Beth O’Brien: It’ll be inside. It might also actually improve the execution on the unrated deals. That’s good to hear. There’s some people can’t own it without a rating. And so it will definitely increase the investor base for this asset class.

Kevin Kim: I wanted to ask about that. So I was speaking with a client who is in a former life was a bond trader and his is he was a critic of this. He was saying, I don’t know if I love this idea because right now the folks that are kind of that can buy the unrated stuff is this. And then once you get a rating, the folks that can buy this is infinitely more because now you’re opening it up to a larger swath of eligibility. Granted, let’s just say, you know, the first year of this is going to be remarkably tight and challenging to price under what’s current market, right? You’re, I think you’re right. That’s going to price similar within what we’re used to. But in the future, as more of these get done. Doesn’t it raise the possibility of too much capital, oversupply of capital flooding the space because of the eligibility now of all the different fixed income buyers that can come in?

Beth O’Brien: First of all, I’m not sure you can have too much capital. Um, and I don’t think you can originate enough in the space to flood the capital and the bonds, right? Like, there is some limit to what you can originate and how many bonds you can have. Truthfully, I think there’s not enough. issuers in the space right now to actually have the type of liquidity that the bonds should enjoy. I think you’re still seeing a niche asset class, um, friction on some of the, some of the trading in these bonds, just because, um, there’s not quite enough. Like if you really want to be in a position where you’re a serial issuer, so that, and it’s, and it’s irrespective of market people who are. Right now, there’s still small enough that sometimes people are just trying to time the market, or they jump in when they think it’s a little bit okay, and then all of a sudden there’s three or four clustered, like It’s a much better strategy to be, you know, quarterly issuing the bondholders know you’re coming. They know that they’re going to be tight on this once, but they’re going to come in because they want to be, they know that you’re going to have bonds when it’s a little wider. And over time, that’s actually more positive for liquidity and for the market and for your brand as a bond issuer.

Kevin Kim: That’s good to hear. I mean, that was, uh, I was thinking about, like, are we going to start seeing some kind of funny trades happen or deals happen where all of a sudden we’re seeing a market where. He made the analogy where, do you remember when institutions first came? There were a time, it was a time where you could, and he, his words, not mine, you can sell dog shit to the, to the buyers and they buy it. Right. And like in the real, and he was like, do you want that to happen? I’m like, I don’t know. I don’t think that’s possible. We don’t have the many houses, but that’s what I had asked that to, um, the new CEO over, over at anchor. That was our sentiment as well. But.

Beth O’Brien: Look, I think if you’re, if you’re trying to, just push junk into the market and off your balance sheet. You’re, you know, maybe you’ll have a great execution on one bond, but you’re not going to, it’s not going to build your brand and have, have a real, I mean, you’re supposed to hold the bottom of these. These are commercial rated, like you’re the first lost piece. You should be originating and structuring with the notion that you’re there the day those loans pay off. And it’s, it shouldn’t be like, when I think about securitization, it shouldn’t be just an offload of risk. Like it can be particularly in the conventional space. What I think you should think of it as is a very attractive financing vehicle. It’s, it’s a warehouse line. It doesn’t, um, doesn’t re you know, revolve once a year and it’s fixed, right?

You can match, you can match duration and you can match. Um, fixed versus floating. And so that is the difference between other types of back leverage. Now you can get a better advance rate. Sometimes you can do other things, but really what you’re trying to do is come up with a financing that matches your, matches your duration and matches your, um, interest exposure. And that’s your focus. You’re not going to be, you know, selling dog shit to anyone. You’re going to be thinking about it as cause it’s, it’s still on the balance sheet to you.

Kevin Kim: That’s a good point. The other part of the kind of weird part of this conversation was there, there were issuers that are quite well known that have said, we have no interest in doing this. And it could be for the reason you just said, right? The first few of these are just not, there’s no reason why we would do these, you know?

Beth O’Brien: Yeah, look, I was involved in the early NPL securitizations. And in fact, the first one they got rated when, uh, the market was coming back. Uh, there are no more NPLs to put in the NPL securitizations, but in the beginning, they were all rated. And it took, at the first seal, took us like eight months to get through the rating agencies. And because of the organic nature of the NPLs, half of them were gone by the time we got the rating. And we were putting new ones in and then we had to go back and get another rating. I mean, it was like this, like, um, you know, almost into infinity.

You could keep going to the rating agencies with the extra assets that had to go in. And it, because it took eight months to get there and the pool was, was organic and evolving. It was also quite expensive and the assets weren’t necessarily there, but it was good. And we started doing several of these securitizations and the market generally did it. Eventually, it actually went the other way where people started doing unrated securitization. First of all, it started moving faster so you could get through the agencies faster, but also people just started doing unrated deals because the market was used to them There was all of a sudden a benchmark and everything else. And you’re like, wow, this is much faster to execution.

Kevin Kim: And that benchmark is the key word that I think like there, there literally is no benchmark. And so that’s why it’s going to be so hard for a while. Okay. So it’s not some massive.

Beth O’Brien: Our space is also organic. It’s not as bad as NPLs in terms of resolutions, but bridge loads pay off. I mean, that’s kind of the good news spiritualists pay off.

Kevin Kim: Well, yeah, you want your loans to be paid off and you want borrowers to get out of the deal quickly. I want also, I mean, we talk about capital and securitization, but also a lot of the thing that I like to ask you about is your perspective on where we’re headed as a market.

The private lending market’s a weird, in a weird place right now. We have never, like my, my particular department on, on representing smaller lenders has never been busier than other ever. We’ve been doing more, we’ve been converting more originators to direct lenders, more licensing work than ever, more small debt fund formation than ever. There’s been a lot of, there’s been a lot of like, all right, I’m going, I’m going purely private. I used to just sell to the cap markets. At the same time, I interview CEOs at institutional business, uh, private lending outfits. They’re all saying there are significant tailwinds behind them, whether they’re being overly bullish. I want to get your take, because you seem like you’re very level headed on this issue. You don’t have this, like, overly bullish perspective. But I want to get, I want to hear the details, because you, you’re seeing all of it on the street, so.

Beth O’Brien: One of the trends I think is very positive, um, particularly among the, you know, smaller midsize landers is the formation of the debt funds. I think, you know, controlling the destiny of where the assets wind up is, um, very positive to the originations in those, in those groups. Where people got left holding the bag was when they thought they had a certain offtake that just didn’t materialize when You had all these fluctuations in the, in the market.

Kevin Kim:  Oh, if you were an institutional buyer, you’d prefer your counterparty to have his own balance sheet.

Beth O’Brien: I’m not sure. If you’re an institutional buyer, you kind of prefer they don’t have it so that you can hold them over a barrel when, um, they want to change the pricing. I think, I think having the debt fund as the originator gives you, um, just more, you know, more flexibility to do the type of loans that really makes sense and to service your clients in a great way.

So I think that’s actually a really. I think it came out of people getting, holding the bad on loans that they couldn’t sell or that they thought were sold and didn’t sell and stuff. But I think it’s a net positive to the industry, um, and puts the industry on stronger footing when people have these debt funds. So that to me is a very It was a very positive, um, outcome of kind of the dislocation.

Kevin Kim: But the dislocation seems to be at the originator level. I mean, the institutional shops have been busier than ever, they’re saying.

Beth O’Brien: Yeah, there’s a few things going on. There’s a kind of mini refi boom, um, for stuff that was done, you know, earlier. Not that, you know, the 21 vintage is going to be tough, but the earlier vintages, um, really are ripe for refi right now. And they need to do something and they’ve had great HPA. The assets are like in the rental business, the assets have been rented. Um, even on stuff that was like early DSCR loans, they’re through the prepay period. And, you know, some of them were at really high rates and it, it, it, It’s not just about rate, right? The, the assets have appreciated so much in value and the rents have improved that they probably have decent coverage. They can probably, they may be able to come in at or below with some cash out.

Kevin Kim: I think so. I, that, well, that I was, we kind of conversation with a client in Florida that said that we, they believe that. DSCR is going to pick up significantly because of what you said. And then the resurgence of, what do you call it? I call it a consolidation loan, but it’s, I think it’s a portfolio loan. These were really popular for a long time. They went away for a while with all the volatility and they seem to be coming back in a big way. And I, let me ask you this, will Encore be participating in all that?

Beth O’Brien: Absolutely. I mean, we love the portfolio loans and are seeing it’s actually exceeding my expectation. The number that we’re seeing, I was expecting to see some, but I wasn’t expecting to see as many this early. And I think it has to do with the sentiment changing and borrowers have that HPA.

Kevin Kim: They have that stabilization and they also want a better rate.

Beth O’Brien: Yeah, they own the assets or, or they’re building the assets. Um, there is actually scattered site built around too, where people are building like urban infill or people are building enough and then putting it together in a portfolio. There’s, there’s a bunch of different strategies, um, none of which are huge, but together it’s a lot.

Kevin Kim: Right. I mean, this industry is built on base hits. So it’s, uh, makes a lot of sense. Are you just aggregating base hits across the country?

Beth O’Brien: Rental rates, particularly in SFR, are still incredibly strong. You’re not seeing the downtick that you’re seeing in some of the multifamily markets. So that’s the thing, right?

Kevin Kim: And so we’re seeing a lot of people shifting away from multi, shifting away from conventional residential and jumping into the sector because of that opportunity and they have the deal flow. But in my brain, I always wonder, like there’s a finite universe of inventory and the difficulty it is to build. I mean, you really have to be, I mean, there are pockets of the country where it’s easy to build, but the vast majority, it’s challenging to build equity capital is hard to come by right now. And then lastly, this is no inventory. So it’s a little inventory. It’s so tight. I mean, as someone was looking to buy it at his second home, I’m, I’m, I’m literally in bidding wars every week. And it is, it is frustrating how little inventory there is. And so like from a macro level. Our industry seems to be very busy, but I think it’s because it’s so niche. Do we face a crisis of our own because purely there’s not enough builders, not enough new homes being built? It’s a question I always wanted to ask.

Beth O’Brien: There are not enough new homes being built. I mean, it’s one of, it’s one of the reasons people love build to rent, but remember that there’s also, there is also always a baseline of housing stock obsolescence. Right. Housing does get old, and I’m sure that, um, you will find your attractive second home, but it’s probably not workforce housing that you’re looking for, Kevin. Uh, I’m guessing. I’m just guessing it’s not workforce housing. It might be, but I’m assuming it’s not. Uh, and there are definitely pockets of the country where the workforce housing Could use a facelift.

Kevin Kim: Oh yeah, that’s very true. And that’s actually what’s been nice to see is workforce housing is making a big comeback. A lot of inventory is being injected into the market in that kind of sub 500, 000 transaction type home, at least in the West Coast, Midwest, probably sub 200, 000 priced home is being pushed back into the market.

Beth O’Brien: I’m a huge fan of workforce housing. I have always financed, uh, workforce housing. I probably go a little lower than the average lender, um, rather than the mansion flip. I’d actually rather see a portfolio of stuff in the Midwest that’s, you know, particularly high-yielding for what it is. But where they, you can actually still do an acquisition of, um, assets because it’s just, it’s depleted. You can actually put something back into the housing stock that’s livable versus new construction from ground up.

Kevin Kim: But on the counter to that though, like the past, like if the industry has been hot and heavy now, I would say, let’s give it, let’s be a little bit liberal with it 20 years. Right. 20 years is a long time. The fact that, is there, is there still enough aging inventory that needs to be re obsolete, obsolescent inventory that can be put back into the market?

Beth O’Brien: Yeah, in the Northeast and in the, you know, mid, some of the Midwest cities, absolutely. There are still whole neighborhoods that can be revitalized.

Kevin Kim: With the silver tsunami and all that, I mean, it doesn’t make sense, a lot of aging, a lot of folks moving out of their homes or downsizing or going to, moving to Florida or wherever it is. It’s always been one of those counterintuitive points to think about because we’ve been fixing flip and construction has been around for a very long time, but yet we’re always complaining about inventory.

Beth O’Brien: So that’s always been. yeah, no, there was only that one period of time where the inventory was huge, um, which was really driven by the mortgage crisis. But the notion that older homes need to be revitalized and go back into the housing stock has always been a concept and will continue to be a concept because there’s, there’s always some cohort of homes that’s aging out.

Kevin Kim: I want to ask about different asset classes, multi. So multi has been a weird one. Isn’t it though? Yeah. It’s tricky. How, how does a pencil in our sector?

Beth O’Brien: It’s complicated right now. Yeah. I was just having, again, I was just having this conversation with someone today too, about multi at the low, like a lower, the really small multi. So something that’s, you know, five or six units and, you know, a million, whatever there’s, there’s financing for that. Even most of the DSCR lenders will do that as a DSCR loan. It’s um, it’s liquid. It securitizes well with the, you know, the multiplexes that are technically SFR. And if you’ve got a 250 million multi that needs whatever, the debt funds are all over at the institutional capital. The issue right now in multi is the teenagers, right? They’re having a really tough time and it’s because I think, I think there again, it’s, it’s because no one knows what the cap rate is. Don’t actually have sentiment that is solid around the cap rate and whereas, and people are just afraid they’re going to pick a cap rate and three weeks from now it’s going to be lower again. And you are starting to see some rent pressure and stuff on the teen, uh, what I call the teenagers.

Kevin Kim: Yeah. And, and one of the things that I was, I was talking to, I think it was, I forget who it was, the new CEO over at Fidelity Bank Corp out of L. A. He’s from, he’s from Wells. And he, we’re talking about small commercial, small balance commercial in general, especially multi.

And I was telling him like, if you can get the capital to buy these loans, you will do well. This used to be a thing that our, our, in our industry, the buyers would buy. Small multi was a conversation to be had and then it just died. No one, no one touches it anymore.

Beth O’Brien: Yeah. It was the expansion loan for a lot of, um, you know, the normal private lender market.

Like multi was the ticket to the next level, right? Right. Well, and I think it has to do again with the sentiment. Because there’s been too much movement too quickly and nobody knows where it’s landing.

Kevin Kim: And you don’t want to price it wrong and be wrong the next day or the next week.

Beth O’Brien: Can’t they run three weeks from now on a consistent basis?

Kevin Kim: Right. And if you’re holding that, if you’re holding that loan on balance sheet, that’s tricky, especially when everything else is pricing up. Yeah, yeah, yeah, yeah, yeah. Okay.

Beth O’Brien: Okay. And the other ones are such strong fundamentals.

Kevin Kim: Yeah, and Resi’s always been very good to do and there’s not been any volatility comparatively speaking.

So why not just double down on Resi? I understand it now. Okay. Thank you.

Beth O’Brien: Unless you can’t find the volume. Ah, yes. You could’ve had your earlier play, Kevin. If the volume’s not there, then maybe that’s why they’re doing multi.

Kevin Kim: Right. I want to close out with kind of what, what you’re looking forward to, where it’s still early 2024. We’ve got a big year ahead of us, according to all the experts. What are you excited about going 2024? What is, what is Encore going to be pushing out and when are we going to have our, uh, Encore’s big coming out party at the industry events?

Beth O’Brien: Yeah, I do want to have a big party. I definitely want to have a party. I have to pick where. Um, look, I am really looking forward to this year. It’s, it’s hard. I kind of pride myself on having like clean numbers and hitting my numbers every year. And I have not quite enough operating history to be as confident as I usually am. But I’m confident in the year and really look forward to seeing kind of increasing volumes and new people in the space.

And I’m looking forward to getting some type of securitization done, whether it’s. Um, you know, small and directed or rated or seeing that market come back, I think is very validating. And then just plain, you know, being part of the industry as it sees this uptick. I mean, I, I saw a line today somewhere, you know, people have been saying that whole, like, stay alive till ‘25. So someone else said, stop saying that. Let’s say, let’s do more in ‘24. And I actually think we have the possibility to do that.

Kevin Kim: It’s logical, right? The volume went down so much in early ‘23 that we have to be doing more in ‘24. But the sentiment was made, actually, so Nema and I did a panel at Apple, at AAPL.

Beth O’Brien: My year-over-year growth is going to look really good.

Kevin Kim: right. We were saying The, the, the, the title for the panel was survive to 25 because someone at Deloitte was, had said that Geneva had a cocktail hour and he was like, yeah, it seems like that. I mean, it seems like our clients are really just trying to live to find another day, but also if, but you’ve got the excitement of a new business and I think that that also fuels the fire a lot and that, and that’s going to allow you to swing that beach.

Beth O’Brien: Yeah, it is so fun to be in a growing business. Yeah, it is. And like I said, it’s actually easy to be year-over-year growth when you didn’t have any last year, but that’s okay. I’m taking it. Like, I like the feeling of year-over-year growth.

Kevin Kim: I love it. Well, I’m excited for you, Beth, and we’re really excited to see you guys come out there and storm that beach. Hopefully we, we see you guys throw a big party. It could be coming-up party at one of our industry events. Yeah, I’ll make sure we talk about that, but you know, I want to say congratulations on the new enterprise and for all of our listeners, please keep a lookout for Encore Capital, Encore Finance Capital.

And, um, you know, this is Kevin Kim signing off for Lender Lounge season four. This is our closing episode for the season. Thank you very much, Beth. Thank you for joining us. Thank you.

Beth O’Brien: It was a pleasure. Absolute pleasure.

Kevin Kim: All right, guys. Well, that’s all I have for today. Thank you so much for all of your time, and we’ll see you on the next one.

Kevin Kim: You’ve been listening to Lender Lounge with Kevin Kim, brought to you by Geraci LLP, the nation’s largest private lending law firm. Geraci is the leading legal resource for specialty lenders, asset-based lenders, private lenders and non-bank institutions. Learn more about the firm at www.geracilawfirm.com. Check out our episode summary to subscribe to our Lender Lounge newsletter and our law firm newsletter, where you can get notified about new episodes and recent content directly from our expert attorneys. In addition, we’d love it if you follow Lender Lounge with Kevin Kim on YouTube, your favorite podcast platform, and on LinkedIn, where you can also check out updates from Geraci LLP. Thanks for listening, and we’ll see you next time on Lender Lounge with Kevin Kim. This is Kevin Kim signing off.