You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to the private lending industry. I’m Kevin Kim. And my goal is sit down with key figures in the private lending industry to talk about their business and their personal lives. We’ll get their takes on market conditions, the industry at large, and their personal stories. Overall, I really want to learn more about how they started and grew their businesses. So whether you’re a lender, a borrower, be a vendor, an investor, or anyone just interested in learning more about private lending, this podcast is definitely for you. Thanks for tuning in and enjoy this week’s episode of Lender Lounge with Kevin Kim.
Kevin Kim: All right, guys. Welcome to another episode of Lender Lounge with Kevin Kim. Today, we are lucky enough to have the CEO of CIVIC and our friend Whit from CIVIC, Head of Correspondent Lending, and you guys drove all the way down from Redondo Beach.
Bill Tessar: We did.
Whit McCarthy: Absolutely.
Bill Tessar: Thank you, beautiful.
Kevin Kim: Thank you very much for coming to our offices here in Irvine and really appreciate you guys joining us on the show. So before we get into it, briefly introduce yourself to the audience for those who don’t know you guys already, and that we’ll get into it.
Bill Tessar: Whit?
Whit McCarthy: Yeah. Whit McCarthy, senior vice president of the correspondent lending division at CIVIC. Was fortunate enough to be one of the original few at the organization. So, I’ve been able to see it from where we started to where it is today. So, very, very fortunate to be in that position-
Kevin Kim: Awesome.
Whit McCarthy: … to be able to see it all the way through the last seven years-
Kevin Kim: [crosstalk 00:01:30] today, right?
Bill Tessar: Seven this month, right?
Whit McCarthy: Yeah, Seven this month.
Kevin Kim: Seven year anniversary.
Bill Tessar: It is.
Kevin Kim: Introduce yourself sir.
Bill Tessar: Bill Tessar, president, CEO of CIVIC, been in the lending space about 30, a little over 35 years. Been with civic, going on five civics in a really, really interesting point in it’s since its inception today. And we’re excited about really our capital base and what tomorrow looks like, so glad to be here.
Kevin Kim: And CIVIC is, just for our audience who aren’t deeply entrenched in the private lending space, Civic is a retail and wholesale private lender, correct?
Whit McCarthy: Correspondent as well.
Bill Tessar: Correspondent as well.
Kevin Kim: And you guys only do private lending, we’re not talking about anything else, right?
Bill Tessar: Yeah. I think that’s important. So when I made my transition over from the convention, I was 30 years on the conventional side and I think everyone believed I was going to come over here and do the BPL stuff and then bring some conventional. That was never the intent. After three decades, it was good for me to make a transition into something else.
Kevin Kim: Yeah and that space is in its own groove. It’s pretty much set in stone now, is that what [crosstalk 00:02:40]?
Bill Tessar: I think there’s a couple tech plays from the big and the mighty, like the Loan Depot’s of the world and they’re still moving that ball forward. I think for the masses, it’s at the tail end of that life cycle, meaning there’s a lot of autopilot that goes on in most of the transactions that take place, or the government is your partner, margins are paper thin, competition highest it’s ever been. So I think the way that I thought about is the opportunities in this space, it’s really more in the embryotic stage. It’s just wide open.
Kevin Kim: Right, especially when you joined five years ago.
Bill Tessar: Very much so, yeah.
Kevin Kim: Yeah. So, let’s go over the core products for Civic, just to make sure our audiences is aware because we have some listeners who are new to the space, who are aren’t even in the space, they’re builders, they’re just enthusiastic, they’re investors. So give us the the 30,000 intro of Civic’s core product line and what you guys do. And we’ll go from there.
Whit McCarthy: Sure. So, our bread and butter historically has been the bridge product. One and two year loan, interest-only programs-
Kevin Kim: [crosstalk 00:03:43].
Whit McCarthy: … single family, one to four, condos, town homes and whatnot, but residential in nature, that’s been our sweet spot, the fix and flip, value-add rehab. So, up to 80% LTV acquisition, 100% rehab, 75 ARV, the standard fix and flip product. We just think we do a very good job at that compared to others in the space. So, that’s what we’ve done historically since day one. We rolled out a rental product to about two and a half years ago. Now that is becoming, I think by this last month, it actually surpassed 50% of our total originations by units, which is the first time that’s happened. But it’s been a very, very strong product. 30 year programs, 517 under 10/1 ARMs, really just stabilized DSCR rental products.
Kevin Kim: You’re hyper-focused then because a lot of your competitors, even on the correspondence side, will do like what I would consider commercial real estate. They’ll do big multi-family, they’ll do mixed use, they’ll do other things, or some others will say, “We’ll do all types of residential.” You name it, right?
Whit McCarthy: Yeah. So we also do have a multi-family lending division as well.
Kevin Kim: Up to a hundred doors, up to a hundred-
Whit McCarthy: I think it’s technically 150 today.
Kevin Kim: That’s pretty small compared to … a lot of these guys are targeting the big, mixed use projects still and it’s kind of interesting.
Whit McCarthy: We’re definitely value add bridge on that. It’s up to 80 LTC and I think low cost and strong programs for any value-add investor for multi-family product. Then what I’ve focused on and specialized in is working with other lenders as a capital provider, being able to give them capital.
Kevin Kim: Right, and a corresponding program, right?
Whit McCarthy: Exactly.
Kevin Kim: And that’s evolved over the years, over past seven years now. You guys are offering all types of programs where originators can work with you directly, you can fund their deals. I think you can buy their deals too, if they want to?
Whit McCarthy: We’re not buying closed loans today, but that’s in the product development roadmap for correspondent of the future.
Kevin Kim: And all within seven years, seven years? I want to know also size because I know the numbers. I mean, but I want you guys to say it because it’s important that you guys say it. I mean, when you guys first started back seven years ago, I think, you were a new market entry and seven years later now, we’re talking in the billions now? I mean, is this per year?
Whit McCarthy: Yeah.
Kevin Kim: I mean, I saw an ad recently, or a Facebook, or a LinkedIn post 2 billion origination. Is that total now?
Bill Tessar: No, no. We passed five, we’ll pass six this year,
Kevin Kim: Wait, wait, wait, wait. Five billion over seven years? [crosstalk 00:06:04]?
Bill Tessar: Yeah, actually it took us … what did we say the first five years? The first four years to do the first billion and then we did four billion in the next three. I think we’ll pass six billion this year, 1.7 for the year.
Kevin Kim: So Bill brought the horsepower then?
Whit McCarthy: You could say that, yeah.
Bill Tessar: Well, yeah it’s a little bit of that but then, listen, I think what gets lost and I’m glad that Whit brings it up, what they did in the beginning to get Civic started, they didn’t know a whole lot about lending when they started. It was really off the backs of Wedgewood being the largest fix and flipper in the space and Jim Helfrich and Gary McCarthy running HMC Assets that they say, “Hey, we’re in the middle of all these transactions, we should do loans.” They started on the conventional side, they realized that’s a very tough gig. Our company, Skyline, bought them and then they pivoted and started Civic on the private money and it was really Whit and Jack and a handful of others.
Kevin Kim: I remember.
Bill Tessar: That deal one like, “Hey, we funded a loan. We funded our first million. Funded our five.” Really, I got to watch kind of closely, but afar, watch what they did.
Kevin Kim: Were you involved in the company?
Bill Tessar: I was involved, not in that company, only with Wedgewood because Wedgewood, when we bought their mortgage company, they invested in Skyline. So I’d have to report back and Gary McCarthy, one of the founders, which is also Whit’s father, and I would meet every quarter to discuss how Skyline was doing.
Kevin Kim: Family [crosstalk 00:07:29], that’s awesome.
Whit McCarthy: Originally, yeah, yeah.
Bill Tessar: Really cool, actually.
Whit McCarthy: A bunch of different silos within the greater Wedgewood organization.
Kevin Kim: It’s still very rare to see. You don’t see a lot of family, like father and son … You don’t see a lot of generational involvement in the industry. One thing you see more of, but we don’t see a lot.
Whit McCarthy: I think yeah, it’s hard. I mean, can you have generations when this, I think industry, is still so in its infancy?
Kevin Kim: Kind of, I mean, it’s starting to now, right?
Whit McCarthy: Yeah.
Kevin Kim: There are folks that … At least we just got back from CMA, right?
Whit McCarthy: Yeah.
Kevin Kim: And there’s folks who’ve been doing this for 20, 30 years when it was a different industry. So, their sons-
Whit McCarthy: Pre-institutional, yeah.
Kevin Kim: … are kind of involved, not really. So, we rarely see it. I think I can name companies where father and son are in the space on my hands. So it’s very cool to hear.
Whit McCarthy: Yeah, it was great. I mean, we didn’t work directly with each other, being that he oversaw NPL division, we had the fix and flip division underneath the Wedgewood banner and then Civic on its own [crosstalk 00:08:20], yeah.
Bill Tessar: Yeah, I think what Gary did a great job with is provide a lot of capital markets infrastructure oversight. So that put them in the game to allow to start expanding their wings a bit. So when we came in, in ’17, they had had a nice run-up and then like most smaller companies they had some capital constraints and so they had to solve some capital problems. I came in, I think in March of ’17, that month they had done like 22 million, I think that 40 employees, but they had, they had good 40, the 40 was solid. So, I think what we did when we came over, we just … When I say we Merced, I brought Merced Cohen, head of operations with me. We just watched for like 90 days and stayed out of people’s way and just made sure that we understood.
Kevin Kim: When you were brought on, you were appointed CEO at the time?
Bill Tessar: Yes, Yeah. And so you don’t really want to get in there and bring a bunch of ideas when you don’t understand what is and isn’t working.
Kevin Kim: [crosstalk 00:09:18], right.
Bill Tessar: I think what I found in those 90 days, there was a lot working and we had a lot of good people and they had a good baseline to build on. Then we started bringing people, we started bringing tech, we started bringing infrastructure, social media push, reputation management, digital platform, the whole thing. It’s really one person and one step at a time. We enhanced pricing. We expanded our comp matrix and started bringing a little products and then really conquering and dividing. So Whit, which might’ve had 11 hats now got to focus on two or three because we were bringing bench strength in. So I think in ’17, we did … So we came, there was 20 million. In that ’17, we did about 600 million, correct me if I’m wrong on any of these.
Whit McCarthy: 20 million a month to … yeah, ended up being 600, yeah.
Bill Tessar: To 600 million for the year. And then ’18, we did like 900 million, in ’19, we did 1,000,000,002 and you go into COVID and the world falls apart. What was interesting for me was, I didn’t really know the economics of a lot of the competition. You just look at the marketing and you-
Kevin Kim: Fill in … You don’t know what’s going on behind the scenes [crosstalk 00:10:31].
Bill Tessar: You never know that, right?
Kevin Kim: Right, right, right, right.
Bill Tessar: But I think what was really eyeopening for me was how many people stopped lending altogether, or just paused? It was 75% to 80% of our space.
Kevin Kim: Oh yeah, I remember the day, it was …
Bill Tessar: Well, I remember it too. And so what we did was, we were very well capitalized, very well capitalized. Had a whole bunch of cash, Wedgewood put a bunch of cash in to Civic, so we didn’t have any line problems. We didn’t have any funding problems.
Kevin Kim: This is all balance your capital.
Bill Tessar: Well, a portion of it and we had a very big warehouse lines as well and Credit Suisse, which was one of our biggies didn’t have margin calls with us. I mean, we were very well-capitalized with them as well. The problem was you had no buyers of the loan. So if you’re originating new paper at a price point or a leverage point that there are no buyers, you’re basically bankrupting a company. So, I mean, we probably spent two straight weeks around the table trying to figure out where you had to adjust, leverage, whack, points, parameters.
Kevin Kim: And it was a daily thing. I remember the numbers are changing every day.
Bill Tessar: They were.
Kevin Kim: Like they’ll buy at what they used to buy, but they’ll want a discount. Or if you want to sell to them, they want the yield to be up by two points.
Whit McCarthy: I mean, we had pretty static rate sheets prior to COVID. I think we had maybe, maybe one adjustment a year, maybe two, if we were feeling a little saucy.
Kevin Kim: But when that happened, I mean … yeah.
Whit McCarthy: We were adjusting every other day, it felt like.
Bill Tessar: I’ll tell you what’s crazy. So, my relationship with Credit Suisse goes all the way to the top. So I’m having a conversation with them and they’re saying, “Bill, so what was 103 or 104 on a bid for a piece of paper was now 92, 93.”
Kevin Kim: Oh yeah, I remember.
Bill Tessar: And he goes, “At 92, I’m not a buyer.”
Kevin Kim: No.
Bill Tessar: I go, “Well, hold on a second. Same if I go … ” “We’re not a buyer.” He goes, “If I were you-”
Kevin Kim: And they were at 92 for you guys, a lot of my clients-
Bill Tessar: That’s right.
Kevin Kim: … who on a small level, it was 86.
Bill Tessar: That’s right.
Kevin Kim: Same numbers.
Bill Tessar: That’s right.
Kevin Kim: It was crazy.
Bill Tessar: But I wasn’t going to sell at 92.
Kevin Kim: Absolutely not.
Bill Tessar: And we didn’t need to … So really, what we did, which leads into the acquisition was another bank that bought a lot of paper from us was Pacific Western Bank. They’d bought in over three quarters of a billion. And that relationship with their CEO and Wedgewood’s CEO goes back 25 years. And they also fund-
Kevin Kim: So there’s a history there, that’s the evolution, okay.
Bill Tessar: … they fund hundreds of millions of dollars with Wedgewood.
Kevin Kim: I didn’t know you guys are selling to … I didn’t know they were buying loans.
Bill Tessar: They were.
Kevin Kim: I don’t know banks were buying loans in that space at all.
Bill Tessar: Well, if you go look at PWB, they’re a very different looking regional bank. They make a little bit more whack and their stuff has a little bit more risk on it. So, they’ve been in this space with us for three years. This was nothing new. Now what they did, what Matt … We didn’t sell a lot to them recently because you had the Credit Suisse’s and the Morgans and the Nomura’s coming in and they were paying, you know-
Kevin Kim: 103, 104, yeah.
Bill Tessar: Yeah, whereas maybe they weren’t. So we had transitioned our paper to there over the last year, but they stepped right up. We lent uninterrupted from March of ’19, March of ’20, right when it started, all the way through. Now, we didn’t lend as much. We were like 60, 70 million a month instead of a hundred million a month but-
Kevin Kim: I remember I got your guys’ updated matrix in like the mid Aprils, but you were the only ones that had it.
Bill Tessar: Yeah and it was, I don’t know, help me, nine and three quarters, to 10 and a half and two points, there’s no leverage.
Kevin Kim: [crosstalk 00:13:52] at that. In California, we were seen nine plus, two points.
Bill Tessar: So we did that and then what happened is they got to look, I mean, they got to look at what we were doing as a company.
Kevin Kim: You had the [crosstalk 00:14:02] too. Yeah.
Bill Tessar: Of course and they’d already had access to all our financials and performance. So, talks began to fast-track because they have a ton of cash and they want to put the cash to work and no better way to put the cash to work then to deploy it through our machine.
Kevin Kim: So their bank, they’re suffering on originations. They can’t get the deals down on their end.
Bill Tessar: And truth be told without getting into names, we were already way down the road in a potential acquisition with another company, a Wall Street firm-
Kevin Kim: Oh really?
Bill Tessar: Way down the road and the brakes came on because we got to watch how that Wall Street firm reacted to such a thing, which was eye-opening to us, a huge firm. So what this company did is they came in and they paid a premium, they paid all cash, and they closed in … it was about six months.
Kevin Kim: Whoa, whoa, whoa. Because this happened during COVID.
Whit McCarthy: It did.
Kevin Kim: It was announced during COVID and we were all scratching our heads. There were speculators saying, “Oh, is it a distress play?” I remember talking to a client of mine saying, “I don’t think it’s a distress play because they’re active, but they’re not … ” Other national shops that are retail and correspondent, and like what you guys do, your competitors, they’re active, they’re not. So there’s no reason why it would be a distress acquisition.
Bill Tessar: It was a significantly greater premium paid-
Kevin Kim: Wow.
Bill Tessar: … than what was on the table and it was all cash with no [crosstalk 00:15:20].
Kevin Kim: And you guys kept control because you’re still in your seat. Nothing seems to change that much [crosstalk 00:15:24] point.
Bill Tessar: Well, I think that’s the big misnomer. Some of the things I’ve heard at conferences, “Oh, they’re owned by a bank, they’re bankified, now you’re going to go to … it’s getting the bank loan.” That’s a crock of shit. We aren’t bankified. We’re owned by a bank, but we’re really powered by a bank. So, my cost of capital has gone from five, or five and a half, or whatever the securitizations now, or three and a half, to 0.25, the Fed window.
Kevin Kim: Fed window, yeah.
Bill Tessar: So it’s a big difference. So the first thing we did … Well, let me back up for a second. So that deal closed February 1st, 2021. It was six months of hardcore diligence. They already had the financial diligence and they already had three quarters of a billion of performing paper from us. So they already knew what we were doing.
It’s really getting in all the lawyers to make sure that the Ts are crossed and Is are dotted, and that you do fully understand what it is that you’re bringing under your banner. So once we got through that, we are set up as a wholly owned subsidiary powered by the bank. I report to the board. Our HR and their head of HR have a dotted line, our head of IT security, dotted line, everything else is sent. We kept every single employee. Didn’t take any of the bank employees. We’ve, since February added, what, 50 people to our organization?
Whit McCarthy: 50 new people and I’d say they have eliminated a lot of potential red tape that we had in rolling out new states and programs. I think we’ve strapped a jet pack onto this thing. That we’ve rolled out more states in the last six months than we have … or since the acquisition than we ever have as an organization.
Kevin Kim: Yeah, it’s kind of confusing too from a market watcher like myself, because I used to work at a bank, I used to work at an actual … we used to compete on loans with PAC Western. I worked for what is now Bank of Hope. I remember competing with them and them being a very … relatively aggressive commercial lender. They did a lot of commercial. They did a lot of loans that we did at the bank. And then I go to law school, I joined the space and I hear that they’re buying you guys. I was just kind of like, “This is not a normal play.” You never hear this happen.
Bill Tessar: That’s right.
Kevin Kim: You’ve heard of Goldman buying, when Genesis was sold, you heard about MFA, you heard about Redwood. These are all Wall Street companies. This is probably the first time a regional, I call retail bank, and actual retail depository bank buying outright for a premium too, a private lender. You guys set the mark but what I am so fascinated about is nothing has changed. You guys still … jet pack, but culturally, you guys are still the same way it seems, marketing-wise-
Bill Tessar: As a matter of fact, they’ve picked up a lot of things from us. And they’ll tell you, banks have a different makeup, you know that-
Kevin Kim: [crosstalk 00:18:07].
Bill Tessar: … having been from one. It’s maybe more older school, more stodgy, more regimented.
Kevin Kim: Hierarchies, like, oh my God.
Bill Tessar: Yeah and with us, it’s exactly the opposite. So one of the things I’ve appreciated about Pac West is they haven’t gotten in their own way. If there is a best practice, they use the same swipe and adopt method that we built Civic on. There’s no pride of authorship. I don’t need you to tell me that that was my idea. If it works, let’s do it right?
Kevin Kim: Right.
Bill Tessar: And we’ve seen that with them. What I would tell you is this, I went in with eight eyes wide open. I’ve been in lending too long to know that on paper, it looked too good to be true. The CEO and the gentleman who I worked with over there, the EVP of strategy, said all the right things. But when the tires hit the road, what’s going to happen, well I can-
Kevin Kim: This isn’t a normal transaction.
Bill Tessar: It isn’t but I’m telling you, as I sit here, I’ve had zero surprise debts. There’s been some things. So, maybe inside of compliance, we have to train our people with certain lessons learned under a bank that we wouldn’t normally train. But as far as lending is concerned, nothing’s changed. When you talk about exceptions, there’s not a lot of companies that’ll lend SFR to 10 million. We just closed a deal for 15 million in Bel Air and the credit committee is me, the head of our operations and four people from there, and you present the deal the way that you would present it to me. There might be a couple of questions and it’s approve, approve, approve, approve. We haven’t had one deal that we’ve presented that has been kicked back because the bank’s not comfortable with it.
Kevin Kim: But that probably also is a credit to the previous relationship you’ve built over the years, that’s on paper.
Whit McCarthy: I think that’s fair, yeah.
Bill Tessar: For sure.
Kevin Kim: They understand the credit, they’re comfortable with the credit bought, they’re comfortable with your risk now.
Whit McCarthy: At the end of the day, I think where we stand with them right now, it doesn’t feel like they’re bankers. They feel like they’re business people, right?
Kevin Kim: That’s the best [crosstalk 00:20:02] part, unheard of, unheard of.
Whit McCarthy: That are in the business to do common sense type of lending.
Bill Tessar: It really is.
Kevin Kim: It raised a lot of eyebrows and questions in the space, because like you said, are you now a bank? I was like, okay, they’re probably going to prove everyone wrong over the next few months. He goes, “Ah, right.” Since it’s been announced, you guys have been on fire and growing. Now even in 2021 now, what’s the numbers for the year so far? And we’re only in August.
Bill Tessar: So check this out. We closed in February. We go four straight months over 140 million and then two months over 155 million.
Kevin Kim: That’s amazing.
Bill Tessar: And remember, buying no loans, not doing any non-QM, no conventional. This is straight BPO. So, I’ve seen a lot of crazy numbers from some of the competitors and I applaud them. But when you start aggregating, oh yeah, we bought 50 million, it is different. We are belly-to-belly with our customers, right. Transacting and adding. And when you do, we’re going to cross 1,000,000,007 this year, 1,000,000,007.
Kevin Kim: Awesome.
Bill Tessar: And let me tell you something, we have five other products we haven’t rolled out yet that will dominate parts of the marketplace, and we only haven’t rolled them out because we don’t want to break operations. I have 240 people in operations and I’ll break it when we roll some of these other products out.
Kevin Kim: [crosstalk 00:21:20] just yet.
Bill Tessar: So we are desperately hiring, desperately trying to improve efficiencies through tech, desperately trying to improve efficiencies through appraisal, which we just rolled out an email product, which is unbelievable. So, I’m not worried about the volume, the volume’s there and if anyone wants to get into the pricing game thing, there’s a lot of meat on the bone. I’d prefer not to because that’s what makes a company’s engine run, but we can. So, if guys want to roll around in the mud and get skinny, we can do that.
Whit McCarthy: But that’s a nice plug, we are hiring, right? Anyone listening … yeah. In all departments.
Bill Tessar: In all departments.
Kevin Kim: And that’s the crazy part, it’s the level of activity you guys have … I know you guys have been on a hiring tear and this is a good transition on the hiring part. I want to talk about the company’s. We talked about the growth from a capital standpoint and the horsepower that’s been brought by the bank and by Bill. But the question now becomes, you guys are massive now. I mean, we’re talking about from, you said, was it 10 employees back when they founded?
Bill Tessar: I think 40 when I came.
Whit McCarthy: It was 40.
Kevin Kim: No, 40 when you came on board.
Bill Tessar: It started with five.
Whit McCarthy: It started with, yeah, four of us in the conference room and we were able to scale.
Kevin Kim: And now how many employees?
Bill Tessar: Just under 370.
Kevin Kim: Almost 400 in a matter of seven years. And granted, you guys had institutional partners, but a lot of our clients now do, but 400 employees and they’re not all here in California, they’re everywhere. I’m friends with some of you guys’ originated … I know some of them in Miami, I know some of them in Texas, you guys are across the nation now, from an employee standpoint and headquarters are in Redondo Beach.
Bill Tessar: They are.
Kevin Kim: But I mean, managing a company of that size in a space that is hyper, what I would call, aggressive when it comes to hiring, we’ll transition spaces all the … We see guys lateral all the time in this space, right? How have you guys built it? What have you guys used from a cultural standpoint, from a retention standpoint, from a training standpoint to build? Because it is very hard to manage that many employees in today’s day and age.
We see companies with the same numbers, but they have a very, very lean team and they are refusing to scale their headcount, for fear of culture, for fear of losing whatever value they establish with their employees, and frankly also out of fear of lateraling, and overhead. It’s a fear from their perspective. Talk about that real quick because I know you guys are very big on culture and I’ve spoken with some of your employees and they all tell me how awesome it is to work for you guys. I saw that thing you guys did … You guys give away a car.
Bill Tessar: We did.
Whit McCarthy: It’s a Tesla.
Kevin Kim: It was a Tesla. You guys had this big party, where everyone converged, the entire country, all your employees, all over the country converged.
Bill Tessar: Yeah, it was our big sales event, in February of [crosstalk 00:24:06]-
Whit McCarthy: Not just sales, our …
Bill Tessar: Sales and ops, yeah, it was our whole company event.
Kevin Kim: And then you guys give away a car.
Bill Tessar: Well, we didn’t give away a car at that event. What we did is we had a whole karma, a gamification, where when people do good things for the community and for one another and hit certain milestones where they would earn points in the top 10 point getters at the end, we would have a drawing for a bunch of things-
Kevin Kim: Oh, so it’s tied to incentivization.
Bill Tessar: Well, we just want people to treat others well. I learned a long time ago. If I asked everyone in this room, “Tomorrow, we’re going to start wearing pink shirts.” And people are like, “I don’t want to wear a pink shirt. I’m not wearing a pink shirt. I hate pink. Doesn’t make my eyes look good. No, I don’t look good in pink. Oh, maybe I’ll wear pink.”
Kevin Kim: I’ll wear pink [crosstalk 00:24:44].
Bill Tessar: If I said, “I’ll give you a $500 every day to wear pink.” Everyone would wear pink every single day. So, it’s finding that … what is the motivator to get people to do good things in the company’s name, so this was it. We actually just gave the car away a couple months ago. It was super exciting. So 10 finalists, we did a reverse ball and like the NBA type of drawing thing, nine, eight, seven, six, and the gal who won it was unbelievable, actually all 10 of them really deserved it.
Kevin Kim: [crosstalk 00:25:15].
Bill Tessar: What I realized after we gave the car away was I wish we had thought this thing through a little bit better and everyone could have won something comparable because to win a $500 gift certificate and watch someone drive off in a $50,000 Tesla, you don’t feel like a winner. That bugged me a little bit, but yeah, we did it.
Kevin Kim: But this is a reward though, for you guys have some kind of like what I would call recognition program for your employees, right?
Bill Tessar: Right.
Kevin Kim: And this is part … We do this here with our employees, with badges and we give smaller incentive. We can’t give away a car, but the idea of, of rewarding and appreciating your employees goes to a lot about culture. We spend a lot of time on the show talking about culture of a company, because I feel like the companies that have been successful in general, have amazing cultures. They have good retention. Their employees want to come to work and they respect the CEO and they respect the board and they know that we’re rolling in the same direction. How have you guys built it? You guys have been around seven years now. It’s not a short time.
Whit McCarthy: Well, I’ll tell you. I think it’s a culture by design, this didn’t just happen. Yes. I think early days when we were a startup and we still try to retain a startup culture, but when we were a startup, we never lost that feeling of looking after each other. I know when I walk into the office every morning, I have every single person’s back and they have mine. I think we’ve been able to retain that culture. I think we live by our core values that we have each and every day.
Kevin Kim: That’s as a common thread on this show is every company that’s … we’ve talked about culture, that has taken this seriously has a core value, have core values here at the law firm. Can you tell us about your core values?
Whit McCarthy: Yeah, I mean, we have them posted on our coin. So every single one of our-
Kevin Kim: This is cool. So I’ve seen all types of means of demonstrating values or appreciating employees, this is the first time I’ve seen … This is a military thing, right?
Whit McCarthy: It is.
Kevin Kim: I think they’re called challenge coins?
Bill Tessar: They are yep. Goes back.
Kevin Kim: You just want to give a background?
Bill Tessar: Yeah. Well, going all the way back, it goes back a number of wars where they had these coins really for an identifier of one another, and then it built into something bigger. My brother’s special forces, had a number of coins as he served our country those 20 years. So I was brought into that a long time ago, really late ’80s, early ’90s. As we went through in establishing our core values, and it was a 16 month process and it was in closed doors with professionals from the outside that help us work through the way that we thought about our business and one another. I will tell you, there were moments in there that we would walk out and there would be ill feelings towards one another, because he might be passionate about one thing and I might not think that that translates or vice versa.
The amount of time, energy and resources we put in to come up with our top five core values that we believed was going to drive this company through whatever it faced. And in this particular case, it was COVID, which you really do need your core values in a time like that, we went through. So, we ended up with five. It was act with honor, be a great partner, communicate clearly, create smiles and simplify. So those are our five.
What I will tell you is each day in every way, when you have a challenge and it’s before you, and you really are not sure about turning left or right, and there’s plenty of those, if you let your coin or our core values guide you, you’ll always find the right answers. If you act with honor, you could never really make a knucklehead decision. It might not have been the best decision, but you didn’t trample over somebody’s grave to make it. I think it’s helped us a lot. It really helped us a lot when we had to think about people working from home, because quite frankly-
Kevin Kim: We lost a lot of cultural appreciation and value when we went remote. It was hard.
Bill Tessar: That’s right.
Kevin Kim: It’s so hard to continuously instill those values and you’re on a Zoom call. It’s just so hard. I mean, how’d you guys do it?
Bill Tessar: I like what Whit said about by design, we have 14 full-time people that work in people and culture and their sole responsibility-
Kevin Kim: Wait, these are our HR people, or these are culture.
Bill Tessar: People in culture and their sole responsibility is the health and wellbeing of our people.
Kevin Kim: Wow.
Bill Tessar: We do keep, stop, starts every quarter. So everyone in our company gets to tell us what we should keep doing, what we should stop doing and what we should start doing.
Kevin Kim: Is that anonymous?
Bill Tessar: Absolutely, it can be, or it doesn’t have to be, either way.
Whit McCarthy: It can be, or you can put your name on it. Ultimately that, and a lot of other things that we’ve done and processes we’ve gone through come from the teachings of John D. Rockefeller, so Scaling Up.
Kevin Kim: [crosstalk 00:29:36]. I watched an interview of you, Bill and you had the scaling up book on your desk. We’ve studied it. We did the [Map 00:29:44] program. We did the Gazelles program.
Bill Tessar: Gazelles, yeah.
Kevin Kim: Yeah, and we did a similar thing, but the challenge that we ran into during COVID was we went full remote, probably two people were here. I’m guessing you guys probably had a handful people at your offices.
Bill Tessar: Yeah, we were 85% to 90% in the belly of the beast, working from home.
Kevin Kim: Right, and you guys are national too. So you guys have employees all over the country, how are you getting engagement from your people, when all you can do is interact via Zoom?
Bill Tessar: Well, one of the things you said, if you’ve gone through Scaling Up, one of the key parts is the huddles. So our morning huddles, we start first that we have 14 in our senior executive team, right. We get on every single morning at 8:15.
Kevin Kim: Every morning?
Whit McCarthy: Every morning.
Bill Tessar: Every morning. Through COVID, not COVID every morning. And if he’s traveling, he gives his information to one of his other cohorts that are going to be there. There we go word of the day, top three things that we’re working on that day, anything we’re stuck on and an announcement. We go through that whole thing in 20 minutes, no matter what. Then all of those around the table have their own huddle, that they will go through-
Kevin Kim: [crosstalk 00:30:46].
Whit McCarthy: Throughout the entire organization.
Bill Tessar: … the direct report. By 10 o’clock. It goes through the entire organization, from the secretary at the front desk to my desk and everyone in between. The important part about that is if somebody’s hurting, especially in COVID, somebody’s hurting, health-wise, financially, emotionally, whatever it is, we’re finding that out. “I’m stuck.” “Why you stuck?” “Whit’s sister has not been feeling well for some period of time. Parents got to come out.” We surround that situation and we solve it because the more Whit has to worry about that himself, the less connected he’s going to be to the company and so we … I mean, what has happened is it’s just been this giant pinwheel of support and solving one another’s problems and concerns and really being there, and let me tell you something, we’ve gone through some really tough emotional times when you have that many employees, people have stuff that shows up.
I think the emotional thing that COVID has brought to the families is probably been the most overlooked. We talked about hospitalizations and people get COVID and financially it hasn’t been easy for some but emotionally, I mean, they’ve had kids at home. They’ve had, parents that have had to be watched over at home, sick, economics, it’s just-
Kevin Kim: Yeah, a lot of folks near psychotic breaks when you’re just constantly being barraged by [crosstalk 00:32:01].
Bill Tessar: I think what you would find out if you talk to our people is it’s like you can have lip service and talk about the coin, or you could actually live it out every day. We didn’t bring these coins because we were talking to you. I could see Whit on the beach, hanging out on a Sunday. If I pull this out of my shorts, he’s got his coin. Anywhere you go, any of our employees, 98 out of a hundred, some might forget it, will have their point with them.
Kevin Kim: You guys build that level of adoption across the company that big because that’s something like … I’m a forgetful person. I might leave that on my desk somewhere. You’re not always thinking about this, values and the living by these values at work, but also in your day-to-day life. So how are you-
Bill Tessar: When you get coined one time and you don’t have it and that’ll be enough.
Whit McCarthy: So the challenge coin, you … what that means [crosstalk 00:32:50]?
Bill Tessar: Yeah, the essence of it in special forces is they walked into a bar and you got a bunch of SF’s there and somebody puts a coin down. If any one of those SFs don’t have the coin, they buy everybody in the bar. And if everyone has the coin, the person who coined them would have to buy the drink. Now, obviously HR doesn’t want me running around making alcoholics out of everyone. But I think it’s really more of an acknowledgement. Like, “Hey, I got you, you got me. You got your coin? Hey, we wear the same jersey.” If you don’t, I don’t have to make you feel bad. You already feel bad that you let the team down.
Kevin Kim: You established a vibe about it, a cultural kind of establishment. Like we’re going to carry this thing, we’re committed to caring this thing.
Whit McCarthy: It’s not a shame thing, like I’m going to be shamed if I don’t have it. It’s more of a pride thing that you do have, right?
Bill Tessar: Absolutely.
Whit McCarthy: And so when I wake up in the morning and I get my way to work, I … phone, keys, wallet, coin. I don’t leave home without it because I feel empty without it.
Bill Tessar: 100%.
Kevin Kim: And this is a thing that’s … everyone’s doing it.
Bill Tessar: And listen, some of the gals that don’t have pockets. What they did is they got lanyards and they wear the lanyards and they put their coin in the lanyards because everyone at one time or another has probably been coined, “It’s right there on my desk.” It’s not on your body. Right there on your desk is not like with you. It’s got to be part of you cause we’re together on this. And so that whole esprit de corps thing, I think just comes through at our level, all the way down. If we didn’t take it serious, I don’t think anybody else would.
Kevin Kim: Exactly, right. So, talking about this level of fellowship, I call this fellowship, but when it comes to organizational fellowship and really having that level of comradery, but now you’ve got someone in Florida on a Zoom call, you’ve never actually physically met this person before. Are you coining them over Zoom too?
Bill Tessar: 100%.
Whit McCarthy: [crosstalk 00:34:24].
Bill Tessar: And if somebody isn’t going like this, if somebody reaches over like …
Kevin Kim: [crosstalk 00:34:30].
Bill Tessar: Come back, Joey, come back Joey. So, we used to have new hire dinners. We’d all go and everyone had already gotten their coin and there would be that moment. Now it is by call because people are all over the United States and listen, it works. What I will tell you is I always invite anyone to come over to our office, unannounced, uninvited, and sit in a corner and watch for yourself. It isn’t like you’re an originator and I am, and we’re against each other. It’s like, how do you help that person right there that might be struggling on a call, might be struggling with guidelines, might be struggling in his marketing. There is a comradery that’s different. I’m just telling you, it is different. Listen, I know like a hot topic in our industry as these non-competes and you can’t go here and you can’t go there. We don’t have a non-compete in our agreement, you can’t leave and take employee contacts and stuff. But if somebody leaves our company, the very first thing I do is I bring our guys together and go, “What did we do?”
Kevin Kim: I wanted to ask about that. So as a company that large with that many employees, turnover is a natural thing that happens. You guys have been awarded on, I think it was an employer website online, like these Glassdoors, like four or five stars, but naturally a company of your size also has people leave, people join, they leave, and that happens. What’s your process when it comes to someone leaves for whatever reason, they can be an executive, it can be a new hire, lower, a new entry. What’s your process when it comes …
Bill Tessar: Yeah, if you don’t mind, I’ll take this?
Whit McCarthy: Yeah, go ahead.
Bill Tessar: I’m very passionate about this one. So I think you treat people as good or better on their way out than you did on their way in. So, what Whit we’ll tell you is like, if you’re an originator, every single deal that is in the pipeline will be assigned to a manager and you will be paid what you should have been paid on that deal, regardless of how long it takes to close. If you’re in operations and you’re leaving for some other reason than going to another company, I’ll help you find another job. I have contacts, three and a half decades of context. If you’re going to a competitor, I’m okay with that. What I’m not okay with and where I can get my hair up is if you do something that’s damaging to the company, you take something from the company, you take employee lists, like that kind of stuff is-
Kevin Kim: [crosstalk 00:36:46].
Whit McCarthy: [crosstalk 00:36:46].
Bill Tessar: Literally, yeah. And otherwise, no problem. Listen, we’ve bumped up, people have left companies and come to us and people have left us and gone to some of our competitors, I’m totally good with that. Just treat them the way that you treated them on the way in plus a little bit and you would expect the same reciprocation from that person who’s going elsewhere. It doesn’t always work that way.
Kevin Kim: Of course.
Bill Tessar: You’ve had some knuckleheads that have done some non act with honor things on their way out. So, I’ll protect our company when it comes to that. But other than that, you won’t find anybody, anybody … that’s never happened, never happened with me in 35 years to enforce a non-compete. So I’m going to tell you, you can’t go make a living for your family? I don’t believe in that at all.
Kevin Kim: What’s interesting is this whole people-centric concept in management and organizational management, it’s been a common thread you see in a lot of companies that have scaled up over the years and they’ve taken the Rockefeller habits seriously, but then you also have this super aggressive, Wall Street themed vibe in the space as well. I think it primarily comes from East Coast operations. You know, we see it a lot in New York and you see a lot of it infused because of the aggressiveness of our space. It’s becoming very aggressive. What are you guys doing to combat that kind of stuff? Because it’s so hard, it’s easy to be aggressive and competitive and hardcore about that kind of stuff and forget about people, especially as you’re scaling.
Whit McCarthy: I don’t think that’s in our nature and our culture at all. I think we’ve built it a little bit differently. I don’t think we’ll fall into that category because we are people first. We want to treat all of our people fairly.
Bill Tessar: The people really are defined in a waterfall effect. It’s not just your employees, it’s your vendors, it’s your customers. It’s your referral sources. It’s your third-party ancillary services. It’s really everyone. We were on a call yesterday, one of our top producers said, “Would you get on a call, meet the potential big investor. We’ve done some deals, but he’s got a whole bunch.” This investor got on and we did all the niceties and talked about and asked a lot of questions. “Tell me about your business.” The guy was just so darn rude. Like, “I can … and this is what … and I expect.” And he talked about a relationship he had with another lender that was excellent. Yet, here he is with me looking at throwing that relationship away for a tick here or a tick there. When I hung up the phone, I said, “Yeah, I’m not like … ” I didn’t tell that gentleman that, but I told the account executive. I said, “I’m not interested in putting horsepower behind a guy that will leave his lender who’s doing a standup job over a tick on his fee, or his … I’m not in that.”
So, we’re in a position right now where we do get to choose who we do business with. So when you’ve run up against some of those guys on a competition, I think the consistency, quality, quantity, consistency, just like those that said, “Hey, they’re run by a bank. They’re not going to do any loans.” I said, “You know what? The market will tell everyone whether we’re doing loans or not.” I think it’s the same way with people. We might not win every deal. There might be some people out there that are so aggressive that they overpowered maybe, a soft sell. We have some aggressive people on our staff too, but they treat people with respect.
Whit McCarthy: I mean, I think at the end of the day, I think we’re going to be competitive out there, right? We’re going to aggressively attack the market.
Kevin Kim: Yeah, no slouches.
Whit McCarthy: And nothing like that but I think it-
Kevin Kim: Oh, you don’t want to be … they won’t work with you.
Whit McCarthy: Yeah, exactly. I think from an internal cultural perspective, I think we emanate this feeling of just respect that we and our partners.
Bill Tessar: And really it isn’t about rates and fees. I know everyone has to have good rates and fees, but we have almost 20 people in our marketing department. If you were our customer, we put our whole marketing team behind you, so you could sell your product better. So you could market your house better. We have almost 30 people in our IT department. If you want to work on your website, we’ll help you with your website. We have relationships with Home Depot and Lowe’s that are different than everyone … We pass those discounts out. So it’s not just rate and fee. It’s like, how do we make you better in all these areas we’ve invested in? That way it’s a real … For me, I don’t look for the cheapest, I look for the best relationship and I’ll pay a little more because I appreciate this, you and me. So, I think we take that same approach with our customers and so far, it’s been worth it.
Kevin Kim: That’s also a common thread on this show. Most of the folks that we’ve spoken with that have had success, not just from origination standpoint, from scaling their business. It’s that, it’s the idea of we might not be the cheapest, but you’re going to really like working with us, you’re going to really enjoy working with us and you’re going to stick around and we’re going to be doing millions and millions of deals together for-
Bill Tessar: If you think about cheapest, let’s scale this whole thing back. If you talk about cheapest, you could basically wipe out account executives and wipe out a big portion of … and then whoever gets the cheapest cost of capital. They advertise the most and you have a fulfillment center. That’s not what we’re talking about here.
Kevin Kim: We’re seeing that.
Bill Tessar: Oh, you’re seeing it a little bit.
Kevin Kim: Yeah, we’re seeing it.
Bill Tessar: We’ve seen some price wars on the rental stuff. Some of these guys are out there with rental prices when you look at the securitization.
Kevin Kim: It’s been real aggressive.
Bill Tessar: Well, they also have to do it in a way that’s sustainable. I know what those deals are trading on through a securitization and what they’re offering the market. The spread is very, very tight. Even with origination points, after incentive comp and all that, there’s not a lot of meat on the bone. So, I don’t know who wants to run a business, doing a hundred million dollars a month and barely squeaking out a profit. That’s not a good business.
Kevin Kim: Those margins are paper thin when it comes to [crosstalk 00:42:15].
Bill Tessar: It’s amazing.
Kevin Kim: And it’s getting more and more aggressive. When it first started, it was rates that I thought were within reason for rental. And then all of a sudden it could cut in half in a matter of a year and a half. Who’s buying this stuff? And this is a good transition point. I want to talk about market conditions because I’ve always talked about this in, on the panels that I do and on the show as well. We’ve seen a race to the bottom in this space, both on fix and flip, but also we’re seeing the same result on DSCR. It’s like the level of risk that people are willing to take now, leverage is going up and up and up. I mean, I’m starting to see advertisements for 90 plus L [crosstalk 00:43:01] cost.
Bill Tessar: No one’s lived through the financial crisis. I can guarantee you that.
Kevin Kim: 30 years experience in the space, right?
Bill Tessar: Yeah, that’s right.
Kevin Kim: So I want you to … You have 30 years of mortgage experience and our industry is so interesting because it’s still in its infancy, I feel like. It’s still immensely fractured. You guys have been in space for seven years now. We’ve been in it for roughly 10, 11 now. It’s evolved over the years. Some folks say it’s becoming immensely standardized and becoming like the conventional space. I mean, as a person who’s seen the conventional space become standardized over the years, because it’s remarkable. Even now I look at it now and when I was a banker, it’s so different, the space looks so different but I’m starting to see shades of it in our space. We’re starting to see really, really large organizations come in and take a UWM approach.
All they’re doing is focusing on securitization and all they’re doing is focusing on price and risk and just that call center approach. It’s frightening from a person who … We started out when the industry was crawling out of the ooze.
Whit McCarthy: True private.
Kevin Kim: It was 100% private, there were no institutional investors, everything was funded by high net worth investors. I’ve been lucky enough to follow the ride and seeds of evolution, but I all have 30 years of mortgage experience talk about. I mean, it’s so different.
Bill Tessar: Yeah, I think if you don’t learn from your mistakes, you’re damned to them. So most of those companies that you’re referencing that are in there in the ’90s like that, they’ve never had a host of loans they’ve had to take back that could literally cripple a P and L, or their balance sheets. So, we pass on those deals and that’s okay. I don’t want to wrestle in that pit. I think we’re aggressive. I mean, we go to 80, 100 on the rehab. I think that’s aggressive enough. We have had a year and a half of HPA, so people have benefited from house pricing going up. It looks like we’ll get a little bit more of that. But when that market switches and prices go the other way, those guys that have 90s and people that may not have finished or completed their deals, people will walk.
There’s no PGs on these smaller loan amounts. They’re not reporting to credit agencies. It’s very, very easy for an LLC to just wipe their hands and say, “We live to play another day.” The end owners of that paper will see a side of the business that they will not like.
Kevin Kim: Right and that also reminds me of last crisis in the sense that they’re hyper-reliant, hyper, especially right now, hyper-reliant on this, just boom that we’re seeing in values.
Bill Tessar: Yeah, and I think that’s a huge mistake.
Kevin Kim: And you’ve seen it for 30 years now.
Bill Tessar: Huge mistake.
Kevin Kim: We’ve I’ve had other people give us their opinion on it. I want to hear yours on that.
Bill Tessar: Well, I think the market is strong right now for a bunch of reasons. Six million units under served right now, so that’s probably a two or a three year. Rates are still at historic lows. I think there’s lots of opportunity in real estate for appreciation over the next two to three years. I don’t think so much over the next five to 10 years. I think it does have to correct itself. We were driving up here and we saw for about six months, 20 to 30 offers, 10% over list price, no contingencies, all cash. People had to lay it all on the line to buy. You don’t have 10 to 20, you might have two to three and it might be 5% over list.
Kevin Kim: What, right now? Right now?
Bill Tessar: Yeah, right now, you’re seeing it.
Kevin Kim: So, it is cooling off?
Whit McCarthy: I wouldn’t say cooling, leveling.
Bill Tessar: I wouldn’t cooling off, leveling.
Kevin Kim: Because I live in Orange County and it’s still like very popular, you still can’t buy anything right now. You have to go-
Whit McCarthy: There’s a lack of inventory.
Kevin Kim: That too, but also it’s popular, people want to live in Orange County. It’s great and there are pockets of LA that are like that too. We’ve always had a competitive market, but I see this phenomenon happen in parts of California that it shouldn’t be happening and parts of … I couldn’t believe when I saw this, I saw this house that was basically a drug house and they got 300,000 over asking price.
Bill Tessar: Whoa.
Kevin Kim: All cash offer. The house was torn to shit. There was literally shit in the toilet.
Whit McCarthy: Literally, when you say.
Kevin Kim: Literally and they had pulled all the copper wire out of the wall, if you think of the worst possible house, it was it and they actually advertised a little slice of hell. That thing sold $300,000 over asking price. And this is recent. A lot of us are telling our clients, this ride is not going to last forever. You have to prepare for it, right?
Bill Tessar: Absolutely.
Kevin Kim: So, what are you guys doing to install those types of redundancies and using your experience to educate our newer operators in the space to really make sure that they’re looking at this from a 20, 30 year perspective?
Bill Tessar: Well, one of the things we always say is you can be off on credit. You could be off on experience. You could be off on FICO, don’t be off on value, get your value right. Don’t get emotionally connected to what yesterday was and what tomorrow looks like. What is the real value of that asset? You have to understand that and you also have to understand very well, the timelines and durations of taking an asset back. I think what makes Civic different, what really made it different early on is really what your father and Jim did from an NPL standpoint, we had a floor of attorneys and when good people do bad things and a deal goes bad, every single loan we’ve ever sold would come back to us to have us do the asset management. Why? Because we were experts at it. So, it’s not emotional. We didn’t get mad at you. We just filed what we had to file, and you’re going to go bankrupt, we’ll be in there. You’re going to file divorce, we’re going to be in there. You’re going to have liens and encumbrances, we’re going to be in there. Get the asset back, get it beautified and get it out.
Kevin Kim: Well, that’s a key component being able to manage assets.
Bill Tessar: It is, you have to.
Whit McCarthy: Absolutely, you have to.
Kevin Kim: Be able to manage assets, to be able to process a foreclosure, understand what that looks like because in the future, those loans may come back to you.
Whit McCarthy: You don’t over leverage. Make sure you value the properties correctly and have a backup if it does go wrong.
Bill Tessar: I think that’s very well said. If you go one, Two, three, that’s really what it is. Listen, you got to pay attention to what’s going on in the marketplace,
Kevin Kim: That’s also a really weak condition. That happened in a way everyone’s like, “Oh yeah.” We’ve interviewed people on the show, said, “That’s a bad sign.” If prices continue to go up for five years in a row, that’s not a good thing.
Bill Tessar: But if you recall, and I remember it like it was yesterday, what happened in ’08 and ’09 wasn’t just an interest rate thing. What ended up happening is the Wall Street had such an appetite for loans. It went from conventional to a little bit of non-QM to a more-
Kevin Kim: Just dogs hit.
Bill Tessar: So at the very end, even Washington Mutual had a 100% LTV, 100% LTV non-owner, non-owner or second home, to $2 million and then they put a coffee loan on it, which was a negative amp and stated … so you have stated non-owner 90% to 100% to $2 million. People that didn’t have solid jobs that weren’t making real money, were stating they make 20 grand a month and qualifying. So what ends up happening is we have no skin in the game and prices then pull back. They look and they go, “I’m 200 underwater, wipe my hands of that deal.”
Kevin Kim: There was no standard of underwriting then.
Bill Tessar: Really, if you think about the legal standpoint, there were so many law firms that specialized in keeping people in their homes for a thousand dollars a month.
Kevin Kim: Yeah, I remember that.
Bill Tessar: So you could never get the asset back. The difference today, the difference today at least in our space, is these aren’t owner-occupied properties. So we have a lot more rights to that asset than you had before. A lot more rights. You have a lot more skin in the game. So, they’re either motivated to solve the problem or you have room to solve it yourself. And then the credit qualified. Let me tell you something, the loans we do today are 10 times better than the loans that were being done in 2008. 10 times better.
Kevin Kim: Yeah, that’s true. The quality of loan and the quality of underwriting, the standardization. The one thing that I feel like our space has benefited from standardization and commoditization, is the standard of underwriting that’s been installed. Wall Street finally understood what underwriting meant. We’re comfortable with this kind of a risk and now everyone’s following suit to that. And some guys are not, and some guys are buying more dog shit than they should, and that’s okay. But there’s still a standard of underwriting. We’re not doing stuff like we did back in ’08. But at the same to me, there are things that … head-scratchers. You start seeing massive willingness when it comes to, for example, a DSCR loan. The amount of leverage they’re willing to go to, the amount of risk they’re willing to take, the amount on the DSCR.
Bill Tessar: It just doesn’t seem like a sustainable business to me. I mean, honestly, if we took this offline and we started talking about some of the firms and you looked at their P and Ls, they’re just getting by.
Kevin Kim: Yeah, and that’s the scary part.
Bill Tessar: [crosstalk 00:51:47].
Whit McCarthy: It is but some firms aren’t even here anymore as a result of the margin calls.
Bill Tessar: That’s right, that’s right.
Whit McCarthy: Everything that happened during COVID.
Kevin Kim: And that’s the fascinating part too. Since COVID, there have been new players that jumped in because they missed the boat like five years ago, 15, when Wall Street just jumped in. They missed the boat then and they jumped in and during COVID and they’re doing well now, but there’s also that same level of aggression we’re seeing when it comes to risk. Agree with you, I think that there’s less risk to be had on these assets, but I feel like there’s still a lot of reliance on this hyper-increase in valuation still.
Bill Tessar: Agree and the way I think about it, is it’s 60 to $70 billion a year space. If we do two billion of it and we’re trying to-
Kevin Kim: That’s a really conservative number, actually, $60 to $70 billion.
Bill Tessar: Well, it gets a little bit bigger if you start throwing some multi, long-term rental builds, I’m talking about fix and flip and bridge and stuff. So, when you start thinking about that and we want to go from 1,000,000,007 to two and a half, or three, or five, you can be picky. You could say no a lot. There’s a part of the market for those that want to take the risks, low margin, higher LTV or leverage, there’s a part of the market where those three or four players can play and do fine and take the risk, and that’s their business model. That won’t be ours.
Kevin Kim: So, this is a good segue into … we’re running out of time, but I want to have a final say on … Well, first thing I want to ask you guys, we always ask this on the show. Right now, looking forward for another two to three years, bullish, bearish on fix and flip, fix and flip? Because this is an interesting time flip and flip, right?
Bill Tessar: Bull. Bull. I’m very, very bullish on the market. Bullish on real … you said two to three years? Bullish. I think if you fast track two to three years, we’re a $3 to $4 billion a year firm.
Kevin Kim: And you qualified it through the years. So you’re predicting a correction in about three years?
Bill Tessar: I’m saying that I’m not smart enough to know past that period. I have enough information right now to know that if all the numbers that I’ve been reading are accurate, it will take that long to fulfill the housing need. Listen, there’s something else that’s going on right now that we didn’t talk about, is people are leaving the big areas of New York and California. They’re going inward, they’re going-
Kevin Kim: Call it mass migration, I call it the great migration, it’s crazy.
Bill Tessar: Really, so we have 14% tax in California. People going Arizona or Vegas, or Nashville, or the Carolinas, they’re going from zero to 4%. It’s an instant raise. And the cost of living is … I was in Texas four days ago, gas was $2.60.
Kevin Kim: [crosstalk 00:54:16].
Bill Tessar: It’s $4.70.
Kevin Kim: $2.60 a gallon, and also houses are like $500,000 and you’re living in a beautiful property.
Bill Tessar: And why it works is we just proved that through COVID that people can get the job done from home. They can. They can get the job from home.
Kevin Kim: Well, with the right kind of culture and reminders, right?
Bill Tessar: Sure, sure. Our experience has been, it has worked. For me, if Whit was happier at a different state and he could still bring in the same sort of value add and offerings to Civic that he did, why wouldn’t I support him 100% to take his family to a place that was better for him.
Kevin Kim: Moving to Nashville?
Bill Tessar: Close, close.
Whit McCarthy: Charleston, South Carolina.
Kevin Kim: Oh you’re moving? You are genuinely moving?
Bill Tessar: He is, he is.
Whit McCarthy: I’m doing it.
Kevin Kim: I’m jealous. I know, literally every week I have a client in Austin. He’s like, “Kevin, look at this ranch. You can buy it for what you paid for your house.” I’m like, “You got to be kidding me.”
Bill Tessar: But I mean, without getting personal, that’s really his. He found an absolute, beautiful, beautiful home on a beautiful piece of property that he couldn’t have gotten this much in Manhattan Beach.
Whit McCarthy: It’s like trade a two bedroom one bath into a much larger home that we can grow a family in and be happy for a long time.
Kevin Kim: Yeah, that’s my thing, that’s my thing.
Whit McCarthy: Without putting another dollar into it.
Bill Tessar: We’ve had that, we’ve had leaders go to Texas. We’ve had leaders go to Nashville. We’ve had leaders go to Vegas, Arizona. I think my position is support them, support them, support their family. It’s a very unique time I also think by allowing that you can bring some more talent on. If you were at a mortgage company that needed you here in Irvine and you wanted to live in Florida and we were open to that, you might consider joining us. So, I think there’s some opportunity there.
Kevin Kim: Absolutely. I mean, you’re going to see people who want that … I mean, you are seeing people want that flexibility. In our hiring, we’re seeing that, they want to have more flexibility, need to work from home twice a week, kind of used to it, I kind of like it. Some folks insist on it. They’ll say, “I live in New York. I live in Florida. I want to work for you. Are you down?” I’m like, “Absolutely. I don’t care.”
Bill Tessar: We spent the last two months coming up with a thing called Civic Anywhere and it’s off the heels of COVID. So, where we are right now, we have about a third of our employees will pass COVID. If COVID’s cured and it’s in the rear view mirror, third of our employees will work full-time at home. About a third of them will be hybrid, half and half. And a third of them will be in the offices. So, less square footage on the big super offices we have. Maybe more offices in the Charleston, Nashville.
Kevin Kim: That’s great because that establishes reach, that establishes a place for you to actually meet and the footprint is nice to have.
Whit McCarthy: And trading additional markets that I think are really tough to take hold in until you have a physical there.
Kevin Kim: You need be there and that’s what-
Whit McCarthy: There’s some states where you have to be there.
Kevin Kim: This space, you have to be there. The Midwest is an underserved market and you can’t get anything done there without being there. So, I think South Carolina, the Carolinas [crosstalk 00:57:05].
Whit McCarthy: Carolinas, Texas, I think there’s a general distrust of people outside of the state.
Kevin Kim: Yeah. I have a ton of clients in Texas and they do very well in Texas because of that and being in the state will make a huge difference, yeah.
Whit McCarthy: But ultimately I think that that fix and flip product is going to continue. We’re bullish on it because people are interested in housing stock elsewhere, right?
Kevin Kim: Yeah.
Whit McCarthy: There’s more housing markets people are looking at. I think a lot of the people that are first time home buyers are looking for a turnkey product as well. So there’s not a lot of people that want to take on a big renovation project as their first.
Kevin Kim: And there’s still on the investor side, the builders side, they’re active still.
Bill Tessar: They are.
Whit McCarthy: So, we are rolling out a ground-up construction product-
Kevin Kim: Fantastic.
Whit McCarthy: … in the very near future as well to help capture that marketplace as well.
Kevin Kim: Fantastic, fantastic.
Whit McCarthy: So we’re excited about that.
Kevin Kim: All right. Well, I think that’s all the time we have for today. Don’t want to go too long. We don’t want to keep you from work. Want to make sure to get you back to work. Thank you once again, we’re coming down to our offices here in Irvine. I know you had long drive and I really appreciate it. We’ll see you at the next show.
Whit McCarthy: Absolutely, Captivate.
Kevin Kim: Hopefully we’ll see you at a show.
Bill Tessar: Yeah, I’m going to be there.
Whit McCarthy: He’s coming.
Kevin Kim: He’s coming, all right.
Whit McCarthy: He’s coming, yeah.
Kevin Kim: All right, well our audience will finally get to meet Bill at a Geraci show, fantastic. This is all we have for here today. Thank you once again for joining us.
Bill Tessar: Thanks for having us.
Kevin Kim: This will be our inaugural episode for season two of Lender Lounge, look out for us at a show and get your hat at the show. All right, take care.
Whit McCarthy: Thanks so much.
Bill Tessar: Thank you.
Thanks for listening to Lender Lounge with Kevin Kim. I hope you enjoyed this episode as much as I did. If you did enjoy, please leave us a five-star review on your podcast platform and be sure to follow our show to be notified of new episodes. If you’re on YouTube, don’t forget to smash that like button and hit subscribe for more content from all of us here at Geraci. Lender Lounge with Kevin Kim is available on all podcast platforms. Referrals really help us spread the word, so please send this over to someone you think might enjoy it. See you next time, this is Kevin Kim signing off.