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.
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Kevin Kim: Hey guys, welcome to another episode of Lender Lounge. Today, we are not in the computer. We are at our conference, Captivate. We are at the Encore Hotel in Las Vegas, and I’m surrounded by these fine gentlemen who will introduce in a second, but I’m super excited to do a live episode here. We very rarely get to do this in person, so it’s nice to do this. We are currently getting ready for our Captivate Conference, so please tune in for more about that.
When we do live episodes, I like our guests to just introduce themselves to our audience, and we’ll start from there, all right? Who wants to go first?
Evan Stone: I’m happy to do it. Someone else is raising their hand. I’m Evan Stone. I’ve been in residential finance, really, since I got out of college. I don’t know anything else, so I don’t know much about much, but I do know a reasonable amount about both consumer and business purpose lending in the residential markets. Currently, I’m the CEO of Champions Funding and the Chairman of Community Savings, both institutions that specialize in non-agency lending.
Dustin Wells: Yes, I mean, I’d say, I did much like Evan been in real estate finance, my entire professional career going on 27 years now. I currently serve as the President of Dominion Financial Services Wholesale Group. I joined that group about two months ago. We’ll probably talk a little bit about what we’re building out. Again, focused on investor residential with a tease into some consumer-focused product as well that we’ll talk about.
Dave Orloff: Thanks for having me, Kevin.
Kevin Kim: Of course.
Dave Orloff: Great to be here and congratulations on your new role. That’s really cool.
Kevin Kim: Thank you.
Dave Orloff: So, my name’s Dave Orloff. I’m the CEO of American Heritage Lending. I’ve been out the mortgage business since 2008, which was sort of a silly time to start that venture. But we do both consumer and business purpose lending. I certainly enjoy one more than the other.
Kevin Kim: That’s why we’re having this pod today, because ordinarily, we do kind of one-on-one interviews. But I’ve noticed a big trend over the past, let’s say, three years of folks having one foot in the consumer camp and one foot in the BPL camp, which I’ll call it BPL. Then there’s also been entries from that world into the space, whether they keep one foot in or not, but they’ve new entries. Some of these are pretty sizable companies have entered the space and really found it to be attractive and I wanted to make sure that we had this consistent theme today.
But otherwise, there’s no rules today. We talk about whatever we want. First thing I really want to put out there is, which one do you guys like better? Because consumer is tough. I know very little about consumer. At Geraci, when we get a phone call, and the guy tells us on the phone, “Hey, I’m doing owner-occupying,” like, “Pump the brakes,” because Geraci doesn’t touch owner-occupied. We don’t touch consumer. We just do BPL. The only thing that we do is a little bit of licensing here and there, but as far as it goes. We always send it out to our friends out there. But like, on the operator’s side, I’ve got to ask first, which one do you like better? Because it’s an interesting perspective that you guys have that is unique.
Dustin Wells: Yes, I’ll go first. I historically have been in consumer-facing business. I think both have a unique delivery to the customer. I think the customer, they serve is slightly different. BPL lending serves a need for those that can’t qualify necessarily for traditional financing or traditional financing doesn’t make sense for them. It’s more predicated on the cash flow of the property itself, which is kind of more akin to commercial transaction.
Consumer facing, I think, serves a need of just, I’d say more traditional homeownership. The idea of achieving the American dream of owning a home. So, I think each serve a unique blend of customer, but I think if I had a preference, I’d say, just because I’ve been doing it for so much longer, probably consumer-facing.
Kevin Kim: That’s what you know.
Dustin Wells: It’s what I know.
Evan Stone: Certainly, the business purpose loans less compliance, not that there’s no compliance, but it’s a little easier from a compliance perspective. Generally speaking, a little easier from an underwriting perspective, too, because you’re not underwriting personal income. I mean, that all said, I mean, I can only really speak for our organization. I mean, I think we’re really indifferent. I mean, at the end of the day, we kind of think of non-QM and DSCR as being all part of kind of the non-agency ecosystem. So, we don’t want to be everything to everyone, so we’re not offering agency-govy loans.
But within the non-agency part of the lending market, we want to have a meaningful wallet share across the spectrum. So, that means serving investors that want to buy investment properties, perhaps using DSCR and cash flow from the subject property. Then certainly, those that want to be homeowners for some homebuyers on the consumer side, and as the US Treasury, CDFI, Community Development Financial Institution, most of what we do is consumer. But certainly, on the investment property side of the house, we see with our target markets underserved people that just like anyone else want to get ahead in life and they don’t trust the stock market, they don’t trust other investment possibilities out there. What they trust is real estate.
So, they build wealth through real estate ownership. From that perspective, we’re serving ITIN borrowers that want to buy investment properties for nationals. That’s what’s really meaningful for us, whether they want to build wealth through buying a home that they’re going to live in or whether they’re building wealth because now they’re at a point in their trajectory where they can buy an investment property. We’re indifferent. So, I know it’s kind of a boring answer. Kevin, I wouldn’t say I prefer one over the other.
Kevin Kim: But you’re serving a need, which is important, right?
Evan Stone: That’s the idea.
Kevin Kim: I know you like one better than the other.
Dave Orloff: Make no bones about it. So, you know, we started in 2008, probably ground zero for the worst time to be in lending, period. To me, I think consumer, you’re riding the sign curve of the interest rate cycle. If you’re consumer direct and you’re spending money to help your loan officers in marketing and what have you, I found that you scale businesses. If you’re looking to build a business, just to have it kind of torn down by stuff that’s outside your control. Then I also find that I struggled with the, what I call the real commoditization of the product, right? It all rolls into a GSE. Evan’s got some unique products that he’s able to offer under this new bank structure.
But I love the business purpose lending space and I love it for the creativity that it’s not a bunch of people kind of hit in AUS until they find an approved eligible. In BPL, you really offered a chance and a premium for your creativity, for a deep credit background of saying, “I kind of understand a borrower. I understand a piece of real estate. I understand credit. I know how to read trade lines and depth of credit and things that are different because of my consumer background.” But boy, oh boy, not just because of the compliances. It’s just to be creative again and differentiate and build products, BPL is nice for me.
Kevin Kim: So, let’s kind of get into weeds of your respect to businesses. I want to know more about the company, like details about how you’re operating, what products you’re offering, but also, how are you capitalized as it pertains to BPL in comparison to the, we’ll call it consumer. Because there has to be differences, right? So, give me some more colour about the businesses, and we’ll go from there.
Dave Orloff: When we got into leaving 10 years of agency to come into BPL and having lots of talks with you at Innovate in Newport Beach, we were shocked how little liquidity of secondary markets really existed.
Kevin Kim: When was this again? What year was this?
Dave Orloff: That was 2018, ‘18, ‘19.
Kevin Kim: Still wasn’t quite there yet.
Dave Orloff: Right. You’re so used to whatever delivery mechanism you go, correspondent, wholesale, whatever it is in agency, you really have a plethora of takeouts, especially if you’ve hit AUS and you have an eligible – so you don’t really sweat funding alone and then not having a home. But boy, oh boy, that’s not the same in BPL.
So, really quickly, we were nervous enough, and I think a lot of consumers coming into our business are using traditional warehouse lines and other products to fund loans. We realized with PGs and all the crazy stuff that’s attached to the consumer side, we were sort of playing with fire, and we went out and we did a joint venture with a big REIT. I think it’s fair to say that that REIT is Ellington here. We, for specifically the RTL and business purpose stuff, partnered there in a meaningful way such that we would have a backstop for liquidity.
Kevin Kim: Now, that’s changed a lot since ‘18, right? And you guys were one of the early ventures into that. We saw that iteration happen over and over in other aggregators and institutional investors start adding to that book of business. It’s certainly evolved in that short time span, three years, four years, now five years. Wow, how far we come. But what’s interesting is the commoditization is starting to – we’re seeing it in our side too, cannot compare it to, nowhere near compared to conventional. But we’re seeing it and it’s been kind of like, “Oh, boy, I don’t know if I like this anymore.” But give me more colour on your guys’ business and let’s chat about this stuff.
Dustin Wells: Agreed. So, I mean, you take the agency piece out of it where you don’t have the easy button lending and kind of that guaranteed liquidity with the two GSEs. I mean, the calculus of risk is completely different. So, at Dominion, we are fortunate, we’ve got some substantial partnerships with a couple of large LifeCo companies, life insurance companies, currently, through a myriad of vehicles purchase about 50% of the paper originated in non-QM today and they really are the principal provider of liquidity in that non-QM space. Whether the non-QM space is focused in consumer help through bank statement product and asset depletion product or through the BPL with DSCR. They’ve really stepped up in a meaningful way. It’s about deploying their dollars in a meaningful way, right?
So, we talk about the economics of the transaction. Those LifeCo companies are going to want more of the traditional kind of down-the-fairway product. So, there’s a push to originate more of that product and less of kind of the fringe product. But I would say, where they are relative to needing to have them as a meaningful partner is mission-critical if you’re going to grow in scale in non-QM in today’s environment for sure.
Kevin Kim: With Dominion, you guys have been, that was – Jack and Fred have been around for how long now?
Dustin Wells: Yes, so Fred Lewis founded the company 22 years ago.
Kevin Kim: Right. They’ve been around for a while.
Dustin Wells: Yeah, Jack BeVier, one of the managing partners joined the firm 18 years ago. Over the course of that two decades plus have originated more than $4 billion in paper, 13,000, 14,000 loans in that time as well.
Kevin Kim: Now, there’s been kind of an evolution. Because when I first met Fred was when I first joined the firm. I went to my first conference on the East Coast and he was basically like the godfather of hard money in Baltimore. Today is a very sophisticated business, adding you to the book, adding wholesale to the book. That indicates a lot of commoditization and institutional relation to the product type, because you guys don’t do all the food groups, right?
Dustin Wells: Yes. So, we’re launching the wholesale with a focus on BPL because that really is the core of Dominion’s –
Kevin Kim: RTL and DSCR, right?
Dustin Wells: DSCR and RTL. And we are going to move swiftly into the consumer space as well through that wholesale channel. I’ve been asked a lot, with Dominion, why now? Like why after two decades that they decided to get in wholesale now? It’s because one in three transactions today is facilitated by a mortgage broker.
So, when you look at the percentage of mortgage brokers and the impact they’ve got on the current marketplace, we’ve not seen a concentration in mortgage broker origination like this since 2009. It’s why not now, right? So, if one in three deals is going through a broker, that means one in three deals without being in wholesale, we’re not able to deliver our service and product to that customer. Our calculus and our hypothesis is it’ll continue to increase. If it’s a third of the market today, it could be a half of the market in three or four years from now.
Kevin Kim: Right. Is that mostly on the DSCR side? Or is it also including the RTL stuff?
Dustin Wells: It’s mostly on the DSCR side, but I think you’re going to see some gravitation in RTL as well. I also think what you’ve seen is a set of brokers that have – they might have heard of DSCR, they heard of – they knew the acronyms, but they didn’t really have to learn what it all meant until the agency rates spiked to a 22-year high and there was panic. It’s like, “Okay, well, now what? I’ve got to keep the lights on. I got to pay my bills. I got to keep my LOs with deals coming in. I’ve spent all this on direct marketing and lead gen. My real estate agents are looking to me for – how can you help me?”
There was this growing opportunity in that business purpose DSCR space. One of the big drivers for us is going to be education, right? Getting out in front of the loan officers and the brokers to continue to educate on how best to structure those deals to get those customers set up for success.
Kevin Kim: Yes, I mean, we’ve heard the same sentiment on the show, actually. Bill Tessar said the same thing. John Beacham said the same thing. A lot of unknown volume coming from that world, untapped, and it makes sense. I mean, at our show, here at Captivate, before us is originally, Connect, and you see Lima there, you see RCN there, they’re all there. So, it makes sense. Please, give us more colour on the business, product offerings, what you guys are doing on the capital side?
Evan Stone: Yes. Well, I mean, I think the common theme, is if you’re in the agency business, the one thing you’re mostly assured of is liquidity and with the folks sitting at this table, you could wake up and the music could dim dramatically, if not, stop. So, at least the way that I’ve approached it is by having a non-bank that uses term financing and we have a consortium of buyers, LifeCo, alternative investment managers that don’t securitize. Then, obviously the securitises. But then, we also own and operate a bank.
So, what I’ve just noticed over the cycles is that the institutions that were always able to capitalize on dislocation were smart and well-positioned banks because they have a consistent and secure source of funding. We have that at our small little bank, and today, there’s not tremendous market dislocation. I wouldn’t say it’s the absolute healthiest I’ve ever seen it, but it’s just fine. But we’ve all seen it where it’s not just fine. So, that’s kind of our hedge that in moments and in chapters where there’s less liquidity, the bank can step in, buy loans, originate loans, and we can keep going. At the non-bank, I mean, listen, these are challenges that we all have to contend with.
I mean, just because you have term financing, just because you have a wide variety of potential loan buyers does not mean they’re necessarily going to be there and step in and step up when those moments happen. I mean, it’s juggling, managing, balancing risk in our line of work, in our niche, is not easy. I guess, the short way of putting it is the bank is really our hedge. We can push and pull levers. We can deemphasize an on-bank, emphasize the bank, or vice versa in any given moment in time.
Kevin Kim: But actually, banks and DSCR get along just fine. They feel it’s a good combination.
Evan Stone: Depends on who your regulator is. I don’t know if my regional office, the OCC office in Cleveland will be watching this. I mean, the reality is, I mean, we’re a relatively new bank. So, new management team, new business model, and whenever that happens, they kind of treat you a bit like a de novo. So, we’re in that kind of almost at the end of that three-year in jail.
Kevin Kim: The lead just got to come up soon, right?
Evan Stone: I mean, that’s the theory. That’s our hope. It seems like it’s trending in that direction. So, to answer your question, I mean, we see plenty of banks that are originating DSCR at present. Community Savings is not all of our DSCRs originated over at Champions.
Kevin Kim: We’re not bringing it up is because in BPL in general, we saw the first – well, I guess, yes. We saw the first instance of a depository institution, so not an investment bank, but a regular bank, jumping into the BPL sector, and that didn’t go so well, right? I’ll leave it at that. We already interviewed Bill, so we don’t need to rehash those issues. But it seemed to me that they had more struggles dealing with RTL than the DSCR. They seem more comfortable with DSCR as a product.
Evan Stone: Yes. I mean, listen, a well-underwritten product is a well-underwritten product.
Kevin Kim: But is it a lack of understanding of RTL? What do you think? I mean, because I always been nervous. Are more banks looking at RTL or are they not? I don’t know what that looks like.
Evan Stone: I’m not aware of banks looking at RTL. I’m definitely aware of banks that kind of the more somewhat down the middle of the fairway, one to four-unit, maybe even up to five to eight-unit, DSCR one or above, conservative LTVs. But I think for banks, what’s nice is you’re always trying to match up assets and liabilities. With consumer, you could see runoff that’s hard to predict. I mean, you tell me what interest rates will be tomorrow in a year and two years from now, then I can model out for you what the CPRs and what the runoff’s going to look like. Whereas with business purpose, there’s generally an element of prepayment protection. So, I think it’s a little easier to match up the assets and liabilities with the business purpose.
Kevin Kim: Right. I like to ask all of you as kind of like first exposure into BPL because they’re like, what was your reaction when you first got exposed to it? I never actually talked to folks that have given me their take on this. Because most of the folks that we talked to and all of our guests on the show have entered the space. Some have lived and breathed them. Other folks came from Wall Street, in different places, but I never actually asked them this and I’ve always wanted to ask folks and the consumer. What were your thoughts when you first heard of BPL as a product offering? What were you doing in your life at the time? Give me your reaction. Because it seems it’s so divergent, it’s so different, and we built a business around BPL. It’s our primary language, if you will. It’s like speaking English to me. I don’t have a problem. I have no questions around it. But from a foreign perspective, there had to have been kind of a different take. What was your guys’ take?
Dustin Wells: My take was it served a need. It served a need, right? So, I mean, those of us that, let’s say, consumer background or consumer lending background, you had customers acquiring rental real estate with some consistency, right? It was really the construct of the deal. The idea of the property cash flowing on its own merit. The idea of the borrower being an LLC, and not a natural person. It wasn’t too far outside the box. But what it allowed for is a customer that wanted to forge – by the way, we saw more formations of small LLCs post-COVID than I think maybe ever, candidly.
The mom and pops that decided to start acquiring real estate because rates are really low and they wanted to acquire some properties and create some wealth in real estate, like Evan had alluded to. So, I mean, for me, it was how can we deliver a solution out to a growing customer set? But for us solutioning for this, would likely go to a commercial bank or a commercial lender, and it would be more of a commercial construct in the transaction.
We talked earlier about how you’ve seen more brokers out of necessity when rates hit a 22-year high, have to learn this new area of the business. Those loans are being originated just by commercial lenders and commercial banks. Candidly, I think the idea of it coming into the fold with a much broader broker set, a more residential-focused broker set, has been good for business, and it’s been good for consumers and for customers alike. I think the evolution has been fantastic.
Dave Orloff: Our kind of giving up assumption from agency was we’re just really, it was gut-wrenching to scale businesses and then let go a team, just because the interest rates pop 50 basis points. Keep doing that. In my experience, we’ve never been successful building out teams of loan officers matched with realtors that you know kind of smooth out that business. So, my first impression and the thing we were searching for was just really a non-interest rate volatile lending product. Then somebody tells me about RTL.
Kevin Kim: Who told you about it?
Dave Orloff: Well, it was the guys at PeerStreet. Remember?
Kevin Kim: Yes.
Dave Orloff: We’re sitting at Innovate and Jason Harris was there and he’s like, “You guys have to get into this space.” I’m like, well, tell me a little bit more, just a little bit more, just a little bit more.” At the time there were 10 and 12 handle RTL transactions and Fannie, Freddie, and five-and-a-half and I’m like, “There’s no way people are selling 12% interest rates.”
Kevin Kim: It was shock.
Dave Orloff: Total shock. Total shock. I said, and if they are, it’s the taking advantage thing, right? It’s just pure hard money to learn that the community underneath that product was primarily a real estate investor, it was shocking. I think that word is good. We were shocked when we kind of looked over the fence.
Kevin Kim: I’ve heard the same story recently. I was consulting with a client that’s opening up an RTL business coming from non-QM, and he was just like, “This is too good to be true. You don’t need this. You don’t need that. I get the email a day late. I don’t need this, right?” I’m like, “Yes, you don’t.” “I don’t need this, right?” “No, you don’t.” Does this apply? I mean, no. I get all kinds of questions and we’d laugh internally at the office. Like, “Wow, they’re broken over there.”
Dave Orloff: Well, that whole Dodd-Frank thing. It’s a big thing, right? You’re an attorney. I mean, the staff is involving.
Kevin Kim: That’s the thing, being attorney. I came from the commercial world, right? So, I was a commercial loan originator, and then I became an attorney, but I had worked in commercial in my entire life. So, I was used to look at the assets. But then I come here –
Dave Orloff: Us consumer guys refer to that as the Wild West.
Kevin Kim: In commercial, we always underwrote the asset. We always underwrote the cash flow of the asset. We never looked at the borrower. We’re like, “Okay, fine, look at the financials. Is he broke or does he have money?” But it didn’t matter that much in commercial, even at the bank back then. Today, I see a lot of folks that are just like, “Wow, this is amazing.” And they’re growing and growing to your point because there’s an untapped resource. I think that’s a really interesting takeaway from today. There’s an untapped resource that we’re all forgetting about and it’s in the consumer world, which is interesting.
I mean, all was your like first reaction? Because you’ve been in, I mean, being in non-QM for a long time now, you had to have exposure relatively early on.
Evan Stone: Yes. I mean, I guess we’ve seen kind of the evolution of it being more institutionalized and liquidity grow for it. I mean, I guess my first reaction was, listen, for the most part, is very makes sense, common sense. It’s a market like anything else and there’s a supply and demand of liquidity and demand for that liquidity. It certainly seems to me like the investors that ultimately own the paper are getting healthy coupons of people that are taking on the debt are, by and large, doing very well, getting leverage against an investment asset that leased over the last, basically, ever since the GFCs, done nothing but go up.
Everyone so far, I think, has been healthy participation and it’s worked well. We’ll see where it goes from here. But certainly, the way I look at it and the way I look at the kind of non-QM in general, because people there’s been all these different monikers and names for things. It used to be –
Kevin Kim: Hard money.
Evan Stone: Then, non-QM some people say, “Well, isn’t that just subprime?” I guarantee you ask these gentlemen; they’ll give you the same answer. When I look at like the average weighted FICO of our book, it’s like 740. When I look at the average weighted LTV, it’s like in the high 60s. When I look at the liquid assets these borrowers have, very healthy.
So, this doesn’t – like back pre-GFC, these would have been like, if there was such thing as foray paper, it was like the best stuff ever underwritten. So, there’s really no, like, it’s not like hard money as I remember it when I was first coming up in the business because there was so much liquidity out there who was really low LTV, really low FICO. It was like you couldn’t get, because you didn’t have to prove income. No one was really looking at DSCR. It’s as all asset-backed. It seemed like hard money and maybe you’ve been in it longer than me. But that’s how I remembered. It was like, “Oh, the sub-500 FICO, that’s hard money.” Now, the business purpose loans are the furthest thing away from a hard money. Some of these borrowers have 800 FICOs, 40% down, but they can’t use personal income or they choose not to.
I mean, to me, it’s the most healthy, when I look at credit and I just think about, where are we today in 2024 from a credit perspective vis-a-vis, 20 years ago? It’s just night and day, night and day difference.
Kevin Kim: But that’s the funny thing is like I still get this a lot. I get this a lot, these hot takes from people like, “Oh, yes, like you said, it’s still subprime. It’s still loan sharking. Hard money has got a bad connotation to it and I’ve been fighting this – there’s been a trend in BPL in general, to get away from the terminology hard money lending and I’ve always pushed against it because I’ve always asked myself, well, at the end of the day, we’re borrower facing. Our borrowers are the ones that matter. Not what we all think amongst each other. We don’t need to tell each other what we’re doing it out there. We all know what we’re doing.
But what does the borrower call you? If the borrower calls you a hard money lender, then you’re a hard money lender. It doesn’t matter to me, right? But are you managing good credit risk? But to that point, there’s been an underlying threat in the space for the past year now. It’s eight months since January of credit risk. Credit risk seems to be the number one thing. The one thing that I really appreciate from the consumer world is you guys understand credit like nobody’s business. You understand it. You understand it at its core. Whereas a lot of our clients don’t. All kinds, I mean, consider it.
So, I like to ask you guys, credit risk today compared to even last year, and what are you doing internally to mitigate that risk? Because the number one concern in our sector right now is credit risk and fraud. Everyone’s nervous about it. They see it all the time. I’m sure you guys are seeing it. What are you guys personal – because your perspectives and your experience inform all this. I think a lot of our listeners can learn from folks that have you guys, because you guys have such a diversified experience.
Dustin Wells: So, I’d like to go back just a little bit, talking about something that Evan had brought up, because I could not agree more candidly. In terms of the quality of the customer that is served by the non-QM and the BPL. Those that associate non-QM with subprime, liars’ loans, we’ve all been in the business a while now, could not be further from the truth, right? These customers are still meeting some level of ability to repay litmus test on every transaction, whether it’s the property has to cash flow, whether it’s the bank statement review and the customer has to cash flow, whether we’re depleting assets to make them cash flow. The idea of non-QM is serving an underserved customer base that doesn’t have the W-2 that can’t fit the square box of an agency underwrite.
It is not about expanding the credit box and creating larger risk or undue risk to give people loans that should not be getting loans, right? They shouldn’t be offered the opportunity or privilege to own a home. They simply can qualify just in a different way, but they clearly cash flow and they can prove the cash flow.
So, I think those that try to associate non-QM with subprime just don’t know enough about what goes into the review and analysis and the credit file in putting a non-QM loan together. I mean, I will say over the course of the last 12 to 24 months, has credit tightened a little bit? Yes. Is there a little more review on collateral? Yes. Are there certain areas in BPL that have become a little more restrictive? Yes, for example, in mixed use.
If that property has a storefront, a couple years ago, a little more flexibility, kind of more aligned with a multifamily, 5 to 8, 5 to 10. Has that taken a bit of a different set of optics in today’s underwrite? The answer is yes. I think some of that is a function of kind of where we are as a country with the economy. Things start to kind of turn around and there is not the same level of risk that that storefront may not have a consistent tenant or that income may not be consistently coming in to help cash flow that transaction, then maybe it’s a different calculus in 12 to 24 months once we get past the election. That’s what I would say as it relates to kind of credit and collateral.
Kevin Kim: Any takes, guys?
Dave Orloff: So, I was just thinking about your previous question about you’re looking over the fence and you hear 12% and when Evan brings up subprime, I mean, where I think hard money for me started was, you’re dealing with subprime files. They didn’t meet credit for some weird reason and then they had such low LTVs, you gave them hard money loans. Well, even those hard money loans were like 10%, 11%, 12%. So, to look over the fence into RTL and see that’s what real estate investors are paying with 800 FICO scores and sometimes 20% down, it just, I couldn’t reconcile that to begin with.
I think then following into that next question of credit, if you’ve been in and around a high-volume agency-type production environment, that’s really all you’re talking about all day long is, how do I find a customer that has this profile? How do I read this credit report? How do I understand this asset? How do I understand, even down to you’re reviewing tax returns, right? You’re trying to understand how does this person generate income and what does the DTI look like?
So, we spent a lifetime, even if it’s been a year or two, deeply involved in the origination of the consumer loan, looking at borrowers, right? I think hard money or commercial, they’re looking at assets.
Kevin Kim: Correct.
Dave Orloff: I think, I mean, duh, that’s the whole nature of the definition of the business, but it’s sort of how you were raised. I think, I have a little bit of difference of opinion. I think in RTL specifically, there’s still a lot of funds, there’s still a lot of non-institutional hard money lenders that –
Kevin Kim: I was about to ask that question.
Dave Orloff: Credit is credit, but I don’t need a credit rapport. I don’t, I mean – I’m not sure they don’t make as sophisticated an underwrite as we do with all these other tools.
Kevin Kim: Good. Update is finally happening. I love it.
Dave Orloff: I’m not sure. I’ll tell you, the delinquencies say they do just as good a job as anybody else.
Kevin Kim: That’s been the fascinating kind of evolution in RTL specifically. DSCR, you can’t get away from it. You have to do it because there’s no balance sheet strategy for a DSCR loan, right? Everyone’s ticking into secondary. You have to. But in RTL specifically, there is a large swath of the market and there’s no consistency in an RTL. I grant you that. There’s a large swath of the market that originates a large volume. I have a client in Arizona. He’s the number one shop in four states. You can’t deny that he’s doing well. His default rates are below 10%. But he doesn’t run credit. He doesn’t run appraisal. I’ve always been stuck in the middle of this debate. I don’t know how I feel about it. It’s been tough.
Dave Orloff: I’m not going to put my neck out on a widely viewed podcast. But I’ll tell you, I think if you pick the denominator that everybody’s going to use is delinquencies, every 30, every 60 or whatever, it doesn’t have to be foreclosure and the net loss on that asset. As much as us, consumer guys will all agree, no matter how you cut your data, FICO is still the number one most important piece.
Kevin Kim: Indicator? Best indicator?
Dave Orloff: A 100%. However, whatever skill or orientation or capabilities these RTF guys have in evaluating true borrower or sponsor credit, even behind an entity and all those things, if the common denominator across all is just delinquencies, they’re doing fine.
Kevin Kim: One thing that we’ve been told on the show, and I’ve been told for years, and I tend to believe this, what’s the borrower resume look like? If you’re a flipper, especially, what’s their borrower resume look like? And if you’ve got at least 10 deals on your belt, likelihood, it’s kind of like a FICO score almost, right? What was the result of those deals?
Dave Orloff: A 100%.
Kevin Kim: But on the flip side, it wasn’t until, I would say ‘16 until we saw this becoming a standard in the space. In ‘16, DSCR was not part of the conversation at all. I think it was exclusively done by the non-QM shops at the time.
Now, you guys, I mean, because RTL, you guys don’t do much RTF at all. But I still like your perspective on this. Like, how do you guys reconcile this in the space? For guys who are used to just FICO as king and then you come to a space and you see this happening, what is your perspective on his take? Because I’ve been caught in the middle of this, and I don’t really know what to say about it. Because I see both sides to it and I support my clients that don’t and I support my clients that do. So, it’s been challenging.
Dustin Wells: I think in the RTL space, an area of focus has, at least for Dominion, has historically always been strength of sponsor or strength of guarantor. Now, whether that part of the calculus or the entire calculus is FICO score of that sponsor guarantor, there’s a lot that goes in. Are they really a seasoned serial investor in real estate? So, maybe they don’t have the best credit, but this is their 10th project, 11th project, 12th project. I think a lot of that goes down, how are they managing those projects? Are those projects performing? I think, is a large part of the calculus that, again, a more seasoned shop like a Dominion, that’s been part of our evaluation since the beginning. Less focus on, although I don’t disagree that credit, at least in the consumer-facing space, has always been kind of the one great equalizer, right?
In the RTL space, it’s just so esoteric. It’s so nuanced that I think kind of a one snapshot in time relative to how that guarantor may be extended at that moment when they decide to do project 10 or 11 is not the only thing that really drives the decision.
Kevin Kim: That’s true. It’s not only the – it’s a checkbox item, usually. If I want to sell this loan, I got to check the box on the FICO. I have to have it, whether – FICO score centre is chained all the time, but it’s not like it has to be in a paper where it has to be seven plus or whatever. I mean, what are your thoughts? Because, I mean, you’ve been exposed to the RTL world.
Evan Stone: Yes. I mean, again, I probably wouldn’t want to speak to specifically about RTL, but more generally, I might disagree that on any transaction, FICO would be what I would look at first. Because when we’re talking about performance, to me it’s really about minimizing losses. So, maybe FICO is a predictor of frequency, but LTV is always going to be the predictor of severity.
I don’t mind so much if there is some frequency. What I don’t want is severity. So, I guess for my seat, the leg of the credit stool that I think is most important is always how much skin there is in the game looking at the asset.
Kevin Kim: Talking about like, let’s look back on the DSCR side, and I have less exposure into DFCR. For those of you don’t know, I’m primarily a fund attorney. I’m a security attorney. I just happen to do this because it’s kind of fun, right?
Evan Stone: You’re a sick man. You think this is fun. You say, “Get up”, and then you’re all geeked out.
Kevin Kim: But on the DSCR world, it’s also interesting because the guys in our sector, we hear the ratios. That’s kind of the driver and that seems to be the “it” driver. Then that goes to the valuation question, and there are institutional shops that are pushing leverage on this, and they’re pushing leverage pretty aggressively. There seems to still be a market for it. The prices are now in a weird place where it kind of coming down a little bit and volume is increasing in DSCR.
I like to get you, guys, take. I’m not an expert at DSCR. I know enough to be dangerous. But there seems to be something interesting going on right now. Right now, it’s August, right? We’re heading into the election, like you said. We’re hopefully heading toward a rate reduction. But DSCR, I mean, we just interviewed Ben over at Constructive. He was like, “Yes, we had a record month and we’re so excited and capital’s excited. I have clients that are originating this stuff at a lower price point.” What’s going on?
Evan Stone: Well, that’s just a function when you look at what the LLPAs are with Fannie for investment properties, I mean, now spreads in non-agency for DSCR have come in. So, not only have reference rates fallen, but spreads have come in. Now, we’ve almost hit a point where, I mean, I don’t know if you guys are seeing the same thing, but there are plenty of instances where the price for someone that deals with tax returns and the whole rigmarole you have to go through to qualify through Fannie Mae, Freddie Mac, through the agencies, the rate price you get there is not too dissimilar. In certain cases, might even be better on the DSCR non-agency side of the house.
So, as spreads come in on this, because as we know, not all these DSCR loans end up in RMBS securitizations, but a lot do. That is a big source of liquidity. Spreads have come in. I mean, I think now we’re at the triple As or like, what, plus 130. I think a guy’s low is plus 125.
Kevin Kim: So, you’re saying that wasn’t a thing before?
Evan Stone: Well, spreads had really blown out. So now, they’ve come in and reference rates have fallen. I think in general volumes up, right? I mean, whether you’re originating agency loans or you’re originating DSCR loans, but DSCR specifically, and again, I’m curious if you guys are seeing the same things. But I mean, what we’re seeing is that we’re absolutely funding DSCR deals in the sixes now. We hadn’t ever done that. I mean, really, since we opened our doors.
I just think that spreads coming in, reference rates falling, it’s unlocked a whole new universe of borrowers, but then also some are just choosing to go DSCR rather than deal with Fannie and Freddie because what’s the difference? Maybe you take a one-year prepay. But I mean, the rate and the terms you’re getting are not dissimilar. It’s a heck of a lot easier to –
Kevin Kim: We didn’t even see advertisements for any kind of rate pricing for DSCR for a solid,
what, year and a half now? And last, what was it, June, I guess? June, we started seeing advertisements were like, they’re now advertising their rates. I’m like, “Whoa, what’s going on? What’s going on, guys?” I don’t complain about pricing in DSCR. Then after those ads started going on, we just started falling and just skyrocket on lightning docks. I was just like, “Something’s up.” I don’t know enough, right? I don’t know enough of what’s going on because we only see kind of the – we have more insight into kind of the aggregators and the guys that buy from them in our sector. We don’t have any line of sight into the agencies. This is news to me. This is great.
Dustin Wells: Seeing that – go ahead.
Dave Orloff: He answered the why for everybody that is tuned into where these bonds trade. He told you the exact why, but I would just add on that to kind of dumb it down for me. But for borrowers, just in the last 30 to 45 days, they’ve been seeing 6s in front of rates instead of 8s, 9s, and 10s on DSCR loans. There was the Fannie economist that came out and he actually gave this huge graph about how many more consumers, borrowers, whether DSCR or agency, would move into the market, normalized to a six handle on a loan versus a seven, and it was a giant, giant jump. So, I think the advertisement spreads tightening.
Kevin Kim: Borrower psychology.
Dave Orloff: It’s borrower psychology.
Kevin Kim: Well, that makes sense. You see a 698 versus a 7.1, you jump. I don’t know why, but you jump. It’s not a meaningful difference.
Evan Stone: But if you’re hell-bent on buying, you have a property you think is incredible, you’re not likely to do it, or not do it base on 50 basis points of interest rate. That said, now where rates are not agency versus agency, it’s tightened so much that now you’re probably seeing more go DSCR as opposed to Fannie, Freddie, assuming the loan amounts are within those limits. If they had both options, almost always they would say, “Well, if I qualify for Fannie, then I would take a Fannie loan.” Today, interestingly enough, maybe not so much, and it’s so much easier, as everyone here would tell you.
If I’m a real estate investor and the rate is 25 basis points higher for DSCR than Fannie, I’ll pay the 25 basis points just not to deal with probably this beyond as so many not so smart people in our industry. I always call our industry very low IQ industry. I mean, a lot of great people, a lot of scrappy people. But you go from shop to shop, even within a shop, person to person, you’re not always getting a uniform underwrite. So, God forbid, you get the wrong underwriter on a Fannie side. I mean, it could be like pulling teeth to get to the finish line. Whereas for DSCR, I mean, it’s really more of a streamline process.
Kevin Kim: I have a question about that. Are the institutional investors that are not necessarily tied to government agencies, are they reacting to this news. Like you said, are they reacting like, “Okay, we better get our prices down. We got to take advantage of the opportunity right now.” Is that what’s going on?
Dave Orloff: I mean, I’m sure Dustin has the – but absolutely. I mean, I think the demand for this product, at its historic performance levels is, I don’t even know if it’s four, or five, 10 times what the supply is. I think the borrower community is waking up like, “Wait a second.” Maybe I’d be curious to know how you think about, if I’m equity trapped, I’ve got my 2.5% to 3%, 30-year fixed, my primary residence. I know I’m not going to leave and go take an 8% Fannie loan, but will I take a six? Or does it need to be five and a half? Where does that start to thaw such that we’re going to get more transactions even out of the primary residence folks. I don’t know the answer to that.
Evan Stone: Well, there’s definitely been fatigue. Because those that maybe wanted to move up, or move just to a different home, different location, perhaps, I think that they were so used to seeing these 2%, 3% rates. All of a sudden, now, they’re 7%, 8%. I think it’s probably pretty hard to get your head around that, but once you see it for two years straight, and then all of a sudden, I mean, any relief, which is now what we’re seeing, I think is going to trigger at least a part of the population. Everyone’s situation is different, but we talked a little earlier about borrower psychology. Everyone wants a deal, everyone wants to feel like they’re getting a good deal.
Two years ago, they wouldn’t have felt like they were getting a great deal in the sixes when the rates have been the twos and the threes. But two years later, and if their desire is really to move to a different location, or move up, or whatever the situation may be, any relief at all could be something that triggers that.
Kevin Kim: Also, a sudden realization that, “Hey, this is not going to get better anytime soon, because there are a lot of people waiting.”
Evan Stone: It took a worldwide pandemic. Like this is what I always say. It’s not just for borrowers, but it’s for people in our industry. If you need that market that was there in ’20 and ’21 on the agency side to succeed, you should exit the business. You’re not likely to see that again. What is really done for those that are so heavily reliant on rate and term refinances, yes, you might get like a mini run from those that took out new loans in ’22, and ’23., and into 24. I mean, really, it’s almost like an equilibrium, where. for all that volume to occur in almost a two-year period, you’ve really taken a lot of the juice out of potentially a decade plus of Ford originations. That bleeds down to the borrower, him or herself, where it’s like, listen, if you’re going to wait for 4% interest rates, 3% interest rates. I mean, you may never see those.
Kevin Kim: God bless you.
Dustin Wells: I think that’s one of the biggest challenges, admittedly. I think it was said very well, right? So, you look at where rates were at the end of 2020. Little history lesson. End of 2020, 30-year fixed, 3.25, 3.35, right? Take a look at where they’re at today. We’re talking about sixes. There’s the positive news, but then there’s the math of it as well, right? So, if your expectation is you’re going to have the buying power that you would have had if you bought a property at the end of 2020, you need to reconcile that quickly, because that’s not going to happen. So, if your focus was, I want to live in the million-dollar house and have this payment or the – the other challenge is. the average home price never been higher. 398,000, I think, was the most recent number.
Now, you’ve got this all-time high sales price, rates that are two times where they were in 2020, but candidly, ridiculously artificially low because of what was going on at that time. There has to be an understanding of what the – I won’t even say the new normal, like the reality is, of where rates are going to stay. We’re not going to be back at 2875, 3.25. There has to be a concerted focus on, this is not the new normal, but this is normal in the market. This is what’s going to happen.
You’re either going to get on the fence or off the fence. You’re not going to be sitting around waiting, and waiting, and waiting, because you’re not going to see 3, and 3.25, and 3.5 again. That really is part of the conversation. Whether it’s the loan officers not having the conversation, or maybe we’re not marketing right to those people to get them off the fence and have a conversation. Maybe, as an industry, do a better job of like saying, “Listen, this is where rates are going to remain. So, let’s talk about what you can afford today.” As an industry, we could probably do a better job of getting that messaging out, but that’s just where things are going to remain. That’s where they’re going to stay.
Kevin Kim: That’s the challenging part, when you say the industry. This pause is very interesting, because the word industry is used now. To me, it feels like a very broad umbrella term now to cover anything residential, almost. So, it’s like, even mixed used and sort of the consensus, and I love it. But here’s what I like to ask you guys, this has been a take that we’ve had consistently over the past three years, is that, is BPL headed in the direction non-QM? Is it turning into it?
Evan Stone: What does that mean? What do you mean by that?
Kevin Kim: Yes, good question. The best way I can interpret it is, I just had an interview with Ben, from Constructive. What he said was very – telling to me, he says, “I take the perspective of a mortgage banker.” If you look at our client base and BPL, for a long time, the vast majority had looked at it more from a commercial perspective. They had taken the position as more of a commercial real estate lending business, and taken those precepts and applied it to the industry. They basically looked at, they saw what commercial bridge had been doing for the years, and brought those same practices over to this industry, in residential.
Since 2016 the advent of the secondary market. The advent of it was in 2014, but really horsepower in 2016, real seriousness in 2018, a lot of the JVs that were happening in 2020 just skyrocketed. Now, a lot of folks, especially the institutional level are advocating for commoditization. They’re advocating for standardization in RTL and construction lending.
In DSCR, I can appreciate, there’s always been that level of standardization. But what you’re saying is that there isn’t to some degree, but it’s still a minute difference. In the RTL, in the construction lending sector, there’s so much fragmentation. I appreciate it. I actually love it for the creativity. I actually go, “Hey, you can’t get your deal done this way. Well, here’s three other ways to get it done, and I’ll walk you through all three ways, question whether you can execute or not.
Today, instead of three ways, it’s become, well, for a long time, those three ways kind of became two ways, or one way. For a long time, the conversation, the strategies would be changing and changing. In the past year or so, the rate volatility being so interesting. Or two years, we’ve been lucky enough that the clients have been realizing, hey, maybe there’s some reality to a balance sheet. But still, this push for commoditization and RTL. I’ve been relatively resistant. I like to hear your guys take, because you’ve seen it applied in the consumer world.
Dave Orloff: You’ve pushed my hot buttons, because I ran from that world.
Kevin Kim: You ran?
Dave Orloff: I didn’t like it. I think, if you buy for Kate RTL, and you say, just this, 12-month paper, and you talk about standardization, it comes down – Evan talked about it earlier, it really comes down from the folks that are financing, the aggregators and the investors that are buying this paper. However, I’m interested. It’s interesting to hear you say that there’s been sort of a consolidation to a standard, because I think that space, it’s such an art versus science application.
I hope for the borrower community and the lender community, I would hope that it stays rather artful in the sense that we all get to use our own judgment about what area we want.
Kevin Kim: Creativity.
Dave Orloff: Creativity, thank you. We want to lend in, and which borrowers we like, and whether we like ground up or we don’t like ground up. Versus, here’s an underwriting doctrine, everyone needs to follow it to get your deal financed. Because, we’ll do a fix and flip loan at 6.5%.
Kevin Kim: In 2020, it was like that. Every week, I was getting asked, I need credit matrices from all the buyers. Like, guys, have you heard of other strategies before? There’s other ways to get this done. Thankfully, after 2020, we got really busy after 2020, because they realized, wait a minute, balance sheet is the way to go with this in conjunction. But it was very mind-numbing for a solid two years of, I need to know every single credit matrix out there so I can sell everything I possibly can. It just feels like, yes, we’re heading in the wrong direction at the time.
Dave Orloff: I mean, I think this is apropos for everything in business purpose lending. Butow, everybody wants an in the fairway loan. But how much of it is there? Then, if you say there’s 10x more demand, where do you start to create opportunities on the margin? It’s either you create those – in our business, in rate, or in product, or in guideline, you have to take your best guess.
Dustin Wells: I’d agree completely. I mean, I think RTL and business purpose has to stay somewhat bespoke. I think, if it doesn’t, it’s going to become far much less effective as a financing vehicle. Candidly, I really do. My take is, if it goes the way of agency, you’re going to leave a large portion of customers out of the fold. I really do.
Kevin Kim: Kill the market. Yeah. Evan, any thoughts?
Evan Stone: I’mgoing to yield to my friends here. I guess, nothing has to do – I mean, it’s just a market. So, usually, these things boil down to financing liquidity, what’s acceptable. Which is why, frankly, I will make this point, whenever I see stupidity in the marketplace, which, interestingly enough is pretty often. That provides wonderful opportunities for my bank to portfolio loans, because there’s always cut. All the time, I see people misunderstand credit risk, and they’ll make these sweeping statements like, they’re like, they’re absolutely, “We’ll never do this.” Really?
So, you mean, if these other things were so beautiful and there’s all these compensating factors, this one thing, you would – it’s a hard no. Oh, yes, it’s just a hard no, because they want it to be uniform. So, frankly, for me, I like it when the market moves to a more uniform sort of standard, because that allows me to be more creative and say, “Okay. There’s all these opportunities here to serve all these borrowers, and we can balance sheet that.”
Kevin Kim: So, you’re taking – [Crosstalk 0:57:40] That’s the beauty of it, right? This is the interesting perspective, because for a business that’s known to be, has a reputation for being so standardized. You’re telling me that, “Hey, no, we don’t want to be that standardized if we can do it, or be standardized all you damn want. Because on the backend here, I’m going to make deals happen and figure it out for people, and they’re going to come to me.”
Evan Stone: Certainly, I mean, out of self-interest, I would prefer that everything be very standardized.
Kevin Kim: Because they’ll come to you.
Evan Stone: Right. Well, just because, I mean, again, like at the bank, I mean, it’s always about safety and soundness. So, it’s not like we can be cowboys and make all sorts of crazy loans. It’s more – we see examples of it all the time, whether it’s in consumer or business purpose, where the more standardized it gets and the more rigid it gets, the less flexible one can be in just applying common sense. So, it’s like when I see – I’m probably not going to think of the greatest example right now, but it may be that there’s, “We just don’t do non-warrantable condos.” Really? Well, what is it? One come in, it’s like a 50% LTV, borrower’s perfect. No, non-warrantable condos. Okay, great. Well, you don’t do that. I’ll do that all day long.
So, I know these gentlemen don’t want it to be uniform, and frankly, for their businesses, I hope it’s not either, because they’re smart, and they know how, they understand credit risk, and they want to be able to apply their own sense of credit risk to files. If you have the right liquidity, then you can do that. I would say, at champions, I don’t have a structure where I just get to kind of make up my own mind as to what I want to fund and what I don’t. There are some swim lanes that we can push them a little bit. But at the bank, where it’s like, yes. I mean, we get it. Every loan has to be safe and sound, but I don’t have to sell it anywhere. I don’t have to worry about what someone else’s potentially not so smart view of credit is. I get to apply my own.
Kevin Kim: Power of balance sheet, guys. With Champions, any interest in the RTL sector, or just not – what was the reason for –
Evan Stone: Keep in mind, I mean, we’ve been only at this a couple of years over at Champions, and we’ve been growing pretty quick. I mean, I think, this month, we’ll fund just little shy of $200 million. To do that in a couple of years, it’s been a lot of growth. I think we just want to kind of stay focused on what we know, and not try and be everything to everyone. I’ve just seen so many businesses get in trouble, kind of spraying focus all over the place. It’s not to say they’re not wonderful opportunities in RTL. For all I know, I’m really missing the boat. But I think we’re just really focused on getting better at how we deliver what we’re delivering today.
Kevin Kim: That raises an interesting question. In the past three years, there have been more non-QM and conventional shops that have jumped into the RTL and BPL sector. They just jumped in. Some have added this to their business. Some of them have acquired their way through this and jumped in. Some have tried and failed, and some have made it work, and they’ve done quite well.
We’ve interviewed a few. Shout out to Keith over at Acura. We’re really happy for him when they jumped into the space, and really excited to work with him, and his crew. We’ve had folks make some headway and tread along. But we also see some massive failures. What do you guys think is kind of the key to success for a consumer shop breaking into this sector? Because it’s a different business. You guys all had your takes when you entered the space. There’s no consistency in strategy. First of all, I’ve had guys come in. They say, “Okay, Kevin, we’re going to call you, we’re going to do a fund.” But other guys say, “Oh, we’re going to get this institutional backer to help us go into this space.” But there’s been no consistency in whether they’ve been successful or not. I camp my thumb on what it is. What is it factor for the guys that have made it? You guys have clearly made it. So, what do you guys think it is?
Evan Stone: I mean, I’m not sure there’s just one formula.
Kevin Kim: Sure.
Evan Stone: There’s lot of ways to skin a cat. I mean, I think we all see a lot of people entering this space. Here’s what I would be, if I’m some of these folks, here’s what I’d be worried about. One, a lot of these people are not very well capitalized, so it’s not going to take much for the lights to be turned off quick. They better be damn near perfect, right. So, I think it’s good. You don’t need tens of millions of capital, and you don’t necessarily need a backer if you have enough capital yourself. But, I mean, some of these folks are getting in with million, $2 million.
Then, it’s going to be hard to get, you know, good financing, and et cetera, et cetera.
Then, I don’t think some of these shops are – I don’t think they’re thinking through six months, 12 months from now. I get it. I mean, they’re just trying to get going, but I’m not sure they’re really positioning themselves day one for success. There’s just a lot of things you have to think about. Frankly, as you start thinking about them, you realize, “Well, these are areas where I may need to make some investments, and they may not be in a position to make those investments.”
I guess, for me, it’s one, you got to be reasonably smart. You can’t just be like, “Oh, the market seems good. This seems to be something I can do. I’m just going to dive in. I originated loans, or I was an AE, or I used to run a company once.” It’s going to take more than that, and you’re going to have to work your ass off, and you better be pretty smart, and you better have some capital. Then, you better set yourself up for success, and not have the margin be so thin that you originated a couple loans to get put back on you, and it’s game over. I think some of these places, they’re not going to be able to absorb some of these bumps that may be ahead.
Kevin Kim: That’s one of the big things I always tell, like, you don’t have a balance sheet at all, and you’re coming in with your commission online.
Evan Stone: Commission warehouse line.
Kevin Kim: Yes. That doesn’t work here. You can fit like 5% of your line on this product, but you can’t do that here.
Evan Stone: I mean, Kevin, there’s so many. I mean, I said it earlier. What I love about our industry, one, you generally get people that are really scrappy and resourceful, which is a positive. But then, you also get, and again, it’s not everyone, certainly not the company that we’re enjoying at this table. But you just see a lot of people that are not very bright and short-sighted. So, you just have to, I hate to say it, just got to let them give it the old college try. Every one out of 10, it might work out.
Kevin Kim: That’s why we’re doing the show. Part of the reason why we do the show, you learn from people like –
Dustin Wells: We’ll talk about RTL as it relates to Dominion. So, a little bit different with Dominion, because their ethos really was an RTL. Dominion Financial Services is a division of the Dominion Group under that holding company, Dominion Properties. We’re the largest owner of investor real estate in Baltimore County. We own over 850 properties in Baltimore County. As a holding company, the founders of the company kind of cut their teeth at investor residential, and they were kind of the pioneers that RTL trying to go to local banks, trying a solution for what it is they needed for the short-term dollars to rehab these properties. Couldn’t find a solution, and they developed and deployed that solution through Dominion Financial Services decade and a half, two decades ago.
I mean, they really cut their teeth in that business, and they understand it very, very well. We also do new construction. The management of all those processes is just in Dominion’s DNA. That’s what I would say about how we facilitate RTL.
Kevin Kim: It also helps to have a nice balance sheet, I recommend. So, they did pretty well.
Dave Orloff: It certainly does. So, if I looked at it the other way. So, I think if you look at coming into the business, out of agency, and we bifurcate again RTL and DSCR. Boy, it’s a very, very difficult orientation coming out of manufacturing a 30-year mortgage, a mortgage to a term sort of finance agreement, RTL thing. It took us ages. We have all those problems.
Kevin Kim: As clunky as it –
Dave Orloff: Oh, gosh. Warehouse lines didn’t know what you’re selling to who, how did you –
Kevin Kim: What is this loan like?
Dave Orloff: Did you mean 12 months as like your prepaid interest or something? I think, the gateway product if I was going that way, if I was leaving consumer, because I’d had it, and I wanted to check out BPL, the gateway products, the DSCR loan. Get it. You can do it. It’s like a streamliner or something. You can get your head around it enough to try, and then see if it’s something for you, whether it matches up with your warehouse banking philosophies, or your balance sheet, or make a smart decision that way. Leaving agency like we did jump into RTL was –
Kevin Kim: We’ve seen it both at the highest levels and at the local levels. It’s frustrating because you’re 100%, I believe, I agree with you. I don’t think jumping into this space and doing your first ground up – starting with the ground construction loan. No, please don’t. The challenge has been, they’ve seen it. I could do that. No, you can’t. I’m sorry.
Evan Stone: I thought that was an excellent point, because what we see all the time are these agency shops, and they’re like, “Well, we’re not making any money in agency. So, now, we’ll do non-QM DSCR.” They use the same underwriters all day long, for years, have been underwriting Fannie, Freddie, which is really an automated underwriting. Then, they get to a product where you do need to dig in. There’s not an automated underwriting system. There’s tools that can be helpful, but you can’t press a button and get a decision.
We see this mistake made all the time, where these shops that they want to be everything and everyone. Now, they’re trying to enter into non-QM DSCR. Why do they struggle? Why are their brokers upset and their AEs are upset? Well, I mean, it’s not hard to figure out. You have an agency underwriter that, yes maybe they took a class, or they did one week of training. I’m sorry, that’s not going to get it done. So, their mindset when they look at that file, it’s the completely wrong mindset to be successful in the businesses that they were.
Kevin Kim: To make it even more complicated is that, there’s a secondary market in the sector now. It’s like our business. It’s like, “Okay. Well, I can just do that.” No, I’m sorry. It’s totally different. Totally different.
Dustin Wells: It’s all manual. It’s all manual.
Kevin Kim: It has to be. There’s no way to make it like that button. There’s no button like that. People have tried to create the button, it doesn’t exist. At least in RTL and DSCR, I think it will in the long term. But I think you’re 100% right, DSCR is your gateway drug, and that’s a smart move, and there are plenty of folks here that think your lows –
Dave Orloff: It’s probably not fair for me to name the names. The biggest wholesale shops in America now are probably the biggest non-QM because DSCR fits in that bucket. Lenders by volume. You don’t even hear about it because it’s still a rounding error to them in the origination channel. So, again, if it’s helpful to anybody, try a DSCR. Broker it.
Kevin Kim: Don’t put it on your –
Evan Stone: Broker it.
Kevin Kim: To this day, I have a lot of clients that are kind of traditional RTL lenders. They have debt funds, they have other kind of strategies, and they still don’t do DSCR. They still don’t touch it. Granted for some of them, entered in pencil. If they’re a construction lender in Austin and San Antonio, it’s hard to make that work. I get that. But can you guys educate the audience and listen, a lot of them are RTL originators and construction, loan originators and lenders, like why they should really – not only why they should do it, but how they can position themselves to successfully transition and add this to their book of business. Because I feel like you’re doing your borrower disservice if you don’t help them move on to a DSCR loan. Because then, you’re not only missing out on the economics. I mean, that’s great for your business, but like your borrower is going to find it somewhere else.
Evan Stone: Well, not only that, but I mean, it seems like there’s kind of this natural with a lot of borrowers. It’s a natural evolution where they had to take some sort of suboptimal financing to fix a project, to finish a project, but then they need something more permanent at the end of it. And what? You’re just not going to be there for them at that point. So, actually, we only did the really messy part of it. Now that everything is in a nice little bow, and you you’re eligible for longer term, permanent financing, we’re not going to do that. It seems like –
Kevin Kim: It’s a borrower service standpoint. It should be in that –
Evan Stone: I mean, it’s like a natural. I mean, why just have one bite at the apple?
Dustin Wells: Correct. I think to Evan’s point, like RTL is a natural directly into the DSCR. I mean, it serves that need. My short-term fix and flip has now come to term, I’ve rehabbed the property. Now, what? I mean, I want a 30-year, and I want a longer-term product. That product is now in the sixes, that’s it’s really attractive. How can I help facilitate that need for that customer, versus them finding it somewhere else? And the somewhere else they go may have an RTL platform. So then, you lose the opportunity for future business with that investor.
Kevin Kim: What’s the disconnect? Why are there RTL lenders that say, “I can’t do DSCR. I don’t do. I don’t want to do it.” What’s their internal –
Dustin Wells: Maybe there’s an aversion to long-term paper, or maybe they were historically a short-term interim shop for construction kind of moved into that short-term interim, and they want that constant churn of those dollars.
Kevin Kim: There’s the fear of, “Oh, I have to pay. I have to hold it.” No, don’t.
Dustin Wells: But again, I think there was a comment made earlier about, then broker that first deal.
Evan Stone: Don’t utilize your warehouse facility.
Kevin Kim: But that’s the thing. Today, you could easily broker it outside of the house.
Evan Stone: It’s your deal too. You had the relationship. So, it seems, probably a lot of it is either, they don’t understand it, and hopefully, by watching this, they understand it. This is not difficult. Then, some of it is just like – people just, a lot of times, they don’t get out of their comfort zones. They just do what they’ve always done. To I think everyone’s point, whether you broker it or whether you’re in a position to bank it, you don’t have to own this paper long-term. There’s a large market, at least at present, there’s a lot of demand.
Kevin Kim: Well, that’s the beauty of our space. I think there’s a fundamental understanding that you should never be holding this on your balance sheet. You should be either funding it, and selling it, or brokering it outside of the house. The objection that I’ve gotten, it’s too rudimentary in my eyes. Like, oh, I don’t want to lose my borrower relationship. Well, hold on, you’ve been selling your paper to the secondary. The same systems are in place, aren’t they? For those of you guys do this stuff, if the broker has called the broker this time, he’s got the RTL on his books, and wants a broker to you guys. Are there installations for him to make sure that he can keep his borrower relationship?
Evan Stone: But what is that? So, I always challenge, what does that mean? I mean, I can only speak, we’re certainly not calling the borrower, soliciting anything from them. Now, admittedly, we’re probably going to package up a bunch of these loans and sell them into some sort of forward commitment. I can’t promise that somewhere down the road, if the servicer has like some sort of a recapture or retail business, that wouldn’t happen. But listen, if it’s your customer and you have a relationship with that customer, why do you worry so much about that? I mean, just stay in front of your customer.
Kevin Kim: Good point.
Dave Orloff: I think every good wholesale agreement is predicated on non-circumvention. I think anybody in this room certainly is not going to be out soliciting somebody else’s.
Kevin Kim: No.
Dave Orloff: But I was really intrigued. I wanted to answer your last question. So, as difficult an orientation we had jumping out of the packaging and manufacturing of a 30-year, whether it was a Fannie, Freddie, FHA or VA loan, over, and over, and over again with certain technologies in the back office. We talked about that off camera a little bit. It was so different to put together and assemble, manufacture, whatever, just originate an RTL loan. Remember, a lot of your RTL originators, and this is a compliment, they have much of their data on Excel spreadsheet. Use in Outlook or Gmail, and some – what I would call, non-top one, two, or three loan origination system softwares, technology out there. When they look at DSCR, it’s like, “I don’t do that.”
Kevin Kim: Because it’s foreign to them. It’s so foreign.
Dave Orloff: It’s completely foreign. They don’t understand disclosures, they don’t understand all this other stuff. That when you’re sitting in agency land, it’s like – well, that, I mean –
Kevin Kim: You can’t do your first loan.
Evan Stone: DSCR seems like a reprieve,
Dave Orloff: Exactly. So, I really think –
Kevin Kim: Which also makes sense when you do trends. The guys that come from, kind of like you, they’ve come from the conventional world, or they were non-QM before this. They have no problem, they all do it. Then, the guys that come either legacy hard money guys, or the guys that came from commercial, they have trouble making it. They don’t understand it. They’re just like, “Ugh.” And they try to fix it, and finish it, and do it, but they can’t do it.
Dave Orloff: They might not have those tools. They might not have places as simple as – I mean, it sounds ridiculous, but they might not have the boxes that put in property taxes, and insurance, and HOA.
Kevin Kim: They don’t. Well, that’s a product of late admin in the space too. Because this product was not really in our – I mean, I’ve been at Geraci now 11 years. It’s the second half my life cycle here at Geraci. It wasn’t the first half. So, it didn’t exist, no one did it. So, the software companies are trying to keep up, and they’re adding it, they’ve been retooling it, but it’s just not where it needs to be, I think. So, there will be some sophistication to that for the LOS systems that are in the space, and they’re going to improve on it. I know for a fact that one of them, I’m really close to one of them, he’s telling me, “Yes. It’s foregone conclusion, we’re bringing it over.” So, that is going to happen. I think that will aid in the process.
Evan Stone: With that chasm or that gateway drug of the DSCR is going to bring all these worlds together. But I could see if you’ve had a successful RTL practice and you grew up, whether you got into it, you were a flipper, and then you decided to lend your buddies, or you’re just hard money or whatever. It’s a rather lucrative practice, with a very, very, very reduced back office to anything that’s originated in a consumer environment. Think about it, though. Credit, underwriting, it’s a single human being or a couple of people. And we have broken down the manufacturing process from the consumer side into multiple roles, multiple people, multiple milestones in our technology systems. It’s a different business, maybe.
Kevin Kim: I like that, because I always get these calls, new market entries, and I always ask them, like, “What’s the first deal you’ve done?” It’s always RTL. It’s always RTL. It’s what they’re used to. But I think one of the things that we should take away is like, if you are listeners coming from the conventional or non-QM world, do DSCR first as your first taste. It’s an easy way to do it.
Dave Orloff: Broker it.
Kevin Kim: Broker it, for sure. For my clients listening that are fund managers, if you’re not brokering your RTL out, you should be right now. I get it, if you’re in Texas, it’s hard. In certain markets, it’s hard, like California’s tough too. But it’ll come around as there’s more stabilization. But I think that it’s a first way in, and if you’re not doing it, you should be doing it. Your investors will appreciate you for it. Make some more money for your investors.
Evan Stone: Kevin, just so those that are listening, because you said Texas and California, it’s hard. Are you saying that because it doesn’t cash flow?
Kevin Kim: I think the cap rates are challenging. I think the cash flowing is a problem in California and Texas. I’ve got – actually, let’s dig into this, because I’ve gotten this as an excuse. But I’ve also seen clients do it, and I’ve seen rent rolls. I’ve seen cap rates that I’m – it’ll suck, but you could do it. It’ll suffer a little bit, and you can do it. Why aren’t you? So, you guys tell me.
Evan Stone: Well, I mean, if you’re up at a 10% rate, and now you’re trying to help this business purpose investor get into a lower rate. If the equity is there, it doesn’t necessarily have to cash flow to get them into a much lower rate. I mean, I’d pump my own company right now, but I guarantee you these guys can absolutely do these deals too. I mean, it’s – I think there’s a bit of a misconception that the DSCR has to be over one to obtain really good financing, probably much more often
Kevin Kim: We’re breaking this today. That’s the conventional wisdom, is that, “Hey, listen. The rents are just not there. It’s just not there.” California is also not a very renter-friendly market. It’s very challenging to be a landlord. So, the costs of being a landlord in California are at the roof right now, especially if you’re in LA County, and also if you’re in Oakland, in Alameda County, Sanchez County, it’s very, very hard. So, that was one reason. Texas, I actually never understood. I always wondered this. I’ve heard this is the case, but I’ve always wondered, like, you can rent these. There’s tenants, aren’t there? What’s the story? What’s the reason?
Evan Stone: Well, that – I mean, again, if you’re just looking for better financing, the DSCR ratio is just one of the aspects of the credit stool. If they have a good FICO and they have a good LTV, yeah, then the DSCR doesn’t have to be outstanding. In fact, sure, they have the same products. I mean, it doesn’t need to cash flow at all. With the view being that, okay, they have enough skin in the game, there’s enough at risk here where they’re going to work to get a renter in to get it to cash flow eventually. But I guess the point being is that, I don’t know where exactly all these rates are at any given time, meaning today. But I would imagine that someone with a 70% LTV, 720 FICO, but DSCR is below one, they’re probably still looking at something in the mid to high sevens. Probably a lot better than the 9, 10, 11.
Kevin Kim: It’s not 10. I mean, Texas is higher than 10, but on the RTL. What do you guys take? I don’t know DSCR well enough to know the details as to why people tell me that these don’t pencil in these states?
Dustin Wells: We originate loans in Texas. I mean, candidly, especially in certain markets of Texas, I mean, are pretty, pretty damn good markets, candidly for DSCR. Again, I kind of go back to that bespoke solutioning. Again, just because your DSCR isn’t at one or better, doesn’t mean there aren’t other litmus test that we put that transaction through to see if it qualifies for financing or refinancing. So, we do that all the time.
Kevin Kim: Are there unique challenges in the market that kind of present themselves in Texas?
Dustin Wells: I mean, there are certain markets in Texas, just like there are certain markets in California. So for example, Travis County in Austin. You know, it’s really appealing to be known as kind of the new Silicon Valley, until it’s not. So, when that kind of burst, all the kind of the big influx of folks into Austin for Tesla, Apple, same as a lot of the chip manufacturing, and that cooled dramatically, and a lot of folks got displaced. I mean, yes, that’s created some challenges here.
Kevin Kim: That’s not specifically to the point that a lot of my local clients will tell them, is like – they always argue, it’s so hard to make a pencil to get that a little more.
Dave Orloff: I think we could all give our phone numbers. All of your guests here would be happy to do that.
Kevin Kim: Call these guys.
Dave Orloff: But maybe what they’re speaking to, and this is deep in a guideline is maybe a seasoning thing. Is this, hey, my guy’s done. He’s built all this equity. I can’t wait, and I’m coming to term, and should we refinance?”
Dustin Wells: Remember, they’re selling to one investor that I won’t mention. In certain counties in Texas, I’d levy a really punitive LLPA. So, maybe that was one of their primary outlets. I don’t know.
Kevin Kim: I mean, I couldn’t tell you what the reasonings are. I haven’t gotten granular because my role is really more on the corporate and security side and licensing. I’ve actually been wanting to scratch that itch for a while. I think you guys have answered it. There are ways to get them done.
Evan Stone: Absolutely.
Kevin Kim: That seems to be true. Actually, we did see some interesting volume changes in the state that are very notable like, “Oh, the deals are getting done.” I mean, our clients are excited about these big markets coming online for –
Dustin Wells: In the traditional smile states, I mean, investor purchasing in Miami, Jacksonville, even in around Orlando, I think it’s a third of the market. A third of the buyers in those markets are investors acquiring properties.
Kim Kevin: For the top markets for DSCR.
Dustin Wells: In Houston, Austin, San Antonio, Dallas, we see large concentration,
Kim Kevin: So, it’s awesome as it were.
Dustin Wells: It has its own challenges, though I still love it. I don’t live there. Then, again, certain markets in California have been maybe a little more challenging, but again, still huge concentration of investor acquisition in the majority of those cities. So, if you’re not in that space aggressively, you’re missing out on what could be a third market.
Kevin Kim: I know. All right. So, I want to transition some kind of closing stuff. I want to ask you guys, first of all, what’s coming for you guys, and we’re closing out 2024. I can’t believe it’s almost –
Dustin Wells: You can’t say that.
Evan Stone: Yes, it’s August.
Kevin Kim: Can you believe it’s August already? Okay. We’re going to be in 2025 no time. What are you guys focused on for the year, rest of the calendar year, and what’s coming for the company you’re at, and tell us what you’re excited about.
Dave Orloff: Thanks for having us.
Kevin Kim: Of course.
Dave Orloff: Great to meet you guys. I think, Evan said, staying focused on what you’re building and trying to get better, it’s kind of our mission statement for 2024. But I think, strategically, we’re going to launch some new products this year, and that’s kind of exciting. But the bigger the company gets, the harder. It is to do those things. I think everybody’s baked it in. But it’s interesting watching, maybe even the borrower philosophy, but also the investor appetite as everybody is now kind of baking in their algorithms that we’re going to start seeing these rates drop.
So, that’s anybody’s guess. But I think, most are predicting a really healthy 2024, 2025 mortgage market. So, that wasn’t really the case even in BPL, came out of COVID, and that was weird for us in BPL. Then, we had 2022 again, the tail of 2022, that was really rough. So, the cycles are certainly shorter, but I think. we’re excited about some product expansion, but hopefully, just an overall great market for everybody, borrowers, lenders, investors.
Kevin Kim: Great. Well, excited to see this in progress for you guys.
Dustin Wells: Listen, I appreciate the invite.
Kevin Kim: Of course.
Dustin Wells: I’ve enjoyed it. I mean, great to meet these fine gentlemen, great conversation. Hopefully, the viewers and listeners get a lot out of this dialog. At Dominion, it’s really simple. We’re excited to launch the wholesale platform. We’ve historically, our pedigree has been consumer direct, both in RTL and business purpose. I joined the firm about two months ago as the president of wholesale to build all things out wholesale. We’re going to initially roll out with that focus on business purpose, serving, again, the broker base that is controlling basically, at this point, a third of the market. A tease a little bit, whether it be the end of this year or first quarter of next year, expand into the broader non-QM product suite, with a focus on second home, and primary residence, owner occupied transactions as well.
Kevin Kim: Big evolution. That’s cool.
Evan Stone: Listen, Kevin, thanks for having all of us, and it’s good to be here in my hometown of Las Vegas. I didn’t have to drive too far to make this. Appreciate you having us at the beautiful encore. I mean, listen, when I sold Pacific Union in 2019, I was forced into retirement at age 40. I think a lot of people think they want to be retired, and maybe some, in fact, really do. Retirement does not suit me well at all. Just ask my wife. Even my kids are like, “Dad, just get out of the house.”
I’ve been kind of like a bowl in a China shop the last couple years, wanting to build, and grow. I think it’s really just continuing to add capacity and always thinking about how do our customers, which are predominantly brokers, some mortgage bankers, but how can we best serve them. Just getting into their heads and speaking with them to really understand, how is it that you want to be served, and building all that out. Just because I think it’s great, it doesn’t really much matter if our customers don’t think it’s great.
I think the way we started was with trying to differentiate ourselves with product and mission. But now, we’ve got to continue to – there’s some wood to chop, with making sure that we are absolutely delighting our customers 9.8 out of 10 times. Because we know, we’ll never get exactly right 10 out of 10. But I think that there’s a pretty clear roadmap for us to do that. It’s just, it’s going to take time, but we’re working hard at it every day. So, I don’t think that’s necessarily a 2025 thing. I think that’s an always thing, and we’re just still on that journey.
Kevin Kim: I love it. I love it. Well, I mean, this has been the first meaningful discussion we’ve had with kind of people that have one foot in both industries. We had a few one-on-one, but I haven’t gotten the depth that we did today. So, I want to thank you guys for giving me this wonderful education too, because I don’t know that much in consumer rights. So, it’s been really nice to talk about kind of the differences and the synergies between the two spaces.
For our listeners. I really encourage all of you, if you’re interested in starting in BPL, I mean, these guys will answer your phone calls and talk to you. For those of you who aren’t doing DSCR just yet, please start doing so. For all of you who are seasoned listeners of the show, thank you for listening to this in-person episode while we set up for Captivate 2024. I’m excited for the rest of the season. Thank you, guys.
Dustin Wells: Thanks, Kevin.
Dave Orloff: Thank you.
Evan Stone: Thank you.
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 geracilawfirm.com. That’s geracilawfirm.com.
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