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Kevin Kim:
Hey guys, Kevin Kim coming to you via Zoom once again, for another episode of Lender Lounge with yours truly, Kevin Kim. Today, we have a very special guest Jennifer McGuinness, president and founder of Invigorate Finance, right? Invigorate Finance?
Jennifer McGuinness:
Correct.
Kevin Kim:
All right. Jennifer, please introduce yourself to our audience and let’s get started.
Jennifer McGuinness:
Hi everybody. I’m Jen McGinness. For those of you that don’t know me, as Kevin alluded, I run Invigorate Finance. We are an aggregator, so a sexy way of saying we enter into contractual relationships with lenders to originate loans to our specifications. We go through diligence and we purchase those loans. We specialize in the non-QM, QM relevant and business purpose spaces, so we’re diversified and we have both delegated and non-delegated channels. I think that you’ll find, through this conversation, some interesting things to learn about Invigorate.
Kevin Kim:
I think it’s really interesting because it’s the first time on the show we’ve had an organization that does both. We separate it here at Geraci by consumer purpose and business purpose on the Resi world and I think it’s really awesome to hear about that. Anthony and I were talking about this and looking back, I think it was about six years ago, wondering where the consumer shops were in our space and why hasn’t it become more of a thing. Preparing for this interview and looking at the client list and business list of folks who do both, very, very few who brought an institutional caliber. We’ve got a lot of originators who do both, but from a capital provider, aggregator, national lender type of approach, type of perspective, not a lot of folks have taken that on. It’s an additional burden. But my first question to you is going to be, what were you considering when you’ve crafted that mandate to do both? Because it’s very rare.
Jennifer McGuinness:
I have spent my entire career focused on more than one sector. Back when I started in the business about 27 years ago, I actually started on the happy side of origination, originating mortgage loans. We did mostly consumer-facing products, but we also did small balance commercial and other types of lending as well. And as I’ve gone through the differentiated aspects of my career, I’ve really tried to stay diversified. For example, I first started in origination, then I went into legal and I did the not-so-happy side of origination. Foreclosures, bankruptcies, REOs, a vast array of complex litigation. Then I decided to take on the next challenge, it was build and run a nonperforming, sub-performing acquisitions and servicing business. So I did the workout side of loans. Then we sold that business. Then I went to the buy and the sell side on the investment banking side. I was a co-head of asset management at Deutsche Bank, for example, and also ran breach of rep and warrant, so did happy and not so happy all at the same time.
Jennifer McGuinness:
Then went into the hedge fund space, then the REIT world. In the REIT world, we designed the single family rental, DSCR business purpose loan programs. First started as the larger term portfolio loans, then everybody realized 80% of the market only has 10 or less properties. So we needed a solution to be able to service the majority of the market, hence bridge and fix and flip and the debt service coverage ratio of 30 year was born. Then we turboed that by adding ground up construction in the business purpose space. On the Resi side of things, I mean when things got really locked up into an agency-only world during the housing crisis and then again during COVID, et cetera. We’ve really lived through an ebb and flow of agencies. But through that entire cycle, my focus has been keeping private capital in the market, not becoming beholden to an agency model, and then bringing creative solutions and lending programs to market that really are a natural hedge to each other.
Jennifer McGuinness:
At the end of the day I’m an investor, but one that’s basically built and run the life cycle of these types of programs and by virtue of doing that, you really can add competitive advantages for both consumer facing and truly business purpose loans. I wouldn’t suggest doing it if you can’t accomplish that natural hedge to each other.
Kevin Kim:
Right. A lot of folks would concur, from a business perspective, they’re definitely nice hedges and they provide some nice diversification to the business model and allows them to pivot, as they progress and one area tends to be a stronger performer than the others, it’s nice to have both. But from an operational standpoint, it can be quite burdensome. I mean, the compliance burdens for 2012 for consumer shop just skyrocketed, comparatively speaking, to our industry. When I say our industry, the private lending industries, which is business purpose, the vast majority of people are exempt. And that was one of the reasons why one of our clients chose not to do it anymore. How did you guys, as you guys started up, give us a little history on Invigorate, when did you guys get started?
Jennifer McGuinness:
Yeah. So Invigorate is a new formation company of a business that was already preexisting. The business actually launched in 2018 as Mortgage Venture Partners. So the business has been around longer than just the Invigorate entity. When we brought it under the Fay umbrella, we did launch it as a new co to just buy for Kate, the historical business from the new business. But I do Kevin want to just address one thing you said, a lot of guys choose not to do it because they built the business as a trade and it’s not actually a business, so in many of my prior roles, we did the same thing. You’d raise hedge fund capital, for example, you’d have a five year duration. You were building a trade and not a business. A lot of the components of the business were outsourced to your TPR firms and other types of fulfillment identities.
Jennifer McGuinness:
You really can only do it well, post 2012 increased regulation, et cetera, if you have a true business platform. So for example, Invigorate has an internal credit team. In order to be able to securitize our loans, we have to go through the rating agency third party review, but we don’t, for example, in our non Dell channel, outsource our pre-close reviews to a third party vendor to make our risk based decisions. That all goes through in-house staffing and that’s one of the bigger components to being able to manage that diversified risk and also take on that enhanced compliance to be able to do both businesses. When you’re only building a three to five year wind down strategy, it’s not something that you could accomplish well, in my opinion.
Kevin Kim:
Right, right. That’s actually a lot of, we see some similar, I guess, philosophies or schools of thought in our other clients, some of them have, they maintain a commercial side of the business to have that diversification. Others have adopted the consumer bridge, we call it the consumer bridge product. And some have maintained diversification into the, I guess you call it the non QM sector, but it’s funny because for our listeners, we always get into this debate about non QM, what does non QM really mean? Because it can encapsulate what we call private lending and my understanding is on that side of the industry, they view that asset class as non QM in a lot of ways. I like to hear more about your preparation in transitioning into this diversified model, because it takes a lot to establish the framework necessary to do both, but add a national scale like you guys are. So give me an idea of what was the preparation process like for yourself and how did the transition with Fay and all that add more horsepower to the operation?
Jennifer McGuinness:
So when I originally started this business, I started first with residential products in 2018, and I never really plugged in the standalone business purpose for private lender. I did a lot of DSCR product, bridge fix and flip, et cetera, but didn’t in concert with the Resi player. In some ways I think we left a lot of money on the table by not plugging in the private lenders initially back then. When we brought up Invigorate, I actually did the exact opposite of what I did initially in 2018, I first focused on plugging in the private lenders, the standalone lenders, et cetera, and then brought back the Resi lenders. And the reason for that is because of the segue of getting the compliance right on this stuff, and to your earlier point, there’s a lot less compliance regulation, et cetera, that takes place on the true business purpose side.
Jennifer McGuinness:
I do want to address one thing that you said, business purpose, private lending is not non QM. I understand that you can in fact securitize them together and many people do, but it’s really the actual way in which you’re speaking to a lender base. If you’re talking to a residential mortgage origination business that’s generally consumer facing, you have to talk to them about the product like it is non QM because it’s non agency. So that’s the nuance. Everything today that’s non-agency, people generically talk about as non QM, unless it’s QM compliant. Is it correct to do it? No, not necessarily, but it depends on your audience. It’s really business purpose loans. Private lending is business purpose loans.
Kevin Kim:
Right. That’s the differentiation we’ve made here internally, but it’s always, we’ve had a few clients transition to it. One up in LA and whenever I have a phone call with them, they always joke about like, no, no, we do non QM but fix and flip is non QM. You’re talking to the wrong audience here, brother. You explained perfectly, who’s your audience, that’s important.
Jennifer McGuinness:
Right. I mean, look, if you’re pitching a bond to an investor and you have non QM consumer facing mortgages in it and DSCR loans, they’re going to generally look at it as non QM. If you’re doing a standalone DSCR securitization, it’s business purpose loans.
Kevin Kim:
Right. So I like to ask more about you and your background, we going to hind it on your professional background a bit, but I’d really like to kind of hear how you came through the industry. You said you started in mortgage origination, was it on the conventional side?
Jennifer McGuinness:
Yeah. It’s funny, my entire career, I like to joke is by accident. I originally was a professionally trained opera singer who took a job at JP Morgan on the M and A side while I was in the music conservatory. And then I accidentally ended up on my career trajectory. I actually was an executive assistant initially for JB Morgan then I looked at some reporting and I saw math glitches. I said, these numbers don’t foot. The boss that I was working with, I had a great relationship with her, so I asked her, why don’t these foot? They don’t make sense to me. Well, back then, because I am that old, the stuff was still printed out in paper I said to her, it doesn’t make sense. She looked at it and she said, it doesn’t, we found $5 million, literally by me asking questions.
Jennifer McGuinness:
Needless to say, I was moved to the analyst team, became an analyst on her team that’s how I initially started my career. So instead of staying in music school, I decided to go back to get a regular degree, because quite frankly, at the time I was an investment bank and without that degree, I wasn’t going to go anywhere above an analyst level or maybe a first stage VP. So I actually quit that job, went back to regular college and started working in retail origination on consumer facing mortgages. I was literally an underwriter and processor when I segued out of that initial role well in school. I worked three jobs to put myself through college. The goal was actually pre-law, so I was on the track to actually become a lawyer. I wanted to be an M and A lawyer.
Jennifer McGuinness:
Then I realized that the business people are the ones that actually do the part of the job that I like more and don’t be offended, Kevin, but the lawyers are the ones writing up the documentation and doing less of the business side related negotiation. Long story short, I got into law school three times, never went, I did get a paralegal degree, worked as a paralegal and have worked with lawyers my entire career, but I’ve accidentally ended up with the job role that I wanted. Anyway, I got my paralegal certificate, started working in law firms, ended up managing the national footprint of law firms for basically default and complex based litigation in concert with partners. Then I was poached by a client to actually come on and help them build that servicing and acquisitions business that I mentioned. That’s actually how my career began and I love to talk about it as a happy accident.
Kevin Kim:
I hear a lot of interesting tidbits there. One thing I heard was you had an employer very early on. You had an employer that, I mean, I don’t know about how things were at JPM, but in a lot of major corporate America, took a risk because she saw something in you. Saw more talent than what I guess the actual people doing the real work and took a chance and gave you an opportunity. I think that stuff is important to talk about on these shows, is the importance of those relationships and you hinted that you had a really strong relationship with that person and she gave you the opportunity to go up and be an analyst. I mean, in some parts of corporate America, they would have been okay, that’s cool, moving on and there’s no involvement there.
Jennifer McGuinness:
Yeah. The other thing is, I’m going to tell you how I actually got the opportunity to first interview for that executive assistant job. Again, I was in music school, I actually was taking, I took on a temp job on a locked floor. I was literally at the front desk. The person that I ended up working with literally was walking up to the door holding a box full of things and I had the common decency to get up and open the door for her. Doesn’t happen as often as you think anymore but something like common courtesy can actually start a conversation that can bring you forward in your life and maybe even change the trajectory of what you’re doing. I literally got the opportunity to interview with her just because I had decency and courtesy. I think that’s sometimes lost today, so I think that’s-
Kevin Kim:
Well, sometimes it’s lost a lot today.
Jennifer McGuinness:
… an interesting feature to go into the conversation as well.
Kevin Kim:
Oh, it’s so important. And I always, one of the things that we talked about earlier on in this show, in the first season, was talking about the importance of networking and asking for help but also what you’re saying is thematically to me is so important is having that little bit of kindness, that little bit of decency and courtesy rings true and it goes a long way. I still remember any random sweet gesture as someone’s done for me over my career, I try to extend the same to them. What’s cool of what I’m hearing is like that has extended throughout. You had an opportunity to work now at the largest bank in the country as an analyst and then I heard something else that was interesting.
Kevin Kim:
But you realized the path forward, you needed to have an advanced degree. You went to college, you did the whole legal field thing. And what was also really interesting is you were able to work in the default world, in the litigation side, so the client that brought you on, you must have built a relationship with that person and was another instance of that personal relationship beyond business. What was the reason why that person brought you into the mortgage world?
Jennifer McGuinness:
I think they knew that I had preexisting mortgage expertise that was coupled with legal because generally I was the one to always solve for how could we expedite the foreclosure. And I think by virtue of being able to do that, we added significant value to the book of business for that particular client. We blended business execution with legal, even though I was working in a law firm. I think that was really what started to develop that client base and instead of asking the client to make the decision, we were suggesting what they should do it. Once you start collaborating, I think that’s really how you build those relationships in order to get additional opportunity.
Kevin Kim:
Let’s talk about, so you go into the mortgage role, you go in house effectively. Tell us from there, what happens next? Where do you go from there?
Jennifer McGuinness:
I go in house and then I end up managing like everything that can go wrong with loans, from special situations, lost [inaudible 00:20:20] to REO, REO liquidation, breach of prep and warrant and document control. I was the escalation for acquisitions and yes, it takes a lot of knowledge and expertise, but honestly it also takes a ton of common sense and I think that people discount common sense a little bit too much. You have to be able to put the parts together, but one of the things that I’ve loved about my career and those particular aspects, and even today, is it’s got a little bit of an ode to Sherlock Holmes. What is it that we’re looking to solve for? How can we get there and how can we expedite the outcome? I think that goes hand in hand, earlier stages in my career, but it also was really a foundation that allowed for me to accomplish other things that happened later.
Jennifer McGuinness:
So for example, in one of my roles, we were the first hedge fund to ever issue residential mortgage backed securities collateralized by newly originated mortgage loans. Many guys had tried before us but they didn’t do it and usually the reason they didn’t do it was because their lawyers would actually quote, the tax code said, blah, blah, blah, blah, blah, blah, blah and they would just take their word for it. The reason candidly that we got it done is I actually opened the citation that was sent to me and read the code, then I went back to my lawyers and I said, where does it say I can’t? We have to build a structure but we needed to have a creative solution and you needed to be able to take the time to put the work in, to take it to that next step on your own.
Jennifer McGuinness:
I think the beginning baselines of my career, working in the law firms, looking at these types of differentiations plus having the lending experience really gave me the catalyst to be able to do that. Whereas in a lot of people in our industry are very single siloed. I’ve really had the opportunity to build and run the full life cycle from origination all the way through securitization, liquidation and default and I think that that is really why you’re able to get those enhanced opportunities or maybe accomplish some of those tasks that may not have been done before. Now, a lot of hedge funds have done it after us but it had to take that first person to get it done and then the strategy gets cloned, you know how this works.
Kevin Kim:
Yeah. Okay. Well, I mean, that’s interesting, because there’s so much diversity in that career path. There’s hedge fund, there’s securitization, but there’s also I basically call default services and fighting in the trenches on the bad loans and there’s so much diversity to experience and I like to pry into the default side a little bit more because we don’t talk enough about, I guess default or foreclosure enough on this show and I think it’s a product of frothy times and healthy times the past two years since the show’s been running. But I always like to ask that the people who’ve been doing, who have experience with that is, what are some of the things that are really just so simple, but always just missed, overlooked?
Kevin Kim:
You were describing things as, what I heard was a pragmatist approach. You’re asking questions and trying to find solutions, not necessarily get hung up on the, this is how you do things, approach but what I’m also, what I want to hear about is how has that been exercised in the world of default services and special situations and REO and foreclosure, because a lot of people, they don’t know what to do in that situation, a lot of lenders even.
Jennifer McGuinness:
Yeah, one of the key features of my career, even when I was in the investment banks, like when I was at Deutsche Bank, for example, I was also handling the asset management and servicing not only certain credit aspects of buying loans. And I think that you need to get ahead of the things that work against you when you’re dealing with defaulted loans. First and foremost, you have to make sure that your servicer in fact is not advancing when they shouldn’t be, so for example, no force placed insurance when you have insurance in place. So you have to make sure that the setups are correct on the loans and new loan origination versus non-performing loan is very different in servicing setup. I think that’s very nuanced and believe it or not, there’s not a lot of aggregators or lenders that are good at selecting a servicer that knows the difference.
Jennifer McGuinness:
That’s an important feature. In addition, how can you get around the roadblocks of foreclosure? So for example, it generally takes three years to foreclosure in Brooklyn. Well that’s Brooklyn, it’s Kings County, everything there is slow. Well, how can you expedite that process? It’s also one of the areas that’s most known for borrowers attempting to dispute foreclosures. Well, if they dispute a foreclosure in New York they just can move to summary judgment, all of a sudden you’ve got a 12 month or less foreclosure. My point is, is knowing the nuances of how to direct your law firm and making sure that your law firm is in fact reacting. If you have legal description issues, if you have title issues, many of those can be dealt with in secondary causes of action and foreclosures, a lot of servicers and also investors wait for title claims to be dealt with and taken on by the title company.
Jennifer McGuinness:
The reality is if it’s a valid claim the title company is going to pay for it anyway, so you might as well get the expediter by adding the component to the legal actions up front, but you also have to have the expertise to do that. Legal description issues, prior open mortgages, stuff like that, you can absolutely handle those things in a foreclosure and move your ball forward while waiting for all the other check boxes to be checked. You got to move in a dual tracking way and really have an asset management component, so for example, on our portfolio at Invigorate, we are always the asset manager on our loans, whether it’s the joint venture, our own book, et cetera, we oversee the portfolio of loans with the servicers.
Kevin Kim:
That’s important and I like the mentality of, because I’m hearing a lot of different things at once, but the key fundamental component is a very pragmatic solutions oriented mentality and a lot of attorneys forget about that. I think it’s because they’re afraid to get sued, but also, sponsors oftentimes, they don’t ask their attorney like, hey, I need you to give me the solution here and they don’t communicate that, and I think all the parties involved need to know. One of the things we talk about here at our firm here at Geraci is it’s all about solutions, where our clients are looking to us to provide solutions, not just tell them what they can’t do. And so I definitely agree with that.
Kevin Kim:
I mean, so during this whole time at the hedge fund of the investment bank, was it a combination of consumer facing mortgages and rental or were you also doing the fix and flip and the construction and the bridge and all that at the same time?
Jennifer McGuinness:
No, generally the business purpose, single family rental space really came to life in 2015, you know that right? So the fix and flip, the bridge and the DSCR really started taking off at that time period. Shortly before that you obviously have the larger, more commercial term portfolio loans, like the loans that for example, Corevest are very well known for. When you think about that and that’s how this business began to evolve into the single family, let’s underwrite loans to rental cash flow space. What really brought about that opportunity obviously was a downturn in the market and being able to buy up a lot of distressed assets. Colony American Homes, for example, which was the initial business at Colony before they did Colony American Finance, which is now Corvette, really was a catalyst in some ways to seeing the opportunity to being able to lend based on rental cash flow, because there was something to substantiate that rental cash flow could in fact be modeled and substantiated.
Jennifer McGuinness:
Because they had become one of the largest landlords on the street, American Homes 4 Rent and some others are other great examples of that. It allowed for the metamorphosis into a new business line. What was just an idea back then is now its own asset class and that’s private lending and single family rental, and that’s a good thing. To answer your question, I’ve always been more diversified, so whether it was small balance commercial agency, non agency, et cetera, that was important. When I was at Deutsche Bank, we were the first ones to do a Ginnie Mae reverse mortgage securitization, even though it had been attempted by other investment banks. I’ve been extremely lucky to be given the opportunity and yeah, some of it’s earned, but some of it is just building relationships in order to be dialed into an opportunity to be able to take part in a lot of those differentiated products, offerings, strategies, structures from lending to asset management liquidation, et cetera.
Jennifer McGuinness:
But you had to have the moxie to put yourself out there and if some of the things that I did early in my career are things that people would never dream of doing, and it was those particular steps or putting yourself out there that really gave me the opportunity to become who I am today.
Kevin Kim:
I’d like to talk about then your exposure into the private lending arena, So was it during, when you were at Deutsche or after Deutsche, was it and then-
Jennifer McGuinness:
No, I was actually the inaugural head of single asset lending for Colony American Finance, so I really got immersed into SFR at Colony itself.
Kevin Kim:
So you were at Deutsche and then you moved over to Colony after that?
Jennifer McGuinness:
No, so I was running the WinWater jumbo conduit, so we were a step out from a hedge fund. We were an issue of RMBS securities and we were really focused on jumbo non-agency mortgages. When I decided that I wanted to move on from that and the business was not going to diversify into additional products and the market really said it needed to. I decided that I was going to diversify whether they were going to diversify or not, and I took a role with Colony American Finance. And the ask there was really to do the single asset lending and whatnot. They obviously already had a preexisting term portfolio loan business and grow from there.
Kevin Kim:
Let me ask you this, so that’s your initial kind of, I guess, exposure into the market, into this market, early stages of the industry, give me your reaction to it as someone who’d been seeing a little bit of everything on the Resi side and in some commercial side, now you get into this weird fix and flip, it’s a short term loan, it’s a flip, what is it, I don’t understand. We get that a lot from hearing stories of people who’ve been doing conventional or just consumer. Tell us your reaction, how you approached it and how you attacked it.
Jennifer McGuinness:
So I obviously had historical HELOC experience, so the idea of an open-ended drop alone was not odd. I also had experience in like 203K loans and things like that, so there are certain aspects of the fix and flip and even the ground up construction that are similar but more flexible than some of those loan programs. Also historically I worked on really large commercial strip mall, high rise financing, et cetera. It was really marrying that real commercial business structure to residential lending because single family rental DSCR is basically that, it’s a Resi loan wrapped to make it into a business purpose loan generally facing an LLC. We obviously could face other entities and have borrowers, but really that is what the model is.
Jennifer McGuinness:
How can we offer a product that’s underwritten not only to somebody’s personal income, but has the credence to be able to make a credit risk based financing decision and the answer there was rent. Leases, rent, documentable cash flow and that’s really what we set out to do back then. But for me it wasn’t so farfetched because of the fact that I had already handled open-ended products and also other [inaudible 00:35:03] commercial items on top of having that Resi hybrid background. And I think that definitely helped me. It didn’t feel foreign to me.
Kevin Kim:
Right. Were there any like, oh, this is so refreshing because there’s less red tape or anything like that? Because that’s another reaction we get a lot in our sector.
Jennifer McGuinness:
With being somebody that’s been in Resi in a big way you sit back and go really, I don’t have to do that. I don’t need to check 18, 19 more boxes and run 25 additional compliance metrics. Honestly, it was a breath of fresh air for me. But I also wanted to make sure that we were able to get to real values on these properties because coming from a background facing both primary residents, second home investment properties, I knew there was definitely a differentiator between how to value those assets and how those assets would depreciate from a care perspective over time and care being more maintenance driven items.
Kevin Kim:
I like to talk about the diversification that Invigorate has come to market with and I can definitely sense the continued parallel path that you want to achieve that level of diversification. What is your thought as to why, in the private lending industry, why more folks haven’t adopted it in some way or shape or form? Because some people are just absolutely resistant to it and some folks are open minded, but then when they discover that, oh, it’s not my cup of tea because of, sometimes it’s compliance, sometimes whatever. What are your thoughts as to why more folks don’t do both?
Jennifer McGuinness:
Well, number one, doing Resi is really expensive because of the extra compliance features and I think it’s also depends on what people’s backgrounds are. A lot of the guys in the private lending space, and I know a lot of people try not to use this word, started out as hard money or they started out as brokers, and it’s more of a natural transition out of hard money or being a broker to do business purpose lending than it is to go from being a hard money lender and a broker into facing primary residents, emotionally attached housing. I think it’s very, very different. The underwrites are also extremely different. The business purpose, private lending loan is a lot easier to underwrite than a consumer facing, let’s call it 24 month bank statement, non QM asset with alternative docs.
Jennifer McGuinness:
So I also think it’s your comfort level on the credit and the customer. In the private lending business, you’re generally dealing with one customer type and that’s the investor. In a residential mortgage business you’re not dealing with one customer type. You could be dealing with an investor today, you could be dealing with the mom with three kids tomorrow and her primary residents. You could be dealing with the higher net worth individual that likes to live in Manhattan but’s got the East Hampton second home. It’s a very different sell, a very different customer base and a very different nuance and then on top of it, regulatory compliance and underwriting deviation.
Kevin Kim:
Right. I mean, as someone who does licensing work for clients, that’s the biggest objection that we I face then our compliance team, they always say that. And I always wonder, we had a client early on when the industry was very much a hard money lending industry transition over to consumer and they’ve done quite well for themselves, but it’s always been like top of my mind. There are companies that have the resources and skill sets and backgrounds for it but yet they choose not to and always, I think you hit the nail on the head from a business standpoint, their avatar is different, is dramatically different. Like they’ve got to deal with, like you said, the moms and the actual primary homeowner. Then there’s also the idea of optics, but it’s still, it’s interesting because on the flip side we’ve seen a lot of folks join the industry coming from that space. They’ve transitioned over to here looking for opportunity, it feels like, as the refi boom fizzled out.
Kevin Kim:
I feel like you guys are in an interesting position because they still have, like okay, consumer products, you guys are an interesting product, service provider to work with them on both fronts. I like to ask you another question. You mentioned hard money as being not talked about, actually, I want to get your thoughts on that. When you were describing earlier, like 15 was the year the industry took off or became a thing, I like to hear more how you view the difference between hard money and private lending because I’m agnostic on the terminology personally.
Jennifer McGuinness:
So I think it’s who you’ve got sitting around the table is going to tell you a different view of the meetings of each of those. What I hear from a lot of guys in the market is private lenders should not be compared to hard money lenders, payday lenders, et cetera. Well, private lending and hard money lending is not payday lending. It’s like two totally different universes. For me, hard money generally is a guy that’s willing to take a bet on giving somebody an extension of credit but knows they may not get paid back, so they’re generally put 14, 16, 18% rates on it. So for the period of time where they are getting payments and maybe the borrower paid the loan back in full, but they’re taking on a differentiated risk. Private lending is really more what we’ll call the single family rental asset class, and that is more repeatable, underwriteable guideline, it’s not shooting the dark do I trust this guy underwriting, and I think that that is a big differentiator.
Jennifer McGuinness:
Do we make riskier loans on the private lending side than we do on the consumer facing mortgage loan side? Not necessarily, because you have to remember that the residential consumer facing mortgage, when they’re calculating a debt to income ratio is doing it to a gross dollar amount, gross monthly income. Well, I don’t know about you, but the tax man takes a really nice piece of all the money that I make. The question really is, is it riskier or not? And I think it depends on the product, the program, the guidelines and the credit risk appetite in either asset class.
Kevin Kim:
Okay. Yeah. It’s been an interesting nuanced topic in the private lending industry as of late and always left me scratching my head because as a former banker, if you’re not a bank you’re doing hard money, that’s how we viewed it. And when I came to this space, it was very much the same. I had clients who were doing 50% LTV fix and flips, and I had clients who were doing 100%t LTV fix and flips, but they were all considered private lender/hard money and depending on who you asked exactly, that said, it’s been interesting to see the evolution of that. It’s almost become a four letter word in its own right. But it’s funny because when I go speak to my real estate clients or I go to a bigger pockets meeting or something like that, they all call it hard money, so it’s funny how it’s been received from our industry and then there’s a lens there, but then there’s a lens on the borrower side and there’s a lens on the bank side and it’s a very interesting debate on a very simple concept, I guess you can call it.
Jennifer McGuinness:
Right I think, look, I think a lot of it is really driven by what’s your underwrite. If you’re doing a no doc underwrite, trust fund verified, I like the guy, I meet him for lunch or whatnot, that’s not private lending. And I think that there are differentiated nuances. I think if you’re doing riskier collateral, look, on the Resi side there’s guys doing a hundred plus LTV loans again, that’s not the business I’m ever going to be in.
Kevin Kim:
It exists.
Jennifer McGuinness:
But you know what, it’s a differentiated risk type but for example, you could save that’s hard money. Because where’s your equity protection and a downside default scenario on those loans? So I think you can make a case that there’s also consumer facing hard money and not just private lending hard money.
Kevin Kim:
Right, and a lot of people forget about that.
Jennifer McGuinness:
It’s really risk and pro plan.
Kevin Kim:
Right, and that was the philosophy that one of our family office clients extended to us. I don’t really care what you want to call it, it’s underwriting, it’s risk, it’s asset valuation, it’s borrower valuation. That’s what we’re doing and you want to call it potato lending, I don’t care. He called it asset based lending when he first got into it. That’s very, very cool. I like to transition more into the business and where you guys have gone since foundation, you mentioned you joined forces with Fay, the national servicer, very well known in this space, and you’ve done both. And the private lending industry, you guys started, you said you came to the market in 2018 or was it 2020?
Jennifer McGuinness:
So Mortgage Venture Partners initially started in 2018.
Kevin Kim:
Okay. Okay. And so in this space we’ve had a lot of changes over the past, that’s been about four years now since that year, and so talk about the initial entry into the market and how you guys have changed or what’s changed over the past four or five years now for the business.
Jennifer McGuinness:
Well, look, I think when I first started Mortgage Venture Partners, I’ll be candid, I started it with a forward flow to Wall Street. Then I used the track record from that to raise a hedge fund strategy. We were then buying for our own book of business. Then we finished investing that fund in April of 2020 and I raised an equity round in a new fund. The reason for the segue in to Invigorate candidly was that for your humor, the money on that capital raise was supposed to fund three days, post the coronavirus lockdown in March of 2020. And much like some of the large REITs and funds and whatnot, my capital got paused and I needed to get it back. So I decided that I wanted to see if we could get some more of a permanent operating capital structure instead of an equity capital raise structure.
Jennifer McGuinness:
Pre that equity, I built the business funding it with my own money. I decided not to take strategic capital up front because I knew what I wanted to build and sometimes your strategic partner is not going to let you build what you want to build because it’s their capital that you’re deploying, so I decided to spend my own money. But by the time I had gotten through that fund one scenario in order to take the business to the next level I really needed additional equity that I wasn’t going to self fund myself. So when the capital got paused, I had the opportunity to go to run a large Wall Street trading desk instead of, and bring the entire strategy there but I really wanted to continue to build what I was building because I really believe in the business versus the trade model. So Ed and I knew each other for a long time, saw the opportunity to work together. We launched a new co and brought the other platform under the umbrella and really relaunched the business from there.
Kevin Kim:
I’m hearing something that I really love to talk about, is that committed capital, permanent capital as opposed to strategic partnership, the carrot that has a big stick behind it. And so now that after you’ve established that with a new partner and you’ve got the new co set up, talk about the, I guess, the change because you guys were operating during COVID, my understanding was that you were, and you guys continued to onboard new partners during COVID, you guys are continuing to operate today. It sounds like, that’s what I heard at least.
Jennifer McGuinness:
Yeah, no, we are absolutely in business and buying loans every day, yep.
Kevin Kim:
And that’s part of the story that I want to highlight because one of the most common threads that we’ve talked about in this show is the idea of that consistent. It may not be the most comfortable, may not be the easiest, but it has that piece of mind factor to it when it comes to the capital that you have and control and it’s committed and you don’t have to worry about it as much. 2020, let’s talk about 2020, because you guys were able to beat a lot of your competitors who froze and continued to operate. What allowed you to maintain that and then scale from there, because that was when in effect a little bit before that was when you guys launched.
Jennifer McGuinness:
Truly having a non-trade strategy-
Kevin Kim:
Or a balance sheet.
Jennifer McGuinness:
… we were able to very quickly adjust our product offering to react to the market and then enter into discussion to do more diversified strategies. And not everybody is that lucky, sometimes they’re beholden or whatnot. Yes, does it take skill? Absolutely. Does it take relationships finitely? Yes. But at the end of the day, you have to be able to know how to pivot quickly. That is a skill that I think really drives why certain people are at Invigorate, why I’ve partnered with certain people on our business, et cetera. It’s being able to be nimble, proactive, not reactive, to keep the business model going but not have to shut down the business. And I think that that’s important.
Kevin Kim:
Let’s talk about that real quick. Talk about that. What changes did you make? What business did you make? Because I like to hear about that a little more because COVID, well, and now also-
Jennifer McGuinness:
Well, you got to think about it. So the non QM, so my initial fund at Mortgage Venture Partners was non QM, QR relevant business purpose strategies. Non QM was never tested, COVID definitely tested it. We all sat there and saw $105 price loans become 88 cents overnight. The value devalued really quickly, but then when they saw there wasn’t a run on Washington on default, we also brought the business back up very quickly. We didn’t take 10 years, like during the housing crisis in order to see a correction on product coming back. So I think that that’s important. I think COVID in a lot of ways is a good litmus test. Things that can go sideways that really have nothing to do with market fundamentals. Now, the market fundamentals weren’t bad and overnight we had product types devalue.
Jennifer McGuinness:
Okay. Why? Government reactivity, for example, driving interest rates significantly lower to make sure that there was still access to credit. Concerns from investors that they really didn’t know away from the housing crisis performance, what could happen from a default perspective and people comparing non QM to subprime, which it absolutely is not. I think that that’s extremely important as well. For us, it was having the relationships to be nimble enough to still keep the business going, but then also the capability to slow down certain products to then speed them back up. I think that’s important. I’ll be candid, I did that again recently in the rising rate environments, because I’ve seen this rodeo before I’ve lived through many cycles of the industry and I knew what to expect.
Jennifer McGuinness:
I had a prediction in my mind and I said, okay, this is the risk I’m willing to take, this is the risk I’m not and I waited to gas pedal certain additional things on our platform until I felt that rates had run up enough to be stabilizing. I think that’s important. The other thing at Invigorate is I have diversified rate type products. We’ve always had the armed products, the fixed rate products, but I also have floating rates, so where a lot of guys only did 30 year fixed, we’ve had diversified products available the whole time.
Kevin Kim:
Interesting. So let’s talk about that. The current climate is, I mean, it’s an interesting time, I guess you can call it. I was dramatically talking about it as COVID, as we were in COVID, I think COVID was its own weird situation. This is a lot more, one of those things that people should have saw coming. You saw it coming. I saw it coming. My partner saw it coming, but for some strange reason, there seems to be a very similar reaction to what had happened back in March of 2020 in the sense that the industry is losing a lot of its capital solutions, secondary is tightening up and a lot of our originator clients are scratching their heads as to now what’s going on now. We’re seeing some slow down in general. I’d like to get your thoughts on that. Where you think we’re going to be headed and how Invigorate it’s going to weather the storm, or actually pick the opportunity.
Jennifer McGuinness:
I mean, look, let’s be candid, originating loans let’s say in the agency locked up world, has just been super easy. The governments during COVID brought rate levels down to historic loans. Like literally in December of 2020 we’re at a 2.68% rate.
Kevin Kim:
Oh, I know. Yeah. Yeah. I refined the second it hit 2.5.
Jennifer McGuinness:
Not far away but has a 5% loan. Yeah. I mean, what bars it at a three, four or 5% loan wasn’t running on Washington to voluntarily refine. I mean, it was really simple to capture the client because you were selling rates. The market has to shift to selling payment and differentiated strategies need to come back, and that means not only being a 30 year fixed world, it also means not only being a five to seven or a ten one arm world. Why? The payment shock after the five to seven or the 10 is going to be significant for these borrowers. The question is, is that the right answer from a possible default trigger perspective or would doing something more floating rate make better sense? So the borrower feels the ebb and the flow of the market and if we are in a world where rates are going to continue to increase, gets to grow up into that larger payment, for example, versus having a five year fixed and all of a sudden they payments four times the amount on a max rate life cap.
Jennifer McGuinness:
I think that that’s an important question that the industry needs to consider and react to. I also think that right now the securitization market is locked up in some ways, because investors have been in a place where it was easy to buy funds historically. Again, low interest rate, lots of production, competitive pricing, yada, yada, yada. We’re going back into the real world guys of lending. The 90s, the 2000s where you actually have to put more effort into that customer acquisition. It’s not just as easy as saying, hey, I got a 2% teaser rate for you. I think that that’s really what you’re seeing, certain companies going out of business, certain market entrance, certain market exits or pauses or ebbs and flows, it’s really who’s been in this business long enough to understand what they have to do to really deal with the market environment we’re in.
Jennifer McGuinness:
The last time that the Fed raised interest rates 75 basis points in one day was 1996, we’re in 2022. I was in the business in 1996, so I remember, but not a lot of people were. So you’re seeing some, what I consider to be overreacting right now, and I think you are going to see some equalization and some of the guys that have pulled out are going to be back in, as an example.
Kevin Kim:
When they more comfortable back, but they’re currently normal.
Jennifer McGuinness:
Yep. But what they’re going to do is watch the people that have done this before, and they’re going to try and clone it. But in that process they’re going to miss opportunity.
Kevin Kim:
That’s a good way to put it. Yeah. I mean, it’s funny because I always, there’s a client, we call him uncle Chuck, he always jokes he’s been making loans since Abraham Lincoln about the civil war. And he’s been doing it for 40 years I always talked to him about this because he’s been doing it for so long he said the same thing. I know exactly what to do exactly when these crises hit, it’s always the same and you got to stick to your guns, but you do that you’ll survive and you’ll be able to win while everyone else has put their head in the sand. So that’s a good way, it’s the same, echoing the same story.
Kevin Kim:
And what’s funny about that is that we had a very similar situation not two years ago, but for some strange reason, I mean, we always joke about how people have short memories, but man, these memories really are short because these solutions could have been solved for, I think a lot earlier, at least for some of our people, not even like the secondary, but at least the originators and clients diversifying their philosophy and strategy and the mandate, that have been easily prepared for was two years to do it and lot of folks just took advantage of the opportunity in front of them, didn’t think the long way. When it comes to that, we’re seeing a lot of talk about people worrying about these rates getting to, I guess you call it 1970s numbers. 10, 12%. I mean, I’m not asking for crystal ball, but rationally within the next year or so, what do you think? I don’t think we’re going to get there, but I have to hear what you think about it.
Jennifer McGuinness:
Yeah. I mean, look, back in the day-day, throwback day, when you were able to charge 19% interest rates, that was a very different era. Like when my parents took out their first loan, I think then 18% rate. I think people are forgetting that there are user recaps in place from a regulatory perspective.
Kevin Kim:
No, laws has changed.
Jennifer McGuinness:
Right. Laws have changed, regulation has changed significantly. What you’re allowed to do as a lender is very different. There’s a lot more red tape. Crystal ball, no, I don’t believe we’re going to be in, on the consumer facing side, we’re not going to be in the 14% rate level anytime soon. Do I think that there are some people on the private lending side who are trying to sell that we’re entering another 2008 financial crisis so that they can charge mid teens interest rates now? Yes. Do I think that’s the right thing to do? No.
Kevin Kim:
That’s a good way to put it. That is happening and I don’t agree with that either and I think that we’re [inaudible 00:59:28]
Jennifer McGuinness:
Yeah. I mean, I sat in on a conversation where a high level executive literally said the market fundamentals right now are identical to right before the 2008 housing crisis. I almost fell off my chair. It’s like, no they’re not, not even close.
Kevin Kim:
Right. Well, I think it’s, like I said, over reaction, general freak out. But we had this debate in the office too, where do you see [inaudible 00:59:55] climbing? I was like, man, I mean, probably eight, as far as it’s going to go is eight. I don’t know. I mean, I think eight, at least eight and a half. I remember my student loans were at eight, eight and a half and were always around there.
Jennifer McGuinness:
Yeah, so if I had to bet and I know this is going to get plagued back to me a year from now. Yeah, you’ll probably be the one to send it to me, but I actually think after the Fed at the end of the month raises rates again, you’re going to start to see things even out a little bit more, and then you’re going to see small rate increases over the course of the next year but you’re not going to see these three point rate increases over again.
Kevin Kim:
No. I mean mortgage rates-
Jennifer McGuinness:
I do not envision that happening.
Kevin Kim:
… steadied out even after the recent rate hike, they stayed out a little bit, declined and declined a little bit, so I agree with you, we’re not going to see a dramatic climb. All right. Well, I mean, I love doom and gloom.
Jennifer McGuinness:
[inaudible 01:00:50] for me. I’m sorry, Kevin, my apologies.
Kevin Kim:
No, go ahead. Go ahead. Go ahead.
Jennifer McGuinness:
Listen. The one thing is I’m also a data junkie. So I look at all of the details. If you really look at what drives inflation with the CPI index and what the Fed is reacting to, and you tease out the core features, the biggest issues you’re seeing are huge climbs in energy, gas, diesel, et cetera, and food costs. I think people don’t really remember that in order to get food, you need gas, diesel, [inaudible 01:01:24] et cetera. How does everything get into a grocery store? My biggest thing is if you get energy under control, you actually will start to even out your inflation numbers and you’ll stop seeing these doublings or one third increases that you’re seeing right now. And a lot of people don’t pay attention to the fact that home prices are not part of the CPI index. They took them out in the 80s. So you’re correlating, making reactions on interest rates to something that’s not even necessarily fully inclusive bond data to react to, but they’re doing a cost of fund perspective, it’s not only mortgage and I think we need to keep that in mind also.
Kevin Kim:
Right. I agree with that and I think a lot of people forget about that, real estate market numbers are still on the rise. We haven’t seen a significant dip yet I think it, I mean, we’ve had this conversation on the show a lot about inventory and there’s a lot of counterbalancing components that don’t put us in a doom and gloom scenario. And I like to stop the doom and glooming transition out anyway but one of the things that we like to do on the show is we pair down for time, we’re almost out of time. I’d like to ask some rapid fire questions to you to get to know you a little more and they are really random ones. And so the first one I want to ask you was, if you weren’t where you currently are career wise, what do you think you’d be doing instead?
Jennifer McGuinness:
I would own a bakery.
Kevin Kim:
Really?
Jennifer McGuinness:
Really.
Kevin Kim:
You are you a baker?
Jennifer McGuinness:
I actually went to professional baking classes on the weekends.
Kevin Kim:
Oh, really?
Jennifer McGuinness:
One of the things that I love to do is I actually like to bake and decorate cakes. I do my son’s birthday cake every year, for example.
Kevin Kim:
Oh, that’s awesome.
Jennifer McGuinness:
So I would own a little coffee shop bakery and be left alone.
Kevin Kim:
Oh, that’s wonderful. I love that. That’s very cool. All right. Next question. What is one business tool that you cannot live without?
Jennifer McGuinness:
You’re going to laugh, paper. Okay. I am still somebody, believe it or not, I am still somebody that likes to plan things out with a pen. I can model like the best of them. I was once a structurer, I can code, I can do all that crap but there is something to be said about being able to quick and dirty figure something out, or sketch it out and be able to then react to it and refine it from there, before you’re working in [inaudible 01:04:10] or PowerPoint or [inaudible 01:04:12] whatever else there is.
Kevin Kim:
Is it a yellow legal pad? Is it a notepad? Is a one of those mole skins?
Jennifer McGuinness:
It’s usually more like a five star spiral bound notebook.
Kevin Kim:
Oh, the college ruled. Very cool.
Jennifer McGuinness:
It’s wide ruled only Kevin, wide ruled.
Kevin Kim:
Wide ruled only, all right, all right, all right, I get behind that. I haven’t seen one of those in forever.
Jennifer McGuinness:
Yeah, but I would say it’s paper and modeling. Paper, modeling and data. That’s the answer.
Kevin Kim:
Love it. Love it. Love it. All right, so last one is, if you’re not out there dominating the lending world, what do you do for fun? You hinted at that on the cake side, but what do you do for fun?
Jennifer McGuinness:
I really like to be outdoors. My family and I have a lot of toys. We have four wheelers and we have razors and go offroading into the mountains, we like to go hiking. We like to go biking, so boating. So we’ve got a lot of toys to play with.
Kevin Kim:
Nice, nice, nice. Any of the ATVs as well?
Jennifer McGuinness:
Yeah I personally have a Polaris four wheeler, 850.
Kevin Kim:
Wow.
Jennifer McGuinness:
My significant other has one too. My son has a 570, so we’ve got the single ride on and then we have a four seat Polaris pro XP, which is a razor.
Kevin Kim:
Nice. Very nice. Those are cool.
Jennifer McGuinness:
And a speed boat.
Kevin Kim:
Oh, what? Wow. Very cool. Very cool. Awesome. Well, that’s great. This is the part of the show that I love to learn more about the person on the show and I love it when we hear about these, like the baking thing. I love to bake myself on the bread side, but love to hear these things, because we spend so much time talking about interest rates and LTVs and real estate, but people are where this business really shines. Thank you very much for sharing that, those little tidbits of information. I think that’s about all the time we have for the show. This is being recorded in July. I think we’re put this out later in the summer, but really appreciate it, Jen, for joining us here on Lender Lounge. For our listeners, if you haven’t already heard of Invigorate Finance, please check them out. They’re going to be at our upcoming events and also go check out their website as well. Jen, once, once again, thank you very much for joining us.
Jennifer McGuinness:
Thanks, Kevin. Appreciate the opportunity. I really enjoyed the discussion. Have a great day.
All right. Thank you very much. Thanks for listening to lounge with Kevin Kim. I hope you’ve enjoyed this episode as much as I did. If you did enjoy it, please leave us a five-star view 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.
