Resiliency Through Diversification | Ben Fertig, Constructive Loans

Ben Fertig Lender Lounge

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In the season 3 finale of Lender Lounge with Kevin Kim, Kevin interviewed Ben Fertig, the President and Co-Founder of Constructive Capital - a leading name in the private lending space and a reputable provider of DSCR loans. Ben shared about the genesis of Constructive and delved into his unique perspective on the private lending industry. With the current market experiencing significant volatility, Ben also provided valuable insights on how Constructive has managed to navigate and thrive in such turbulent times.

Ben Fertig currently serves as President of Constructive Loans. Constructive originates, services, and securitizes single-asset rental loans, and originates and services fix-and-flip loans. Prior to Constructive, Fertig ran Credit and Asset Management at Finance of America Commercial; and, before that, he served as Chief Operator Officer of Jordan Capital Finance, where he managed originations, credit policy, and capital markets. He was instrumental in the sale of the Jordan Capital Finance platform to Blackstone and Finance of America in 2017.

Episode Transcript

Thank you to our sponsors for this episode, Spiegel and Lightning Docs.

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Lightning Docs

Lightning Docs is the gold standard in document automation software for producing business-purpose loan documents all over the country. Whether you’re working on a short term fix and flip or a 30 year rental loan, Lightning Docs has you covered in all 50 states. Our staff here at Geraci is constantly working to ensure that Lightning Docs is kept current with all the ever changing laws and regulations. So you never have to worry about your document set being outdated or providing you with inadequate protection.

Our goal here at the firm is to provide our clients with peace of mind, which means that we’re always working to provide you with the best and most streamlined user experience possible. Whether that means getting you set up to pair Lightning Docs with your LOS system, setting defaults in our interview or just changing some of the language in our document set, our staff is always ready and willing to help you with whatever you may need. Whether you’re a private lender, a broker, bank, credit union, title company, you name it, Lightning Docs is the solution to all your loan document needs. For more information, please go to www.lightningdocs.com.

Kevin Kim:
You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to the private lending industry. I’m Kevin Kim and my goal is sit down with key figures in the private lending industry to talk about their business and their personal lives. We’ll get their takes on market conditions, the industry at large, and their personal stories. Overall, I really want to learn more about how they started and grew their businesses. So whether you’re a lender, a borrower, a vendor, an investor, or anyone just interested in learning more about private lending, this podcast is definitely for you. Thanks for tuning in and enjoy this week’s episode of Lender Lounge with Kevin Kim.

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Hey guys. Kevin Kim, coming to you with another episode of Lender Lounge. Today we are interviewing an esteemed colleague and someone I very much look up to, Mr. Ben Fertig. Ben, please introduce yourself to our audience and tell us a little bit about what you do in the company you are with.

Ben Fertig:
First of all, happy New Year, Kev. Good to-

Kevin Kim:
Happy New Year.

Ben Fertig:
Connect with you again. Ben Fertig. Serve as the president of Constructive Capital. Constructive Capital is a capital provider to our esteemed client base. We work in two primary residential investor asset classes. Probably best known for our DSCR platform, but we’re also active in the residential transitional classes, fix and flip, ground up construction, bridge financing. But it’s a client first focused platform and that’s what we spend a lot of our time thinking about.

Kevin Kim:
And just so our audience understands the business model, when you’re saying your clients, you guys are primarily capital providers in the context of … Is Constructive more of an aggregator or are they working directly with brokers? What’s the usual role it plays in the marketplace?

Ben Fertig:
Yeah. The majority of our concentration comes through a table funding model. So we fund on behalf of our client base and coincidentally we’ve just rolled out a correspondent program actually in the RTL classes. We brought on somebody who’s fairly well known in the industry, Rob Kang, formerly with Toorak and PeerStreet. And Rob has incepted a correspondent business for us in the RTL classes. But relative to DSCR and still a lot of what we’re doing on the RTL side, we’re table funding on behalf of our clients. And that’s got a couple of different variances, whether we close the loan into agnostic trust or we close the loan in the name of our client can vary. But effectively we’re providing those funds at the table so we can effectively mitigate the balance sheet risk for our client base on the DSCR classes, which as you know, has been volatile to say the least this year.

Kevin Kim:
Say the least. It’s been a wild ride last year and continues to be. And I feel like our space has gotten a crash course in volatility in the past few years. One of the things that our listeners and actually myself is I don’t know that much about the history of Constructive. I think you guys came on the scene about four or five years ago and-

Ben Fertig:
Yeah.

Kevin Kim:
We’ve been very close ever since and we see you at all the events and you’re a valued client of the law firm, but we don’t know as much about the history of how did Construction come to be and all that kind of stuff. So let’s get into that a little bit.

Ben Fertig:
In September of ’22, I … Celebrated is probably not the right word, but realized my 26th year anniversary when it comes to mortgage banking. The last 12 or so of those, call it the end of 2012, early ’13, have been exclusively in the residential investor loan market. That came through the inception of a company that was Jordan Capital Finance. It was actually named something else for a minute before that. And then Jordan Capital Finance … 2012, 2013 was about the time that this industry started to attract institutional capital on any type of scale, if you remember. So when we got into the business, we actually had a repo facility with Wells Fargo. They also had one with Genesis at the time, and then ultimately with Blackstone through B2R. But that was kind of the first capital on an institutional basis that was matriculating in.

And then around the same time you saw auction.com become Colony, which ultimately became CoreVest, right? That was all about that time. And actually Jordan Capital was a platform that we sold it. We did two mergers and acquisitions with it. The second time it was purchased by Blackstone and merged with B2R, which ultimately became Finance America Commercial. That was February of ’17. And look, I was part of the executive team there, enjoyed it and just kind of happened to hook up coincidentally with some of the partners at Fay Financial who owned the second largest at the time, now they’re the largest … They were the specialty servicer of residential assets. And just kind of hit it off with those guys. I’d played hockey in college. Their executive team was … There was definitely an athlete DNA there and it was just relatable to me. So they were looking to add a business purpose lender to their platform. So we incepted that in the fourth quarter of ’17 actually and made the first loan in ’18. It was me and one other person out of a basement office that Fay had had. And probably did several million bucks the first month just with their people.

Kevin Kim:
That was just direct origination yourselves or was it still the same business model?

Ben Fertig:
No, I think it was direct. It was direct origination back then. And I think the big iteration that I know that you’re familiar with and anybody who goes to conferences is familiar with, that in early 2018 is when Alex Offutt joined. And Alex really drove two initiatives. One was he really only wanted to do third party business and he really, really gravitated towards DSCR loans, which at the time relative to what origination populations looked like, it was a smaller concentration. I always say it’s because he was lazy and he didn’t want to do the work that it took to do an RTL to direct borrower, but that’s not exactly the case. But it was efficient and just kind of iteratively we continue to go down that path. And over five years that we’ve been in existence, I mean we certainly are doing well into the nine figures in what’s heavily concentrated towards the DSCR as far as our population’s still the case.

And it’s actually one of the things that we’re looking to do is diversify a little bit just relative to what we think a healthy concentration is between RTL and DSCR. So yeah, we’ve been here five years. The DSCR business has made us a good loan doc client, I think. We still are sticking around that $240,000 average loan amount. So we do a lot of units and that’s always been the model and going into this year, we’re not going to change that model that much. We’re going to supplement it. We did bring on some things that we’re excited about on the technology side and we are going to diversify into this correspondent business, which I think kills two birds with one stone when it comes to diversification. We’ll diversify the funding channels, the distribution channels, and I think we’ll be able to diversify the product mix also at the same time. So we’re excited about that. But I’d say that since 2018 we’ve just continuously built this third party DSCR business and I think that anybody who’s familiar with us probably knows us for that.

Kevin Kim:
Yeah. I mean you guys certainly cemented your reputation through all the crazy times the past two years and really have proven to be quite a valuable provider when it comes to that product. And I’ve had many conversations with Rob and Alex over the years, but from a historical standpoint, the lifecycle is remarkably short, comparatively speaking, but also quite resilient. Can you comment on that? Because one of the things that I’ve noticed with Constructive was when things … I mean, pardon of my French, but when shit hit the fan in ’21, when shit hit the fan this past year, you guys really were quite resilient and I was really impressed by that. And we had private conversations about it and you’ve commented on it on conference panels, but one of the things that we don’t really get to know more about, say what you were thinking about as the president of the company during these crises. The ’21 crisis of COVID, ’22 crisis of the rate hikes. What was going through your head in preparation and execution through all that?

Ben Fertig:
No, that’s a good point. And I think that one of the things that we did and our word of the year for 2021 was diversification and our word of the year for 2022 was also diversification. And look, that extended to what our liquidity sources looked like. We didn’t do a great job with the product mix because we’re still very heavily weighted towards DSCR and then we wanted to just add to our distribution channels. And I talked about this extremely early on and I can remember being on some panels with NEMA just saying, “Hey look, we diversified through a direct life insurance partner when securitization was the dominant provider of capital in the market.” And look, you go back to 2021, the securitization bid was far more efficacious than any insurance bid will ever be.

I mean insurance, you’ve got to aggregate $50 million before you can trade it. You’ve got to in most cases realize some of the economics through the servicing, not necessarily just through a premium. And I think that at the time created a barrier to entry on some level, but the same time, while insurance money is rate sensitive, it’s not as directly correlated to some of the disruption we’ve seen in the credit markets. So we’ve seen spread related assets get crushed in all those things and insurance is less sensitive to that. So we started to diversify early in 2021. And Tom Haida from your firm did the MLPA for us with the insurance provider. I won’t name them, but everybody knows who they are if I would. And at the time, look, everybody was making a ton of money in 2021, relatively speaking. We made a little less on some of those trades, but we got them engaged. And I think as we looked at what would create the best path to sustainability for the business is you saw what happened to securitization markets in March of ’20, right? That was obviously the COVID occurrence. And look, I was in the markets back in 2008, 2009 during the global financial crisis and the same thing. It just ceased to operate.

Kevin Kim:
Question though. Because in ’21, you’re right, there was so much room for profit if you went toward the securitization route. And it must have been quite the challenge internally to actually conclude that, hey, we got to kind of bite the bullet here because of future risk. How did that [inaudible 00:16:47] go? And you must’ve gotten pushback.

Ben Fertig:
Look, we diversified. I think the market’s perspective was generally that we did really well with that. But that was a result of getting our ass handed to us in March of 2020 where we were dependent on the securitization market. So when everything stopped there, we got this reputation for continuing to lend through it, and we really effectively didn’t. I mean we made some loans that the liability of not making a loan was probably greater than a liability of making a loan at the time. But we weren’t really out there looking for business during that. And then we talked to an insurance company and they said, “Look, we would’ve bought loans through this, but we’re not going to do our first trade in the middle of a global pandemic.” Now, we had a relationship that was established and we got the sense that they were genuine and said, look, we’ve got to give up a little economics, effectively, in the name of diversification.

And it was well worth the investment. It wasn’t like we weren’t making plenty of money in 2021 like everybody else was. So yeah, we did a little planning. I think I had started talking about it probably in the first quarter of ’21 that, hey, this is the direction we were taking. Why some others didn’t necessarily take that direction, I can’t speak for. But now you’ve kind of seen some aggregators that are well known in the space, and you would know them, that have brought insurance money. They’ve kind of liaised it to the market a little bit and they’ve done it with really good price. So there’s others that have it indirectly. We have a relationship with them also. So you’ve seen that everybody’s kind of recognized that that was the way to go. But we did get ahead of it.

And there was a time where things were going batty that we were able to operate consistently and we were definitely a price leader. I don’t know if we were the lowest price out there, but we were definitely a price leader. And it made a big impact. This is the year, I call it the year of the inversion. We were up 70% year over year in volume and we were down 70% in net profit versus in 2021, which is kind of the times. But it served us well through the first three quarters of this year. And then the market found a way to catch up, albeit indirectly, and we’ll figure something else out to continue to differentiate ourself and add value to our clients.

Kevin Kim:
And I have appreciated the thinking through that because when you were discussing it, we’ve been talking about it internally over here because we were always scratching our head as to where is the life money? Where is life co money? Because we also have commercial clients in the commercial sector. They jumped in years and years and years ago. And it felt like this was the right time for it to happen. And then lo and behold, in ’22 … No, in late ’21, we saw a lot of it happening. And today it’s kind of now standardized. But what’s been fascinating is this industry has had so much ups and downs from ’20 onward and going in ’23. And what are your thoughts? What are you guys preparing for ’23 and where are you guys headed for ’23? Because this is a year of, let’s see how it goes. That’s how I feel at least, right? Let’s see how it goes.

Ben Fertig:
Yeah. Look, we don’t know. We don’t know. And I think that one of the things that you plan for is the fact that you don’t know and you better be ready to iterate, you better be ready to pivot and you better be agile. I think we can both look at what you would do intellectually to prepare for this. You want to stay diversified, you want to have … Look, I don’t know what the securitization market’s going to do. I mean there was a deal that just got done actually though. It was done by OBX who is a subsidiary or affiliate of Annaly, the reit. And that was an IQM deal. It was over subscribed, the 3A spreads were under 200. And that’s the kind of stuff … The oversubscribed, I mean you didn’t hear that since 2021.

So I’m not sure exactly what’s going to happen with the market conditions and obviously we don’t have any control over that. I will tell you that we have found a way to use our forward commitment with the Life Co to provide some value on the credit side as boxes are tightening out there. And that is something that we really designed based on client feedback that there were opportunities that they just couldn’t get to anymore. And what’s been interesting is that hasn’t been that price sensitive. I mean we’re running over an eight and a quarter whack on that business. So I think it’s just those types of things. You just have to keep on listening to your stakeholders and you have to make decisions as they come because if you try to plan 2023 on an Excel spreadsheet, you’re wasting your time.

Kevin Kim:
There’s too much room for error there. No way to know.

Ben Fertig:
Right. I think it’s encouraging to see a deal get done that there was actually some demand for. Well look, as you know, there’s definitely a divergence in what the Fed is saying versus what the market’s saying interest rates are going to do. So some ways you’re going to have to be right and we’ll see what happens. I think the rate landscape will play a big part in this, but I’m not sure that we’ve seen the full impact of the fact that the borrower base, the investor base, the capital markets in investor base has fully digested the fact that at some point in most of these transactions, the calculus of looking at the risk related to, whether it’s DSCR or RTL, through a 3% conventional mortgage rate lens to now a six and half percent conventional mortgage rate. I’m not sure that that’s been fully integrated yet. And we’ll see how priced in it is and how much of that still needs to be discounted into ’23. But I think the impact of that recalibration I think is also going to be critical, especially on the credit side.

Kevin Kim:
It’s one of those weird feelings to enter into a year of uncertainty, but I feel like we’ve been through a lot over the past few years so I think we can make it through some.

Speaker 3:

So what is Lightning Docs exactly? Well, Lightning Docs is the gold standard in document automation software for producing business purpose loan documents all over the country. Whether you’re working on a short-term fix and flip or a 30 year rental loan, Lightning Docs has you covered in all 50 states. Our staff here at Geraci is constantly working to ensure that Lightning Docs is kept current with all the ever-changing laws and regulations so you never have to worry about your document set being outdated or providing you with inadequate protection. Our goal here at the firm is to provide our clients with peace of mind, which means that we’re always working to provide you with the best and most streamlined user experience possible. Whether that means getting you set up to pair Lightning Docs with your LOS system, setting defaults in our interview, or just changing some of the language in our document set, our staff is always ready and willing to help you with whatever you may need. Whether you’re a private lender, a broker, bank, credit union, title company, you name it, Lightning Docs is the solution to all your loan document needs. For more information, please go to www.lightningdocs.com.

Kevin Kim:
Now Ben, I want to pivot a little bit and can I ask a little bit about you because a lot of the industry have seen you participate in various different panels and things like that and talk about the market and talk about capital markets and those kind of features. Well, like we just did. But a lot of the industry really don’t know that much about Ben. You mentioned earlier you played hockey in college, and did you get into this space right away? Or how did you land in-

Ben Fertig:
No. So-

Kevin Kim:
This is a niche industry.

Ben Fertig:
So back in ’96, I came out of the University of Minnesota and I tried to play professionally for about eight days. And it was quickly realized that, not to overuse the word pivot, but it needed to happen. And I was living in Minneapolis at the time, so I went back to Minneapolis and I started applying for jobs. Mostly finance related jobs. I applied at Nicholas Applegate who was a boutique investment advisor at the time, at the finance department at Caterpillar. Jobs like that. And you would go through this process, you could tell that you would send a resume in it would get looked at, get looked at it, get looked at, and then you might get a call, you might not. That’s just how it was in the ’90s. So I sent my resume to this place that I must have seen an ad for and I get a call back in five minutes and it was a branch manager of some mortgage company. I don’t know what a mortgage is really, right?

So anyways, I go in for this interview and I like the guy. I think this is in Bloomington, Minnesota. And we’re kind of just going through, I would say, a typical interview. And at the end of the interview he says … Because we had talked about where I had applied and what my interests were. And he says, “You applied for all these financially related jobs.” He’s like, “Why the psychology major?” And I just looked at a guy and I was like, “It was the major at the University of Minnesota with the best looking girls.” And he said, “I’d like to extend you an offer of employment.” So that was how I got in. That was in ’96. I went into management nine months later maybe. I mean that’s just kind of how it was back then. I mean, if you were a good loan officer, the non-agency market, the subprime market at the time was growing so fast that you’d go into management if you were a good salesperson generally.

So all but nine months or so of my career has been in management, which is probably why I’m so angry all the time. And then interestingly, there was a crisis in the late ’90s that was related to prepay speeds of these subprime loans. Because these programs would come out and somebody’d come up with an 80% cash out and then the next year they’d come up with an 85% cash out. The capital markets were just kind of moving along as data was being collected. It was fairly new at the time. So that was almost like a disruption like we’ve seen in … It stopped and then rates were recalibrated 200 basis points higher, but when you’re that new, you don’t know what the hell is going on. So from there, I just continued to … I left that job in ’01, stayed with another firm through the crisis. And just continued to stay in-

Kevin Kim:
Similar kind of firm? Like a mortgage shop?

Ben Fertig:
Yeah. Third party wholesale mortgage banker based out of Houston. And then we were nationwide, fairly large. And then I connected with Mark Filler in the end of 2012. And Mark had started Prism Mortgage and Prospect Mortgage, and he had realized some unbelievable exits for those businesses and done really well. He still invests in some businesses in the space. So we started Jordan Capital from scratch. I think admittedly Mark would tell you he’s a high level guy, has a great executive overview, but really needed somebody to run the day-to-day of the business. And effectively that’s what I did. And we did two mergers with Jordan Capital, the last of which was to Blackstone. And then after that I ended up founding Constructive with my partners at the time. And we’ve actually taken on another partner into Constructive, a reit.

So a lot of what I’ve done here is really try to build a sustainable platform. I mean, I think we’ve got two well capitalized ownership groups. We’ve diversified our liquidity. So we’ve done a lot to create what we think is a stable environment. And the one thing that I think is lacking that we haven’t done a good job of is to really build the RTL business. Because I think the RTL business has got … Which by the way, I mean that was Jordan Capital’s DNA. It’s not like we don’t have a lot of experience with the management team with it. But I think that if you look at how that structure generally works, you’re either keeping it on balance sheet or you’re collecting some type of a residual strip, which I think is the next piece of the puzzle that we need to focus on. And I think that’s why I’m excited about the correspondent business and seeing what we can build that into.

Kevin Kim:
And that’s a very interesting … I want to ask a question about that because today in our space and industry, you’re quite well known for having a good insight into institutional capital markets and its role and its impact on the industry and on your business and a lot of those aspects of it. And over your career, where did you pick that up? Because with Jordan, you said you were kind of the day-to-day guy running everything, and Mark was the executive oversight, and previously you were managing a wholesale mortgage bank. And so there’s a lot of different hats you have to wear and I’m sure capital markets was part of it, but you didn’t come from Wall Street. A lot of our colleagues in this space kind of came from that world, right?

Ben Fertig:
Correct.

Kevin Kim:
So where did you pick this stuff up and how did you gain so much mastery over it?

Ben Fertig:
When I started, when I first went into management, I was telling you there was a crisis that kind of came up right then and there relative to … The securitizations in subprime at the time were … It was fairly new back in the mid to late ’90s. So one of the things was just that you felt the impacts of it so you organically got an understanding of it. But there was also a level of you started to get into through becoming a branch manager to an area manager, look, if you had a trouble loan there, you needed to help sell it, you needed to determine if you needed to go back and get extra documentation. And the other thing is that the economics relative to … And I’ve always basically been on some type of a P&L or arrangement that directly tied me to profit. You need to understand what’s going on out there. Now, I will say that when I went to the wholesale banker, that was really autonomous. I was a regional vice president over eight states, and we were effectively doing our own training. So you were carving where loans went because you were really originating them to some type of investor specific target. So if I needed-

Kevin Kim:
Did that opportunity give you direct communication with training desks?

Ben Fertig:
Direct communication relative to the delivery, relative to price, relative to the impact of the end user who was the bond buyer and the securitization had. We actually did an asset backed security there too, or a couple of them. So I think a lot of that was organic. And then when I got to Jordan Capital, it just was … Nobody really understood how institutional capital was going to work in this space. But you were learning with the Wells Fargos of the world. They gave you a template. And a couple of those guys are still at Churchill, right? I mean that’s where those guys were. They were working under Dash actually, who’s at Redwood, and Ken Logan, who’s at Signature Bank now.

So it was those guys like Derek and Travis were over there. But it was iterative and they kept making improvements to the facility. So you were just really … A big part of the business was liaising what they were doing on the cap market side to the real world. And so that was a big part of how you serviced borrowers because, look, at the end of the day, you had a borrower base that was used to these fragmented regional lenders that could operate so quickly, so effectively, with such agility that you had to figure out what it was going to take to win them over. If you didn’t have the product to do it, it was an uphill battle. So I think a lot of it was organic. And then obviously when you start a business, you have to make sure that your liquidity landscape’s in place so there’s a lot of time that’s spent on that.

So I do do a lot of that relative to the day-to-day of it. But look, this business comes and goes with our clients. I mean, we have great clients. I mean we have five or six clients that could be on the show. They’re at that level, they’re that sophisticated. They’re almost institutional themselves. And by the way, a lot of them have RTL businesses that are better than ours. But we’ve just found great synergies and great partnership when it comes to DSCR and we’ll see how much more we can do on the RTL side with those clients. But it’s been a combination of something that’s organic versus something that’s real purposeful and I don’t know.

Kevin Kim:
And that raises another interest topic from a capital market standpoint, I guess, is the future of … Not future, but where this industry is leading towards when it comes to capital. And so as a capital provider and someone who studied the market and I consider very well in tune with where capital is and where capital isn’t, and where smart capital is and where smart capital isn’t, this space doesn’t have any consistency to capital strategies at all. And there’s I would say at least 20 commonly used structures out there from mom and pop operation all the way up top. And what’s really fascinating is every other aspect of just lending, even outside of mortgage, has some kind of commonly used strategy. Like in CRE there’s a lot of these debt bonds and they trade with institutions and there’s a lot of institutionality to it, maybe some securitization or [inaudible 00:41:17]. You don’t see you a lot of … I call TPO programs or correspondence programs that exist in the commercial sector. In non QM and consumer, it’s the opposite. And so our space has borrowed, I guess you could say, strategies from all different forms of finance and lending. Do you see this space getting towards some type of standardization or is it just too fragmented for that?

Ben Fertig:
Yeah, no, that’s a great point. There’s definitely not much standardization. Look, I think if you look at some components of it, take a DSCR loan for instance, I would tell you that … This is how I would probably frame it is that in a good market, a DSCR loan is somewhat commoditized. It’s going to go to generally a securitization exit and there’s rating agency pressure that forms the credit box and so forth. Now to your point, the origination strategy of the originator is probably completely different because you’re right. Some guys come in from commercial and try to do this. Some guys come in from resi like myself, and some guys come in from capital markets. I mean, you don’t know where everybody’s coming from. And I think that that’s a benefit from an industry perspective, because look, borrower experience and client experience isn’t one size fits all.

But yeah, no, you’re right. I think the one thing that you could possibly see, and this is where you’re at the forefront of it, is you’ve got to realize that some of those older verticals that you mentioned, and generally any consumer related vertical, but certainly conventional mortgage banking and non QM mortgage banking to the extent that the borrower is a consumer, you’ve got a regulatory environment that has really crammed those businesses into a pretty narrow operating channel. I mean, you can only do so much. And that doesn’t exist in our business yet. And to the extent that you see regulatory pressure heightened, maybe you start to see more of a consistency amongst what people are doing. Because for instance, if you’ve got to provide … And on the DSCR side, you’ve still got to provide some disclosures and so forth.

But if you were in something like if these loans were, let’s say, covered by a TRID for instance, you have to effectively balance your initial estimate, your GFE, with your closing and you’ve got to have the right operating system to do that. You’ve got to have the right staff to do that. You’ve got to have the right leadership to do that. And I think that probably could tweak the DNA as opposed to saying, hey look, there’s been people who come into this space from the commercial side that have done great. It could be something like that. But no, I think that you kind of look at it and you’re like, well you’ve got these business purpose lenders out there, you’ve got your client base, the funds and so forth that have just … They could be so agile and flexible and they know their markets and so forth. But then you’ve got the big non QM guys who are doing DSCR.

Kevin Kim:
Right. And the way they fund their loans and the way they take care of them is so different. Their borrower experience is different, their sales process is different. Everything’s different.

Ben Fertig:
Their borrower experience and the distribution’s completely different. So I don’t know that anything forces this to become universal. I think that-

Kevin Kim:
[inaudible 00:45:54]. That DSCR product is the most likely … If you look at it from a product standpoint, you can kind of see-

Ben Fertig:
It is. Right.

Kevin Kim:
I didn’t think of it that way. If you look at it from inside of DSCR, there is some level of standardization in operations. You don’t see a DSCR death bond. It doesn’t make any sense to do one, right?

Ben Fertig:
Right.

Kevin Kim:
So in the RTL, you see a common strategy. In the construction, you see a common strategy. And multifamily. Everyone has some kind of standardization in their approach because business needs. And that seems to be a good driving factor. And I didn’t actually think about it that way. That’s a good way to look at it. And I’m really hoping that DSCR is here to stay in our sector and not gobbled up by a lot of these large non QM shops that seem to have a liking to our space.

Ben Fertig:
I don’t think it’ll happen. I think it gets back to the distribution. I mean at the end of the day, the lenders in this space, and there’s a lot of good ones, whether they’re institutionally funded or they’re not, or they’re working somebody with somebody like us, they know how to service the residential real estate investor. And if you’re offering bank statement loans and recent credit event loans and all these other non QM offerings, which are all good by the way, I just don’t know if you can meet the level of sharpness that some of these business purpose lenders have when they deal with their borrowers. Because there’s a lot of differences. This is a recurring borrower and-

Kevin Kim:
A recurring borrower factor is a huge deal. Customer service in the space is so important.

Ben Fertig:
You go about getting that borrower different. And at the end of the day, and we’ve made a lot of investments in technology, a lot of it, almost all of it based on client feedback, is that there is a certain analog component to business purpose loans, whether they’re DSCR or they’re RTL, that I just don’t know is ever going to go away when it comes to the borrower and broker base in this space. And you’ve seen, look, there’s some good technology out there. I mean, you’re never going to accuse a Tiabi of not having good technology, but I bet if you ask their borrowers or members of their company whether or not there’s still a big analog component to what they do, they would tell you that there is because these loans are just conducive to that. And that’s why when somebody says, “Well this non QM lender’s come out and has this,” I would be more concerned about the competitors that attend your conferences, your events and the events where we all see each other versus a comprehensive non QM shelf when it comes to market share.

Kevin Kim:
And to make sure I understand what you’re trying to say is they don’t appreciate and can’t comprehend the depth of complexities in dealing with these borrowers.

Ben Fertig:
Well I wouldn’t say that they don’t. I just think that they’re-

Kevin Kim:
They can’t appreciate as well as our guys can, I feel like. It’s a different world.

Ben Fertig:
They’re unlikely to be as efficient and that’s just my opinion and it’s biased, but I think-

Kevin Kim:
So is mine. I agree with you.

Ben Fertig:
And you get feedback. And by the way, I mean if you’re doing … Take nothing away from your non … There’s tons of great non QM lenders. Don’t get me wrong. But look, if you’ve got to set up a framework to deal with consumers, you’ve got to spend time on compliance. You’ve got to spend time dealing with regulatory issues. Not that you can’t develop a good product for the stakeholders in our space, but I’m not worried about the non QM lenders coming in and just taking all the market share. I’m more worried about Jeff Tacher or Tennison or some of those guys taking my market share that I compete with every day that know the space that are great companies. But look, to your point, they have good access to capital and can price it accordingly and-

Kevin Kim:
Very cool.

Ben Fertig:
It’s a fair point.

Kevin Kim:
Right. I want to ask you a question, Ben. As president of the company, you mentioned earlier that 70% growth. Growing pains over the past five, six years now must have been tough. Can you talk about that a little bit? Because you guys have grown a lot and you guys have cemented your reputation in the space, but that doesn’t come without pains. And from an operations standpoint, how have you guys addressed it and any takeaways for our listeners to address that as they grow their businesses?

Ben Fertig:
No, look, I think one of the things that I’m super impressed with our team is we’ve got a low cost to originate. And look, a lot of people know it. We’ve got a low cost to originate, which ultimately is something that you can pass through to your client base. Look, it’s not as important generally as the price you’re getting from the capital markets just on a weighted basis, but it’s important. So Constructive, we routinely do 500, 600 loans with 95 people and I don’t think it’s happening. If it’s happening elsewhere, certainly it isn’t widespread. But look, we’ve seen times where all of our queues are backed up and you’ve got to play damage control. As a matter of fact, when we got into … I’ll give you a great example of this.

When we got into the first month of our forward, we had gotten into the forward, basically what happens is we’ll set a price with them on the 15th of a month that is effective through originations of the following month and then we’re delivering probably the third week of the following month. So they’re almost extending two months worth of … They’ve almost got two months of rate exposure. So we ended up getting a really, really favorable price and the market went the other way days after. What was interesting though is that the rest of the liquidity landscape, and you remember this, this was probably about March or April, just dried up. And you started to see participants re-trading DSCR loans, what, 200, 250 basis points at least. Or not doing them at all. But we had this unbelievable price at the time and we used the first 40% of that really defensively. We didn’t make a whole lot of money off of that and we probably could have, and we honored everything that we had out there.

And I think that went a long way and we’ve used it judiciously ever since. But I think that yes, there’s growing pains, but it’s how you deal with them. I mean, if you go back to March of 2020, we pulled money … There was loans that we were set to fund that we did not fund. Now, like I said, we did get a reputation for lending through it because there were some circumstances that we did fund some loans, but we went back and paid … It cost us about a half million dollars. We paid brokers to reimburse borrowers for earnest money. We paid out broker fees. We even ran a damn contest in March of 2020 for brokers. And some of these guys, by the time the third week rolled around where everything kind of stopped, they had already hit thresholds that would’ve got them paid. We paid them all.

So when you’re going through things like that, I think there’s times where your queues are backed up and your locks expire and you need to take care of your client base at that point in time, whether it’s economically favorable or not. So yeah, we’ve dealt with them but the other thing is that if you look at our leadership team, I know that Tess has spoken on some of your panels sometimes, and she runs the operations here. She’s at Morgan Stanley 25 years. So yeah, are we doing a lot of units at Constructive? Sure. But I think that a lot of it is that if your leadership stays focused and look, you got to make some decisions that aren’t necessarily favorable at the time but I think that’s how we deal with it. But yeah, our queues do get backed up. Generally it’s when we get a little bit of an ARB on price and the market realizes it very quickly. It’s amazing actually how quickly the market realizes it. Look, you focus on your clients first and your margin second and it makes dealing with those types of things and decision making and process pretty easy.

Kevin Kim:
Yeah. That’s-

Ben Fertig:
Usually.

Kevin Kim:
That’s a massively important thing that a lot of people forget. They let their bottom line dictate everything and the bottom line’s going to shrink if you don’t take care of customers. You don’t take care of your clients, take care of your people. So agree with that. Cool.

Well I want to transition to our little more fun questions that we have prepared and they’re a little more easy. We always ask these of our guests. So I want to ask you the first one. What was your very, very first job?

Ben Fertig:
Oh, my first job was caddying. And that’s funny because I needed a better agent or something because what I pay the kids now is egregiously-

Kevin Kim:
Caddying on a golf course?

Ben Fertig:
Oh yeah. Yeah. Caddy on a golf course. But I mean, I used to carry bags for 22 bucks for eight 18 holes. These guys now, I’m paying these kids 5X that.

Kevin Kim:
Was it very common when you were young? Because the caddying thing kind of went away on the west coast before I started playing golf.

Ben Fertig:
Yeah. I grew up actually in suburban New York City in Westchester County, which is … I mean there’s no shortage of private golf clubs there. That’s probably a good way to explain it. So no, I think it was common for kids in high school to caddy at the local club and kids to come back even from college and caddy at the local club.

Kevin Kim:
Right. That’s a good way to make some nice money that way.

Ben Fertig:
It’s always been big. We have a good program at our club in suburban Chicago too. But yeah, that was my first job. I ran with that one for a while.

Kevin Kim:
Do you learn anything at this first job that you still use today?

Ben Fertig:
I would say, if I had to answer it, I would just say just high level, look, you’re relating to successful, intelligent people and you hope you pick something up from that. But I probably can’t think of anything directly.

Kevin Kim:
No, but keep your ears open, right?

Ben Fertig:
I got stronger carrying two golf bags around.

Kevin Kim:
Oh man, that’s a lot of golf clubs. Okay, next question is, is there any business tool that you use that you just cannot live without?

Ben Fertig:
Doesn’t exist.

Kevin Kim:
Doesn’t exist.

Ben Fertig:
That doesn’t exist. I’ve figured out, I’m not good with technology anyway. We’re obviously trying to set the meeting. No, there’s nothing. No.

Kevin Kim:
All right.

Ben Fertig:
If we needed to run Constructive with fax machines, we would do it.

Kevin Kim:
Figure it out. All right. I like that. I like that. And last question, just so we can get to know you a little better, when you’re not running Constructive and being that leader of the company that you are and watching capital markets, what do you do in your own personal time?

Ben Fertig:
Yeah. I play a lot of golf. My mother took up golf at 72. My wife has historically played over a 100 rounds a year. And my daughter, who’s 14, is a very, very good competitive golfer. Actually has a future at some level. So I play a lot. And then the other thing is I work out quite a bit. It wouldn’t be uncommon, in Chicago it’s May through October probably, where I might run 40 miles a week and play three rounds of golf in a given week. And that’s probably just to keep me sane, right? Because I feel like the weather in Chicago now, my golf game and the 2022 mortgage market probably have a lot in common.

Kevin Kim:
I can appreciate that. Yeah. Yeah. Hey, if it keeps just sane and you love it, and it sounds like the whole family loves it.

Ben Fertig:
It must be cold in SoCal because you’re not in a short sleeve shirt.

Kevin Kim:
No. Yeah, it’s cold. I actually have a coat here. And speaking of golf, it’s been raining for the past two weeks so no one’s playing. All the course are closed. Because when we get rain, it floods on the courses because they don’t have good drainage because they don’t think about water.

Ben Fertig:
Right.

Kevin Kim:
They’re scared of lightning strikes so they don’t let anyone on the course because we never get rain here. But otherwise, 11 months out of the year, it’s fantastic golfing. But we don’t have caddies. So that’s one thing we don’t have out here.

Ben Fertig:
Yeah, that’s weird. I mean, who knows? The California labor laws, you’d probably have to … I don’t know.

Kevin Kim:
That’s probably the reason why. We have a lot of car valets here. We have a lot of kids valeting cars, but we don’t have any golf courses, even private ones, with caddies. And I kind of wish they did because it’s-

Ben Fertig:
That’s weird.

Kevin Kim:
I played in Asia and they all have caddies and those ladies will teach you the best way to approach the whole, and they tell you exactly how to play after they figure out how you play and it’s so useful. So anyway.

Ben Fertig:
I just think it’s good for the kids. It’s just good for the kids to develop a network. Right? I mean if you got college kids-

Kevin Kim:
Learning personal skills.

Ben Fertig:
That are coming back.

Kevin Kim:
To be able to talk to people. It’s not easy.

Ben Fertig:
Personal skills. Connections. I don’t know.

Kevin Kim:
Yeah, if they had that when I was a kid, I probably would’ve done it, but they don’t. Not here in California. We don’t get that.

All right. Well Ben, it’s about that time to wrap down the podcast. Thank you for joining us. It was really fun.

Ben Fertig:
Yeah, no, I enjoyed it a lot. It was good to catch up. We’ll have to figure out the next time we’re going to see each other, but I definitely enjoyed it, so thank you for having me.

Kevin Kim:
Thank you, Ben. All right. For all our listeners, thank you for listening to this episode of Lender Lounge with Kevin Kim. See you on the next one.

Wow, that was a great episode, wasn’t it? Hey guys, don’t forget to put your Apple Podcast comments and five star review. You’re going to be entered into a contest to win a pair of Apple AirPods. So please do so. Let us know how you feel about the show and we want to hear your feedback. Thank you very much. This is Kevin Kim.

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