Special LIVE Episode | Mid-Year Outlook with Daren Blomquist & Rick Sharga

Mid Year Outlook

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The Lender Lounge with Kevin Kim podcast hosted a special livestream featuring industry legends Daren Blomquist, VP of Market Economics at Auction.com and Rick Sharga, Executive Vice President at ATTOM. Watch the recording of May 18th LIVE episode and hear these industry leaders’ thoughts on housing demand, build to rent, interest rates, inflation, and everyone’s favorite doomsday question: is a recession coming?

Daren Blomquist, VP of Market Economics, Auction.com

Daren Blomquist is Vice President of Market Economics at Auction.com. In this role, Blomquist analyzes and forecasts complex macroeconomic and microeconomic data trends to provide value to both buyers and sellers using the platform. Blomquist has been cited by thousands of media outlets nationwide, including major news networks, The Wall Street Journal, The New York Times and USA Today. Prior to Auction.com, Blomquist worked at ATTOM Data Solutions.

Rick Sharga, Executive Vice President, ATTOM

Rick is the Executive Vice President of Market Intelligence at ATTOM, one of the country's leading providers of comprehensive real estate data for companies in the real estate, mortgage, insurance, finance and government markets. Prior to this, Rick was the Executive Vice President of RealtyTrac, an ATTOM company that publishes the country's largest database of foreclosure information for real estate agents and investors.

Episode Transcript

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

Kevin Kim:
All right. I think we’re live, guys. All right. Well, everyone. Welcome to a special edition of Lender Lounge with yours truly, Kevin Kim. We’re going to change it up this time. For those of you who’ve been watching the podcast and listening in, we’ve been doing a lot of this midyear, mid-season live streams. And up until now, they’ve been random ones where it’s fun and games, but right now, in the year that we’ve been having, I think it was a good idea to have a little more of a serious discussion, have a little bit more of a impactful discussion. So being it that we’re close to the middle of the year, there’s been a lot of uncertainty and volatility in the private lending industry and the economy at large. And we here at Geraci felt like it would be a great opportunity to ask two of our favorite economists and data junkies that serve the private lending industry to join us here on the podcast. So gentlemen, why don’t you go ahead, introduce yourselves, and what you do and who you work for? Rick, why don’t we start with you?

Rick Sharga:
I was going to say we should go alphabetically and let Daren do it. So thank you for reversing the order of the alphabet.

Kevin Kim:
It’s like to my left to my right, whoever goes first. Right?

Rick Sharga:
No. It’s all good. Thanks. Thank you to Kevin and the team for inviting me to participate today. My name is Rick Sharga. I’m the executive vice president of market intelligence at ATTOM. For those of you not familiar with ATTOM, were one of the nation’s leading providers of real estate and mortgage data to the real estate, financial services, insurance, and home services industries, as well as government agencies and educational institutions. So delighted to be here with my longtime friend, Mr. Bloomquist.

Kevin Kim:
All right.

Daren Blomquist:
Yes. Thank you. Yeah, honored to be here as well. My name is Daren Blomquist. I am vice president of market economics at Auction.com. And I didn’t do a good job of branding as Rick did teach me. I didn’t put the name of Auction.com up there with my name, but I’m with Auction.com, we are the largest marketplace for selling distressed properties in terms of specifically foreclosure auction and bank on auction. We account for about 40 to 50% of that market,, of the transactions that occur there. And certainly, what I… And look, I paid close attention to that distress market, but the retail market matters a lot to us and our sellers, as well as our buyers who are real estate investors out there on the front lines of the housing market.

Kevin Kim:
All right. Well, I want to do an opening segment and more general of a discussion. For those of our listeners who are watching things, I mean, it’s all over the news. Everyone’s talking about this issue as it pertains both on the politics side, but on the industry side as well, is that there has been a lot of concern and volatility. We’ve got record inflation. We’ve got rate hikes we haven’t seen in 10 years. Mortgage rates are up to the roof. A lot of uncertainty. A lot of concern.

Kevin Kim:
I talked about this with some friends and shades of the 1980s. Right? So first things first, I… You gentlemen are going to open up, and give us your thoughts and current general outlook. And then let me know if you like to have the slides put up. We have the slides here for you guys ready for your use as well.

Rick Sharga:
You want to talk economic outlook or housing market outlook?

Kevin Kim:
Let’s start with the economic outlook for now. The general economic outlook is one of the first things that I’d start with, because broad impact right now, there’s a lot of concern, generally speaking from a lot of our clients, but haven’t gotten thoughts from folks like yourself who live and breathe this stuff.

Rick Sharga:
Daren, I’m going to let you go first since I got to introduce myself first.

Kevin Kim:
There you go, gentlemen.

Daren Blomquist:
Oh, wow. Look at that. And actually, I do think there might be another opportunity for this slide. But the slide where we kind of, has just tons of data on it.

Kevin Kim:
Yeah. Let me get it for you.

Daren Blomquist:
Including…

Kevin Kim:
This one right here?

Daren Blomquist:
Yes. That one.

Kevin Kim:
All right.

Daren Blomquist:
The last couple of recessions, I could have gone back further. But I think the main point in reference to your question, and this maybe steals some thunder about what we’re going to talk about later too, but yeah, and the main point is if you look at the gray… The gray lines and the gray bars there are the last three recessions including the pandemic recession, which was extremely short. And then, the gray lines, which are the Federal funds effective rate. Almost, it’s not guaranteed. It’s not quite death in taxes. But when the Fed raises its rates, we do… They’re not intending to cause a recession. They’re intending to cool the economy off. But when they do, we typically do see a recession following that. And we’ve seen that the last three times.

Daren Blomquist:
And if we went back further in time, we’d see it very consistently over the recessions. And so, I think in terms of an economic outlook, broad outlook, I think there is a very high risk for a recession. Given the anticipated Fed rate rise increases that are coming. We’ve already seen one. And it looks very small there on the right-hand side of your screen. But if those continue as are expected, we would see something more like what you saw leading up to the 2020 recession, as well as the 2008 recession, as well as the 2001 recession. More of a trapezoidal-type of shape there. And so I was… My answer would be that…

Rick Sharga:
Did you say Trumpizoidal?

Daren Blomquist:
No. If I did that was a Freudian slip.

Rick Sharga:
I thought it was a Freudian slip. Yeah.

Daren Blomquist:
Yeah. Trapezoidal. I don’t know if that’s a word. I think that there’s a very high risk of recession. People who are smarter than me, have looked at this longer than me are predicting a recession. It’s not guaranteed. But I think that in terms of economic outlook, it’s coming. You could argue. There was actually a decrease in the GDP in the first quarter, so we may be closer than we think.

Kevin Kim:
The initial first signs. Right? And that was all over the news as well. Rick, give your insights to us, and we’ll get into the weeds a little bit on this stuff on the housing side.

Rick Sharga:
Yeah. I tend to agree with Daren on his outlook right now. Although, I don’t have quite as many data points on the chart. If you look at the history of Fed involvement in trying to prevent the economy from overheating, trying to get inflation under control, eight of the last 11 times, they have tried to do that. They’ve overcorrected, and the country has gone into a recession. Probably worse than that, the three times they successfully executed a soft landing, they did it by raising rates proactively before inflation got terribly high. Those three times they successfully executed a soft landing. Every other time, when they started to take action after inflation spiked up, we entered into a recession.

Rick Sharga:
And to Daren’s point, the technical definition of a recession the economist use is two consecutive quarters of negative GDP growth. We’ve had a negative quarter in Q1, down by about 1.4% after, you know, phenomenal growth since the one month or the one-quarter drop off when COVID was first declared.

Rick Sharga:
I was talking to Lawrence Yun who’s the… And Daren actually was on this panel as well, who’s the chief economist for the National Association of REALTORS. And he said something really interesting about the coming recession. He said, “We’re probably going to have one, but it may not matter.” And that wasn’t as cavalier as he made it sound. What he meant was, technically, from an economic standpoint, we might actually have a recession, but the fallout from the recession may be so minuscule that we almost don’t notice it. And I would point to this current quarter, this past quarter, as an example of that, we were in negative territory, what, 1.4% minus growth. But job growth continued, unemployment didn’t go up. Consumer spending continued to be strong.

Rick Sharga:
Even though technically, we were in a negative quarter, it didn’t feel like a battery recession. The reality is that there are a lot of things that are contributing to what’s happening right now. It seems to me almost impossible to imagine that the government and the Fed activity combined could pour $11 trillion into the economy in 18 months and not have some inflationary impact and perhaps a rebound that leads to a recession. The other thing to factor into this, and then, I’ll stop talking so we can have a conversation is, consumer confidence right now is the low as it’s been in decades. The trend line has been down. There’s a disconnect right now between consumer spending, which represents about 70% of the gross domestic product, and consumer confidence which is continually getting lower.

Rick Sharga:
That disconnect, historically, just doesn’t happen for long periods of time. And consumers could get worried enough between inflation, the war in Ukraine, another wave of COVID that they do clamp down on spending. And that could all by itself lead us into a recession. I don’t really think it’s much of a question. I think the question is really are when and how bad it’ll be? And right now, I’m thinking mid-next year and fairly mild as US recessions go.

Kevin Kim:
I’m hearing a fairly mild outlook, nothing too crazy to worry about and it echoes some of the other panels I’ve been on and discussions I’ve had with other industry folks, more folks on the lending side, who had the general sense that the party’s not over but we should probably start thinking a little bit more conservatively.

Kevin Kim:
And let’s try and take this over to housing, because I mean, that’s what everyone in our industry is watching like a hawk. And this is one of the most material, I guess, factors when it comes to the private lending industry. Because, hell, we’re making loans on houses. Right? So let’s talk about that. One of the things that Daren’s slide here is showing is the correlation to some housing stats that are pretty interesting.

Kevin Kim:
I was reading this slide, Daren. There seems to be some pretty interesting, I guess, predictors that, are we headed toward a pretty bad situation on the housing side because there’s a lot of corollaries to 2008? And so, everyone I’ve talked to so far, and my kind of just sense doesn’t feel like we’re headed toward our 2008 part, and everyone seems to be justifying that based off of the inventory issue. We talked about inventory, inventory, inventory, the demand side is so high and the supply side is so low that that’s going to be our saving grace to some degree. But based off of what I’m seeing here, and some other conversations I’ve had with you and other folks, that may not be the case. So, I mean, let’s open up that. So what do you guys think? I think you’re on mute there, Daren. There you go.

Daren Blomquist:
There we go. Can you hear me?

Kevin Kim:
All right. Yeah.

Daren Blomquist:
I had to take a coffee break while Rick was talking because he gets me emotionally… But anyway, so the point is actually, trying to parallel, maybe what we’ve been through over the last couple of years to a little bit more to the recession in 2001, my theory is that we were headed toward a recession anyway. The recession signals were flashing in 2019. And nobody was foreseeing a pandemic at that point. And we were actually headed toward what you might call a soft landing in the housing market interest rates. The Fed had been raising interest rates as you can see there with both the gray line and the blue line. And home price appreciation was slowing down. In fact, the data we used, which is actually the public record data from Adam shows there was one month where home price appreciation was as low as 1%, Actually a little bit under 1% as interest rates rose there for an extended period of time above four.

Daren Blomquist:
And so, above four and a half actually. And so, we were headed in that direction. And what the pandemic did was actually save us from that soft landing, maybe, potentially, and what would’ve been a recession anyway. And all the stimulus thrown at the economy during the pandemic helped to save us from that, and maybe a softening of home prices. And what it did is it, as you can see there with the green lines, it created a huge increase in home price appreciation, acceleration of home price appreciation, or it helped contribute to that.

Daren Blomquist:
I think the… We saw a somewhat similar scenario back in 2001, the Fed lowered the interest rates as that recession hit, and that stimulated home price appreciation. But what happened is it may be overstimulated home price appreciation to a point where a correction almost was needed once the second recession hit. And so, I think… I don’t want to say we’re going to see another 2008 at all. I would get lambasted by Rick for that I think.

Kevin Kim:
And myself.

Daren Blomquist:
And I don’t think that’s the case. There’s a lot of different…

Rick Sharga:
Good.

Daren Blomquist:
The inventory that you talked about is a huge piece of it, and the quality of loans that we have. But I do think there is a risk… At least a correction in home prices given all of this. And I think when I… We just surveyed our buyers, who were, I like to say, are on the front lines of the housing market. They’re thinking six months ahead. They’re the borrowers of the private lending community. And they’re always thinking in six months cycles, what’s going to happen after I buy this property in Auction.com and renovate it, and then resell it down the road in six to 12 months. What they said, 55% of them were saying that they think… They described their market as overvalued with a correction possible. And that was up from 40% a year ago.

Kevin Kim:
And how current was that? Was that recent?

Daren Blomquist:
That was… We did the survey in March.

Kevin Kim:
Okay. [inaudible 00:15:49].

Daren Blomquist:
A couple of months ago. And that was even before we saw some of the increase in interest rates.

Kevin Kim:
Right. I mean, direct sale increased recently right up to 6%. I mean, it seems to be what… I mean, I’ve only heard anecdotally speaking, nothing data-wise that seems to indicate HPA is now stabilizing or on the decline. We’re not… I mean, I’ve personally seen it on homes that I watch and stuff like that and in communities that I live in. But it’s not been validated by anyone. I mean, on your guys’ end, even though rates were climbing, climbing, climbing over the past five months, mortgage rates that is, it didn’t seem to have an impact on home price too much.

Daren Blomquist:
And the consumer has been extremely resilient. The homebuyer has been extremely resilient in the face of rising rates, but I do think that risk is continuing to increase. The more that we see double-digit home price growth continue, the greater, the risks for a correction down the road. But when I say correction, I’m not saying 30 to 50% decrease in home prices like we’re talking 2008 and…

Kevin Kim:
And all doom and gloom. Yeah.

Rick Sharga:
Yeah. Can I…

Kevin Kim:
Yeah. Rick, go ahead.

Rick Sharga:
Can I please put the… We’re looking at 2008 all over again meme to bed once and for all?

Kevin Kim:
I’m glad you were you bringing that up? Yeah, please do.

Rick Sharga:
The market dynamics this time compared to then could not… If you wrote a script and said, “Do a Jerry Seinfeld opposite day episode,” that’s what we’d be looking at right now. Daren touched on a number of the points, but just to put a little bit more granularity into what he was saying, we’ve seen inventory start to improve a little bit now. We’re up to about 1.8 month’s supply of homes available for sale. We have less than… We have, I believe, 0.6 month’s supply of new homes that are completed and available for sale. In a normal market, we’re usually somewhere between four and six months supply. So even with the modest improvements we’ve seen lately, we’re way, way off where we’d normally be.

Rick Sharga:
If you look at inventory leading into the financial crisis, we had 13 months of supply. So the builders never got the memo. They kept building. Once some of those bad loans started to go bad. We had foreclosure inventory coming into the market, the lenders clamped down on credit demands for what they were going to allow in terms of their loan portfolio. So nobody could get a loan at precisely the same time as we had more than twice as much inventory as a healthy market would support. So the inventory thing that we kind of globally refer to is really much more real than most people give it credence for.

Rick Sharga:
The other thing is Daren mentioned loan quality. There are a lot of borrowers who are buying on spec, speculative borrowing going on. People are getting 125 LTV loans, 133 LTV loans, negative amortization loans, pick-a-pay option loans. The only way they were able to afford a house they bought was to get in on the teaser rate because they didn’t understand that when an interest rate went from two to four, it didn’t represent a 2% increase. It represented a hundred percent increase in their interest payments.

Rick Sharga:
There was a story about a woman here in Orange County, where I think all of us are located during that period, who was losing eight homes to foreclosure. She was a cleaning woman who made about $40,000 a year and had eight mortgages on individual properties that she bought as investments. You have to wonder what the loan officer around loan six or seven or eight must have been thinking in order to approve yet another loan on these properties. We don’t have that kind of speculative buying going on today. We have owner-occupants who for the last couple of years were driven by a desire to move from renter to homeowner. They were getting to that prime-home buying age.

Rick Sharga:
They very often were putting a lot of cash down. In fact, 34% of purchases in the last quarter of residential properties were cash purchases. A lot of those by owner-occupants and the wall price has been going up. We’ve seen equity levels go to record numbers. The last published number I saw was $27 trillion in homeowner equity. 90% of borrowers currently in foreclosure have positive equity. And if you juxtapose that with 2008, when a third of all homeowners were underwater on their loans, and again, it’s just the conditions couldn’t be more different. Having said all that, I tend to agree with Daren. I’m probably a little more selective. I don’t know that the entire housing market is due for a correction. But I do know there have been some regions, some markets, and some price tiers that are definitely overpriced. And we’re already starting to see list price reductions. So Bay Area of California, Pacific Northwest, maybe some markets like Austin or Phoenix or Boise or Saint [inaudible 00:21:22].

Kevin Kim:
Overheated areas that were…

Rick Sharga:
Yeah.

Kevin Kim:
I mean, Phoenix is supposed to be one of the most highest increase in home value in the country as recently.

Rick Sharga:
Well last year, Boise was at 45%. Now, I guarantee.

Kevin Kim:
Right. I mean, here down in Orange County, it’s terrible too.

Rick Sharga:
Orange…

Kevin Kim:
That’s an interesting part.

Rick Sharga:
I think the median price in Orange County is either a million dollars or very close to it right now.

Kevin Kim:
Exactly.

Rick Sharga:
Which is just, it’s insane. But there’s nothing available for people to buy. And there’s people that are still very happy.

Kevin Kim:
And that raises the interesting question, you mentioned earlier is the equity amount, right?

Rick Sharga:
Yeah.

Kevin Kim:
It sounds like, I mean, I hate to say this, but the ATR requirements of the conventional programs seem to have given us a little bit of extra protection in the sense that there’s not as many speculative owner-occupant borrowers. But when we look at our market on the private lending side, there has been a significant increase in the amount of leverage that’s being offered to both flips, construction, those types of short-term loans, but also on the term rental programs. Before we kind of transition into the impact on the industry of private lending. I kind of want to ask the impact associated with a certain phenomenon, I guess you can call, within the home buying industry as a whole. One of the things that everyone seems to have been complaining about was these cash buyers, right? And they’re causing challenge. But you mentioned something Rick, that was interesting there. You’re saying that the cash buyers that you’ve been tracking have been actual owner-occupants, right? So it’s not as many iBuyers as we think there are. Is that the case?

Rick Sharga:
Well, we’re actually crunching the numbers right now. I can’t give you a percentage, but I will. I will promise you that there’s a higher percentage of owner-occupants using cash to buy homes today than any time since I’ve been in the industry. I don’t know the exact percentage, the iBuyers muddy the waters a little bit because they are coming in and buying properties with cash. But you’re talking about collectively tens of thousands of acquisitions a year in a market where 6 million properties were sold. There’s another category called power buyers, companies like Ribbon and Knock, who will effectively make a consumer a cash buyer by fronting them the money to buy a property while they’re trying to sell their home. But the other that’s important here, I mentioned Boise a couple of seconds ago is you’re seeing people tap into the equity they’ve acquired to then use that to buy a property with cash.

Rick Sharga:
There was nothing organic about the Boise economy that justified a 40% increase in home prices. It was buyers coming in from the Bay Area, who sold a house in San Jose because they can now work from home. They took the $600,000 in profit, moved to Boise, bought a home for 400,000 that had been listed at 300,000, kept the other 200,000 in the bank, and property values inflated. You’re seeing an awful lot of that. And it’s important for people to understand that most of the buying today, a higher percentage of buying today among consumer buyers is move-up versus first-time buyer.

Rick Sharga:
Those really expensive houses they’re buying, they’re using all that equity they’ve built up to make a significant down payment, to keep their monthly payment within boundaries. So again, it’s not the kind of risky buying that we saw back in 2008. But normally, the first-time buyers account for about 40%-ish of the market. The last numbers from the NAR was about 25%. So there’s very little inventory available for first-timers. They’re not able to afford a lot of the inventory that’s out there. And so, a lot of this is people tapping their equity.

Kevin Kim:
Interesting.

Daren Blomquist:
Yeah. Just a couple of comments. One of the things on the inventory side… I agree on the inventory side, but I guess I view it a little bit differently than Rick. I mean, when I look at the new home inventory as of March, 407,000, that’s the highest it’s been since… Sorry, I’m looking at my spreadsheet, since August of 2008.

Rick Sharga:
But doesn’t that…

Daren Blomquist:
And we have now seen-

Rick Sharga:
Doesn’t that include homes currently under construction?

Daren Blomquist:
It probably does.

Rick Sharga:
Okay.

Daren Blomquist:
Right. Yeah.

Rick Sharga:
I don’t actually disagree with you. I was talking about the ones that are completed, but a lot of these are being sold while they’re being built. So you’re [inaudible 00:25:54].

Daren Blomquist:
And actually it raises a-

Kevin Kim:
A question I wanted to ask, and Daren, it’s a good topic on construction, it’s because I’ve actually been challenged on the inventory topic, and there’s data that backs up the argument that there is an inventory shortage, but a lot of our clients are saying my lender’s perspective, “Is there really a shortage because construction lending is through the roof right now.” Right? New construction. There’s a lot of people that make the argument that fix-and-flip is dead and it’s all construction loans now. And is that producing sufficient… And that’s one piece of the puzzle, but compare that with also the massive supply and communities that are being built. I mean, drive around Orange County, they’re being built everywhere too. So talk about the construction you’re looking at there.

Daren Blomquist:
Well, I think that we’re on… If this trend continues, it could quickly flip and home builders are notoriously, and partly just because of the industry are behind the times because you can’t immediately have a house.

Kevin Kim:
No.

Daren Blomquist:
You can’t create a house overnight. And so, I think there is some risk of builders getting behind the curve. And we did see housing starts at a nearly 16-year high in March as well. And so, there are some signs that inventory is coming back. We’re also seeing inventory… It’s a smaller part of the puzzle, but we’re seeing some of the inventory held back by the foreclosure moratorium come back as well. And so that all coalescing could, I think, fairly quickly shift the tide, and certainly, on the existing home sales side, the inventory is just razor thin. But it’s more on the new homes that I see some of those signs.

Kevin Kim:
I’d like to ask on that though because there’s a lot of construction going on. True. But I’m… A lot of our clients really doubled down when term rental became a great product for them, or a capital market standpoint, they were able to originate and sell those loans on volume, became a big piece of the private lending industry. But one of the fascinating things that came from that, that I noticed was this whole build to rent phenomenon.

Kevin Kim:
And it seems to be that they’re not building… They’re building to hold these things and rent them out. And whole communities, it raises a interesting question from an inventory standpoint for supply, which ultimately, it impacts values, how much of that is being factored into this analysis? Because it worries me when I hear about master plan communities that are being built solely for build to rent. And that may not be a thing as rates climb, but I do want to bring it up, and get your guys’ thoughts on that.

Rick Sharga:
That could even be more of a theme as rates climb. Daren and I pretend to disagree, but we’re actually really, really close in terms of our perspectives. Just a little different dots on the continuum. I’ve seen indications, I’m sure Daren has as well. That we may have peaked in terms of demand at this point. If you look at some of the statistics out there, we’ve had eight consecutive months now where existing home sales are lower than they were the prior year. We’ve had 10 consecutive months where pending home sales are lower than they were the prior year. The Mortgage Bankers Association’s purchased loan application index, which tracks the number of loan applications for people looking to buy houses.

Kevin Kim:
Wow.

Rick Sharga:
It’s trailing both 2021 and 2019. You have to throw out 2020 because it was a weird year.

Rick Sharga:
You look at all those things and California, which a lot of people look at as a bellwether state when it comes to real estate trends, home sales are off 7% year over year at this point in the year. I think inventory is one of the issues. I think the other issue that really becomes a huge, huge factor is affordability. And if you just look at the fact that interest rates have virtually doubled for a 30-year fixed-rate loan in the last year, home prices have continued to go up 17 to 20%, depending on where you’re looking.

Rick Sharga:
That average monthly payment is 25 to 30% more expensive than it was a year ago. And that just wipes a lot of buyers out of the market. So as those rates go up, as home prices go up and we may get to this later, but I’m of the belief that as we hit this affordability, while you’ll start to see home prices plateau, and home price appreciation get much, much lower as we get toward the end of the year, but that could actually drive more people into renting these single-family units that a lot of private lenders are funding the development of, because they just can’t justify spending as much as it costs them to get into the owner-occupant market right now, but they may be still like to be in a house.

Rick Sharga:
I think that becomes an opportunity for the investment community. People that are buying and handling these single-family rental units.

Kevin Kim:
And absolute… A sharp decline that support the argument. And in one of the debates that I’ve had on the show, and questions I’ve asked our guests is the whole idea of the next generation being a generation of renters. Right? There’s a lot of… If you go to a rental show, I remember all the panels like, “Oh, Gen Z and Millennials love the rent. They don’t want to buy.” And then compare that to record home-buying demand. Right? It’s happening and it’s been going on.

Rick Sharga:
If you go to an ostrich farmer’s conference, they will tell you that ostrich is the up-and-coming meat. You have to be a little careful where you get that source.

Kevin Kim:
Well, it’s kind of funny because the industry, those events are full of folks who are doing fix-and-flip and rental and bridge and construction and they would rather someone buy the home than rent it. But the interesting part of that is… My perspective is, there’s a lot of conflicting arguments on this front, but there seems to be supporting data on both sides of it.

Daren Blomquist:
I actually think it’s a little bit of both because the Millennial… We talk about the millennial generation, which is in their prime home buying is so big, that if you look at homeownership rates among those Millennials, it’s still the furthest among generally Millennials under-35 age bucket from the Census Bureau. That homeownership rate is still the furthest below its 2004 peak of any age group. So they’ve been the slowest to become homeowners in some ways of any generation. But they’ve also seen the biggest increase since 2016 in homeownership rates. So there’s room for both trends to be happening there. They’re increasing their homeownership rates, but they have more runway to increase their homeownership rates or stay renters at the same time. I think there may be a little bit of both there because just the sheer size of the fluctuation.

Kevin Kim:
It seems to me that it would benefit a lot of us to see an increase in, I guess, demand, but make it a little more affordable. But one of the questions becomes… And I want to bring this up because California announced they have this… The California Housing Finance Agency is offering this type of forgivable equity builder loan. Right? And they’re offering for first-time homebuyers. They made a certain income threshold. It effectively sound like it’s a forgivable loan as a second, so you can put a down payment on the house. And similar to what those for-profit agencies are doing. But where do we land on this? I mean, this seems to be an artificial attempt that… From my perspective is an artificial attempt to increase demand, but I mean, at the end of the day, if your income bracket isn’t there, you can’t afford the average house against it in where you’re trying to live. Right? So how does that… Where do you guys… I mean, what do you guys think about that, and how to [inaudible 00:33:54] that?

Rick Sharga:
Down payment assistance programs aren’t new. There have not for-profits that have offered those over the years. And by the way, according to research from the Urban Institute, there’s been no indication that properly qualified borrowers with down payment assistance, foreclose at any higher rate than anybody else does. So the key there is… The problem they’re trying to solve is certainly not lack of demand. It’s lack of affordability for underserved communities and for households at the low-end of the wage spectrum. The key to making this work the right way is to make sure that if the down payment is the only thing preventing successful homeownership by that family, that down payment no longer becomes an issue. But if you-

Kevin Kim:
Well, my concern with that though is the ATR analysis may not… If they require median… If any area median income as the qualifier, do you meet the ATR analysis to actually own or take down more…

Rick Sharga:
You and I are saying the same thing, Kevin. If they vet the borrower properly and say that once we get past the down payment, they can absolutely afford that monthly payment and they have adequate cash reserve so that when the water heater blows up, they don’t go into foreclosure. But if they just start doling out down payment assistance to get somebody into a house without doing that careful qualification, you’re basically setting a lot of people up for failure. Because those typically are borrowers who have no margin for error, very little wiggle room. And so, putting them in a spot where they have that financial responsibility, and maybe aren’t ready for it is just really not good for anybody.

Daren Blomquist:
Yeah. And I see it as solving the wrong problem, which is stimulating demand. We already have plenty of demand. We need more affordable housing, more supply. I mean, even though I’ve just talked about some issues on the supply side, but I do see that as potentially simulating demand. I mean, if you look back… Actually, you might be able to see it on this graph here. You see the first-time homebuyer tax credit. I know the numbers are really small there. First-time homebuyer tax credit was a-

Kevin Kim:
Let me try to increase it for the audience. Yeah.

Daren Blomquist:
… policy put into place to try to…

Kevin Kim:
I see. There we go.

Daren Blomquist:
Yeah, we’re here.

Kevin Kim:
A little bit better.

Daren Blomquist:
Yeah. I think it went into effect January 2009, to try to stimulate demand coming out of the recession. You actually see there, there was a few months in 2009, maybe into 2010 where we saw home prices go positive. But then once that homebuyer tax credit went away, the home price appreciation went back negative again. And we’re not in a scenario where we’re trying to… Actually, that was a scenario where you did want to stimulate demand. We’re not even in a scenario where we want to stimulate demand.

Kevin Kim:
Right. They’re trying to solve for the affordability problem, but they’re really impact… They’re really just in increasing demand.

Rick Sharga:
Yep. So, true.

Daren Blomquist:
Yeah, which is going to exacerbate the affordability problem in my view. And so, I think more supply. And I do think that the folks that this industry, the private lending industry is lending to, are one piece of the puzzle in helping with that, provide affordable housing supply…

Kevin Kim:
Exactly.

Daren Blomquist:
Yeah.

Kevin Kim:
And I want to talk about that now because transitioning over to the industry-specific issues. One of the things that we’re all watching like a hawk is foreclosures. And Daren auction is one of the best places to get this information. But the interesting part is… I’ve anecdotally have gotten information from clients in New York and all the country that saying, “Foreclosure moratoriums, not as much of a concern anymore.” But they’re all worried about incoming disruption from legislation. We have it in California. We have that. I call it the sniper bill. Right? Like someone is sniping and take your foreclosure out from underneath you. But give us some intel as to whether it’s become a national thing. Are we going to start seeing this trend across the country in disrupting foreclosures? Because now the moratoriums are over, Our client’s borrowers can go to auction and buy these properties, but are we going to have a stall because of the things that… similar that we have in California?

Daren Blomquist:
Yeah. I think there’s some well-intentioned policies and we are seeing a trend, as Rick said earlier, “California is a bellwether state in more ways than one when it comes to legislation.” We are seeing a trend in that, “Okay, these foreclosures are coming back, let’s get them into the hands of… They’re affordable. They tend to be on the affordable end of the spectrum. Let’s get them into the hands of owner-occupants.” And I think that’s very well-intentioned that the bill in California does that by saying, “After the foreclosure auction has ended, a owner occupant or a nonprofit can come in and make an upset bid of that.” And we’ve seen that. We’re tracking that in our data. We’ve seen that happen to a certain extent. There hasn’t been a lot of that going on, but that has been happening and it disrupts the process.

Daren Blomquist:
It creates unknowns for the buyers at the first foreclosure auction. I guess the real foreclosure auction for a lack of a better way of saying it about they put that cashout and they have to wait 45 days before they actually know if they take possession of the property. So there’s uncertainty around it. And we’ve seen some potential abuse in terms of nonprofits coming in and claiming to be non… I mean, they are nonprofits, but really just buying up those homes and not renovating them and doing quick flips. I think, the problem with some of this type of legislation is it’s got good intentions, but you’ve got to think about human nature, unfortunately.

Daren Blomquist:
And so I think… The other trend that we’re seeing that I think is more helpful, although it’s not going to be a silver bullet is a first look. After the foreclosure auction has taken place, a first look opportunity for owner-occupants and nonprofits in the what’s called the second chance auction which happens with HUD properties, where it’s an REO, it hasn’t been renovated. We put it up for auction on Auction.com and there’s other places as well. And HUD has just recently announced that they’ve expanded that first look period to 30 days. So owner-occupants and nonprofits have 30 days to go in and make a bid where other bidders are not allowed to participate.

Daren Blomquist:
And that may have some lift, but the other issue, and we actually did a joint study with the Urban Institute looking at this. “Why don’t more people buy at foreclosure auction and REO auction?” And the conclusion is, as you guys probably know, these properties are in very poor condition. They’re often not financeable.
Daren Blomquist:
And they require major renovations that an owner-occupant is not prepared to handle. And about half the time they’re occupied. So if you’re an owner-occupant, you take on the task of evicting the current occupant. And that’s not something a lot of owner-occupants are ready to do. So it gets a little thornier when you look at this. And when we look at some of our data, this is something we’re looking very closely at. When the property’s bought on our platform, when they’re resold after about 200, 250 days, 71% of them are going to owner-occupants after they’ve been renovated. And so we think, “Hey, the market’s actually doing a pretty good job. There’s some incremental things we could do to increase that eventual, ultimate owner-occupancy rate.” But the market’s actually doing a decent job of that.

Kevin Kim:
Or it’s going to keep…

Daren Blomquist:
And I could go on and on about this but, yeah.

Kevin Kim:
And looking at this fix-and-flip model in general. Right? The rehab, fix-and-flip model, in general, the data itself is showing that. Because it takes a professional to do that kind of stuff. I don’t want to buy it. I don’t want to do that. I’m your exact person. I don’t want to do that kind of stuff. Right? I can’t be bothered. Go in and do a full rental on an REO or evict a tenant. I don’t have time for that. And I think that’s ringing pretty true across the board.

Rick Sharga:
Your lenders will probably agree with this, that the two biggest mistakes investors make when they’re buying one of these properties, are they tend to either overvalue it, and so they pay too much in its current condition, or they underestimate the cost involved in bringing it to move-in-ready condition. If investors make those mistakes from time to time, imagine the likelihood of a first-time homebuyer looking at one of those properties and being able to accurately gauge how much to spend, and how much is going to cost to fix. And at Daren’s point, a lot of these properties are in such bad shape that they’re not even… You’re not going to be able to get financing on them. So as Daren said, very well-intentioned, I think everybody’s heart’s in the right place, but I’m even more opposed to this than what Daren was.

Rick Sharga:
Because again, I think you’re inadvertently setting a lot of people up for failure. Trying to do the right thing, but completely ignoring the value-add role that investors play in these markets, and doing what they do to improve the value of a community of a neighborhood, bring properties onto the market that are ready for people to move in and still doing it at a relatively affordable price.

Rick Sharga:
You asked about other things that we’re hearing. Two things worth mentioning. One is that I have heard there’s another one of these sniper bills in consideration in Ohio, where they’re looking at a similar program to what we’ve seen in California on that sniping after the auction piece. There is a letter that was published by the Consumer Financial Protection Bureau last week that was warning servicers not to execute foreclosure proceedings on a borrower who might qualify for their state’s Homeowner Assistance Funds.

Rick Sharga:
Right now, if you’re a servicer and a borrower calls you and says, “Hey, I know I haven’t made any payments in six months and I’m out of forbearance now, but I might qualify for HAF, from the state capital,” you probably don’t want to put them into foreclosure right now. So that’s going to keep some of these properties from getting to the market anytime soon. And one last point, the Biden administration for a while had been considering its own 15% down payment program, that would be available nationally for the first-time buyers who met certain financial thresholds. So again, to Daren’s point, the last thing we need to do right now is stimulate more demand which would actually drive cases [inaudible 00:45:41].

Kevin Kim:
[Inaudible 00:45:41] cases of the economy.

Rick Sharga:
Purpose of…

Kevin Kim:
I mean, there’s a lot of money out there. So the Fed tape running at… It’s counter to what the Fed wants to do. All right. So I want to transition to now industry-specific issues and metrics and what you guys have been seeing as it pertains to fix-and-flip loans, construction loans, and term rental loans. The three big products that our industry is focused on, right, bridge, which, we classify bridge as fix-and-flip construction on residential for investor properties, and then the term rental product which has become… Which was this massively popular product when rates were at record lows. And it has become a very hot issue as of late with rates being what they are.

Kevin Kim:
Daren, I think your second slide has this information on it. So I want to see your… Give me your guys’ perspective on things. How have things been going on the investor front? How are things going from your perspective as it pertains to all of the things we just talked about.

Daren Blomquist:
Sure.

Kevin Kim:
And relevant to our clients. And then, we’ll get into some… I’ll share some data that we have, and then we can go into a discussion from our perspective.

Daren Blomquist:
Sure. Yeah. I think that… I’ll preface this, connecting back to something I said earlier that 55% of our buyers, when we surveyed them in March, said their market is overvalued with the correction possible. Those are the fix and flippers. Those are the prime fix and flippers who… And so when you first… At first blush, you’d be a little concerned that they’re getting bearish on the market. However, about 80% of our buyers said, they’re planning to either buy the same or more properties in 2022 as they did in ’21. And only 17% are expecting home prices to go down in 2022. So it’s this interesting thing. I would say, they’re being a little bit more cautious because they do think there’s more risk for this correction, but they still want more inventory. They still want to buy.

Daren Blomquist:
And so, from a fix and flip perspective, I think there’s going to be a lot of demand for that continuing in 2022, just based on that. And then also based on this data, which is actually from Adam again, on the right-hand side, you see the short-term flips, and this is by quarter spiking through 2021. Properties that are flipped within six months of the first purchase. It’s actually a little bit of a concerning trend as well, but it does show that there’s a lot of demand because of this low supply environment that we’re in.

Kevin Kim:
Well, that raises an interesting question though, Daren, because, okay, this goes to 2021. Right? Take out…

Daren Blomquist:
It’s actually got the first quarter of ’22 in there, although it’s not…

Kevin Kim:
It’s not in there? Okay. Okay.

Daren Blomquist:
The very…

Kevin Kim:
Because the question…

Daren Blomquist:
[Inaudible 00:48:41].

Kevin Kim:
… that I get all time is, “Okay. Rates just climb to the roof. Mortgage rates. We’re now at 6%, roughly. That happened recently, and this is causing… We know it’s going to cause a massive issue on DSCR.” And we’ll talk about that in a second. But when it comes to flips, the question mark becomes, how does that actually impact the frequency of fix and flipping construction because those rates are not, not necessarily correlated directly to mortgage rates, right, and so the lender will decide based off of effectively what their capital partners and the cost of capital is, and also market demand? But it’s not directly correlated to actual mortgage rates. And so, have you seen any change in that when it comes to, I guess the borrower side, and that’s the best way to look at it? Right?

Daren Blomquist:
I mean, yeah. We look at demand metrics on our platform which, the two big ones are sales rate, the percentage of properties that come to auction that are selling, and then the price execution. And there was a little bit of a dip at the end of last year. And I’m not sure what that was. But those demand metrics have actually bounced back in the first quarter of this year despite the rising mortgage rates. And so, to the extent that we continue to see strong demand from our buyers who, it’s about 60% of our buyers fix and flip, about 30% hold for rent, and then the rest are a different strategy. But we’re still seeing strong demand in the face of those mortgage rates. I’ll stop there unless… I don’t know. I’m not sure if that answers your question.

Kevin Kim:
No, it does.

Rick Sharga:
Just to add to what Daren saying, our data on the fix-and-flip market, did show a little bit of a decline in the percentage of fix-and-flip executions that were financed at the end of 2021. So since 2018, it’s been roughly 60% cash purchase and 40% finance purchase, give or take a percentage point. It probably dropped one or 2% as we got toward the end of the year. And that happened while we were actually seeing more flips. So it doesn’t look like the percentage is going down simply because we have the same number of flips and fewer people are financing. But that’s a trend to watch as rates go up. I know you said they’re not directly connected, but certainly, conventional rates have some impact on-

Kevin Kim:
Oh, it does. Yeah, it’s strategic financing [inaudible 00:51:30].

Rick Sharga:
Private lender feels like they can share it.

Kevin Kim:
Yeah. Yeah. I mean, they’re all dependent on it for sure. Because it’s tick-off financing for the sale, and I’d like to share some of the data that we pulled from our platform. So to give a little background on this slide here. So Geraci, for those listeners who don’t know, we prepare loan documents and closing documents and close loans for private lenders across the United States. And so my partner, Nema, pulled this data from our platform and what we… This compares two big different products. Right? Bridge versus construction. Bridge versus rental, I’m sorry. And so, you see that sharp decline and this is a national aggregation of data for our origination from January to May, basically yesterday. And so, you saw a sharp decline effectively in the rental product, right? But you don’t see as much in the bridge product.

Kevin Kim:
And when we say bridge we’re contemplating fix-and-flip bridge and construction loans on residential real estate. And so, what we found really interesting was that also, if you look at the rates in the middle bar graph there is that the rates were going up, right? And I mean, logically rental rates, because they’re correlated to the mortgage rates, they’re climbing in association with mortgage rates, but the fix-and-flip and the construction rates are going up. And they started out in the beginning of the year and averaged at 8.9%. Now, in May on average at 9.45%. And so like, I think we’re starting to see a little bit. Not dramatically compared to 200 basis point increase on the rental product. But what’s interesting is that fix-and-flip and just what we call a bridge has remained quite healthy, absent a slight… And our clients actually echo the same sentiment.

Kevin Kim:
Rick was like, “January was weird for everybody.” And the beginning of January was weird for everybody. And no one could explain why, but then it all picked back up again, mid-year, mid month, and then toward February, it got better. And then Q2, at least for our bridge lender clients seemed to be quite healthy. What’s fascinating is because all of this is now funded through various institutional investors who have their cost of capital directly tied to the Fed funds rate. So with that being said, I’m not quite sure if you guys watch this stuff, but I get your thoughts on this. I talk a lot about this with clients is, during 2020, during COVID, the institutions had a liquidity scare, and they pulled out from the market from a secondary market, a buying loans perspective. Do you feel that with all the institutional intention that has come to both private lending and also to residential real estate as a whole, do you feel like there may be a little bit of a pullback from the institutional investors as we start in getting into this higher rate environment when mortgage rates at six?

Kevin Kim:
Jerome Powell is basically saying that he’s going to keep hiking rates until we get inflation under control. We’re only at 75 bids so far, but who knows where it’s going to go? And we have this joke in the office like, “Our mortgage rate’s going to be at 12% again.” Right? That’s kind of the question mark for you guys, and I want to get your thoughts on it. How do you act?

Rick Sharga:
[Inaudible 00:54:56].

Kevin Kim:
The institutional investors’ perspective on this and then what where are they going to head?

Daren Blomquist:
One quick question, Kevin on this. My assumption is the main numbers are not, of course, fully baked. Right?

Kevin Kim:
Of course.

Daren Blomquist:
That huge drop is… You probably want to stick with the April numbers right to look at your fully baked trend or is that…

Kevin Kim:
Yeah. Overall, this is clearly when the rate… I’ll give you some anecdotal evidences. In March, there was a big change in rates on the DSCR product and the volume of DSCR origination… Because our platform is purely loan document production. Right? And closing, so rates were going up, institutional investors were having trouble figuring out what the pricing was going to be on the purchase of the loan. And so, there was a lot of uncertainty come April and May that volume definitely tanked because of our client’s inability to originate. Because they’re dependent on the secondary from an acquisition or funding standpoint. Because it’s purely an institutional product.

Kevin Kim:
And so we… I mean, anecdotally, I can tell you, there have been many, many clients tell me who originate this stuff and they tell me that a lot of the programs out there have either gone by the wayside, no longer exist, or have got significantly more expensive. And so, volume on the DSCR rental product has definitely taken a dive.

Rick Sharga:
It’d be a surprise if capital costs don’t go up, which private lenders will then have to reflect in their interest rates.

Rick Sharga:
To me personally, it would also be a surprise if capital suddenly dried up. There’s just an unbelievable amount of capital still parked on the sidelines right now, what you haven’t talked about, that could also be an interesting factor into this mix and could scuttle all of our projections is how fast the Fed unwinds its positions and mortgage back securities. Are they going to have to sell off a lot of those assets? If they do, does that compete in the capital markets with the funds that would otherwise be available to your private lending clients? That’s a real X factor in my mind, but just in general terms, everything in the secondary market right now seems to be… I mean, everybody seems to be looking for things to invest in. So MSR numbers are through the roof, any non-performing loan pools get gobbled up. Reperforming loan pools are getting gobbled up. I don’t see lack of capital becoming a problem immediately, but I also didn’t see COVID two years ago. So don’t take my word for it.

Kevin Kim:
Right. And it’s a shock to the system on whether they could… Well, I felt like that the explanations given to me, at least during COVID was, they weren’t sure whether they should be deploying the money because of evaluation concerns, and that created a liquidity crunch. But in this situation, we’re not having as much evaluation concern in the asset class. So do we have… So you’re suggesting that there’s a redirection of capital flow because of the release of RMBS from the Fed, which should have [inaudible 00:58:24] in there [inaudible 00:58:24] that have to happen.

Rick Sharga:
Potentially, that could be an issue. And again, capital costs are absolutely going to go up and that’s going to ultimately get passed along to the borrower. I did speak to the CEO of one of the larger private lenders about their stance in COVID when they shut down. And his indication to me, it wasn’t that they couldn’t get capital at that point, but they weren’t willing to take on the risk of the unknown because nobody knew what the impact on the housing market was going to be, how long it would be, how deep it would be. And they didn’t want to put that capital at risk. So it wasn’t lack of capital. It was basically lack of knowledge about what was going to be happening next.

Kevin Kim:
Do you guys expect expect any kind of negative impact with our clientele originating these loans? A lot of our clients are really too uncertain. Everything that they’re seeing… And I get this a lot. They always say like… And this happened during COVID too. Everything they’re seeing seems to be fine. Right? Volume is fine. Borrowers are fine with the rates. There’s not much of a concern. Borrowers are okay with an increasing rate… At least on the flips and the construction, they understand. It seems from their perspective, not so much to be concerned about. Now, DSCR is a totally different topic. But let’s just concentrate on bridge for now. But what I’m hearing from you guys is that there might be a challenge that they may be facing and based off the earlier part of the discussion on the inventory, whatever it is, please expand and give me your thoughts on the overarching impact on the bridge space and where you think they’re going to be landing in the next year or two.

Daren Blomquist:
Yeah. I mean, there was a lot of questions in there, I think.

Kevin Kim:
Yeah. Yeah. Yeah.

Daren Blomquist:
But I think, it boils down to… Yeah. I mean, how confident are we? And I think the big thing that changes the dynamic for me is if we see signs at that homebuyer correction materializing. That changes a lot, all of a sudden.

Daren Blomquist:
The formula’s change for the fix and flippers and the confidence in what the future market will do changes as well. And so I think, if we see that potential correction materializing, that could put a lot more uncertainty into the bridge market and create some negative issues for private lenders potentially. And so to me, that’s the biggest wild card is this trend that we’re on going to lead eventually to some type of… I think it’s certainly going to lead to a slow down in home price appreciation, which will take away some of your, I guess, the way lookie-loo investors who are relying very heavily on home price appreciation. But you’ll still have your core customers who are still operating in that environment in a slow-down environment.

Daren Blomquist:
I think in a negative price appreciation environment, then you see a lot of… At least a lot of the investors I talked to, all of a sudden, instead of flipping that property, they keep it as a rental. And so, it switches to that rental bucket rather than the maybe fix-and-flip bucket. And so that’s the biggest wildcard for me.

Rick Sharga:
There’s likely to be margin compression both for the lenders and for the fix-and-flip investors themselves. I think less so to Daren’s point on the rental owners because they can amortize that cost over time. And once they have a tenant in place, they can get more conventional financing if they need to. But capital cost going up means that the cost of borrowing is going to go up. If we do have a price correction in the market, or even if price appreciation just plateaus and levels off at a much lower number, that’s always an inflection point where flippers who came into the market at precisely that time, unfortunately, you’re going to take a hit. And so you could have more problem loans for private investors or private lenders during that period until the market adjusts. The best case I can offer you of being a little bit off on a big number is Zillow Offers who went up selling a lot of properties for less than they bought them for, which is a recipe that, at scale, leads you to lose $300 million in a quarter.

Rick Sharga:
A little bit of a change in appreciation, a little bit of a change in interest can have real meaningful numbers, a real meaningful impact on the margins.

Kevin Kim:
I like that comment. It’s the idea of driving to a rental. But our feel of things seems to be… On our industry side of things is that the term rental product for the private lending industry, which was like just a massively popular product for a lot of our lenders is falling apart for them. And a lot of folks have been saying, “Now, it’s getting… Now, we’ve kind of figured things out because now the securitizations have figured out where prices are going to go.” But the concern on our end is, it seems to be at least, that DSCR may not be as prevalent. But it sounded like you guys are saying that as things head more toward a rental strategy from an investor perspective, that as long as there’s some type of certainty from a rate perspective, that they’d still be willing to do it, and then they can always refi out to a perm loan with a government agency or something like that. Is that what… Okay, that sounds good. Okay.

Daren Blomquist:
Yeah, I think that’s fair. I mean, I’m looking at it more from the perspective of the behavior of the investors in terms of acquisitions and strategy. Now, how they will react to rates, I’m less confident there.

Kevin Kim:
Yeah.

Daren Blomquist:
Yeah.

Kevin Kim:
I mean, it’s a pretty big shock to the system, right? I mean, at least for the DSCR clients, I mean, two, 300 basis point increase is a pretty, pretty big shock. I’ve been told that it’s a product of the uncertainty on the bond side, but they’re going to have to swallow that bitter pill eventually, right, 6%, 7% rates. And that seems to be the case on conventional as well. Okay. Well, I mean, I guess the last question I’d like to ask you guys is… I kind of want to circle back to the type of recession that you guys think we’re going to be facing. It’s not like we’re in agreement. “There’s going to be some type of recession coming. We should prepare for that.” I think I want to get… So we can close with that, where do you guys think it’ll end up? Give me your outlook on that. Will it be this soft landing we’re all hoping for or is it going to be a little more sharp?

Rick Sharga:
Briefly for me, I think we do enter a recession probably about in the middle of next year.

Kevin Kim:
Middle of next year.

Rick Sharga:
I don’t think it’s a particularly deep recession. I don’t think this is one where we’re going to see jobless rates or unemployment rates skyrocket. But probably, fairly short. I would say probably, no more than two to three quarters, and to quote Lawrence Yun, “It might not feel like it’s all that bad a recession once we get through it.”

Daren Blomquist:
Yeah. I think I’m generally on the same page. I want to disagree with Rick but I just can’t. Yeah, I think that’s actually in our forecast, when we plug in a recession, we’re plugging it in. And I guess I’ve been around economists too much, but I look at it as scenarios. There’s an increased likelihood of a recession scenario. It’s again, not a hundred percent, but the increasing likelihood of that. And we’re plugging that in around the second half of 2023. And yeah, I guess to Rick’s point about what Lawrence Yun said is that the recession is actually the lesser of two evils than continued rising inflation.

Daren Blomquist:
You don’t want to minimize a recession, but in that sense, it’s almost a needed correction to this overheated economy that we’ve been in. In terms of specifically our world, it will make a difference. I mean, when we plug in a recession scenario, we do definitely see elevated levels of foreclosure activity without the recession. We see, basically, foreclosure activity are returning to 2019 levels somewhere around there and kind of leveling off. With the recession, we would see those foreclosure activity, foreclosure of volumes return more like to 2016, 2017 levels. But not 2009, 2010 levels.

Kevin Kim:
We’re all in agreement. We’re not facing that. But I mean, one of the jokes that was made is like… I guess we hear it on the news too is like, “I started the podcast with shades of the ’80s.” Right. And I don’t think that’s the right analogy. It sounds like, I think, probably more a unique situation because a lot of this has artificially been generated it sounds like. I get nervous just because of cost of capital. And I think that’s the biggest concern I have. Frankly, from my perspective, the clients that I serve, they’re mostly balance sheet lenders, mostly are not so reliant on the Wall Street and capital markets would love an opportunity to have an increasing opportunity for more foreclosures, and which means more opportunity for their borrowers, and an increasing cost of capital means less a competition from the institutional markets.

Kevin Kim:
I think there’s some pros and cons that come with that type of down cycle. So I think there’s going to be some benefits from that. And hopefully, some NPL opportunities come up for our private lenders and our real estate investors to get after some new opportunities that way. I’m hoping that’s the silver lining for our industry. All right, guys, that’s all the time we have for today. I want to really thank you, guys. This is… It’s hard to make doom and gloom fun, but I think we did. And I really appreciate you guys coming on the show and this will be out as a recording as well later down the line. And so, once again, thank you guys for joining us on the show and we’ll make sure to get you guys on social media so you can share that to your audience as well.

Rick Sharga:
Thanks for having us, Kevin.

Daren Blomquist:
Thank you, Kevin.

Kevin Kim:
All right.

For everyone listening in, this was Kevin Kim for Lender Lounge. We will see you on the next one. Thank you.