Structurally Speaking: Non-Qualified Mortgages

Summary

In the inaugural episode of the 'Structurally Speaking' podcast by Hildene Capital Management, Brett Jefferson, founder of Hildene, delves into the realm of non-qualified mortgages (Non-QM). With his colleague, Jason, they explore the advantages of non-QM mortgages in today’s highly regulated market compared to the subprime mortgages that contributed to the financial crisis. Non-QM mortgages are portrayed as safer investments due to higher FICO scores, considerable down payments, and rigorous income verification processes. Brett emphasizes Hildene’s competitive advantage in this space, highlighting strategic partnerships and deep expertise. The episode underscores the growth potential of the non-QM market amidst regulatory changes, while also spotlighting Hildene’s community involvement through Team Impact, a program supporting sick children by integrating them into college sports teams.

Highlights

• Non-QM mortgages are currently a hot topic, offering a more secure investment than subprime loans. 🤑
• The Hildene podcast explains how the organization capitalizes on stricter regulations post-financial crisis to invest in mortgages safely. 🔍
• Hildene's strategic relationship with CrossCountry Mortgage enhances their competitiveness in acquiring Non-QM loans. 🏦
• The podcast reveals insights into how Hildene sources and secures Non-QM assets efficiently. 🔗
• Brett Jefferson shares personal insights on mortgage market shifts and regulations. 📚
• The episode highlights a unique charitable program, Team Impact, supported by Hildene, which aids sick children by involving them in sports teams. 🎗️

Key Takeaways

• Non-qualified mortgages (Non-QM) offer a safer investment landscape compared to subprime mortgages due to higher FICO scores and substantial down payments. 🏠
• Hildene Capital Management leverages strategic partnerships like with CrossCountry Mortgage for competitive advantages in the Non-QM sector. 🤝
• Strict income verification and property appraisals have tightened regulations, making Non-QM mortgages safer. 📊
• Hildene maintains its competitive edge with strategic sourcing, knowledge, and a deep understanding of market intricacies. 📈
• Team Impact, a charity supported by Hildene, integrates sick children into college sports teams, providing community and support. ❤️

Overview

Hildene Capital Management dives deep into the world of non-qualified mortgages (Non-QM) in its podcast series ‘Structurally Speaking.’ This inaugural episode features insights from the founder, Brett Jefferson, on the safety and viability of Non-QM mortgages compared to the infamous subprime loans. With the aim to educate listeners, Brett and his colleague Jason explain how the stringent regulations today make these mortgages a stable investment choice, thanks to higher credit scores and substantial down payments.

The discussion spotlights how Hildene's strategic partnerships, especially with CrossCountry Mortgage, afford them a unique competitive advantage in the Non-QM market. Brett emphasizes how these relationships allow for efficient sourcing and secure investments, amid ever-tightening regulations that ensure thorough income verification and accurate property appraisals. Hildene's commitment to these principles underscores their strategic positioning in the financial landscape.

Additionally, the episode introduces Team Impact, a charitable organization supported by Hildene that brings sick children into the fold of college sports teams. This venture not only benefits the children through social interaction but also enriches the lives of student athletes and parents, exemplifying Hildene’s broader commitment to community and social responsibility.

Chapters

• 00:00 - 00:30: Introduction The inaugural episode of the Structurely Speaking podcast series, presented by Hildan, is introduced. The podcast aims to discuss investment opportunities and current industry trends in a relaxed and friendly manner. The host welcomes listeners and introduces Brett, a colleague and friend.
• 00:30 - 03:00: Brett Jefferson's Introduction and Background on Hildan Capital Brett Jefferson, the founder of Hildan Capital, introduces the firm and discusses non-QM mortgages, highlighting it as a significant and appealing asset class within the structured finance space. Jefferson outlines what gives Hildan a competitive edge in this product market, and expresses eagerness about the new platform designed to inform the market about Hildan's identity and expertise.
• 03:00 - 06:00: Overview of Structured Credit and Hildan's Competitive Advantage The chapter introduces the concept of structured credit, which involves investing in or creating financial products like Collateralized Loan Obligations (CLOs), mortgage-backed securities, trust preferred CDOs, and consumer receivables.
• 06:00 - 09:00: Hildan's Involvement in the Mortgage Space Hildan is engaged in the mortgage sector through structured products and asset management. The organization issues debt to generate returns akin to a bank or financial entity. Their activities include purchasing, creating, breaking, and nurturing structured products. Hildan has been labeled as trust preferred CDO experts, a field in which they hold considerable expertise.
• 09:00 - 13:00: Non-Qualified Mortgages Explained The chapter 'Non-Qualified Mortgages Explained' delves into understanding credit default obligations (CDOs) and structured financial products. It emphasizes three key components to assess: the value of the assets involved, the structure of the product, and the options for early retirement of the deal. A crucial part of evaluating these components is determining whether the risk taken is compensated adequately.
• 13:00 - 16:00: Hildan's Approach to Non-Qualified Mortgages In this chapter, Hildan discusses their approach to assessing non-qualified mortgages. Rather than conducting a detailed analysis of every single underlying credit, they utilize a system to evaluate the assets. The focus is on understanding the risks of these assets and the structures they are part of. Hildan's primary objective is to determine whether the compensation is adequate for the risks taken.
• 16:00 - 21:00: Regulatory Changes and the Safety of Non-QM Mortgages The chapter discusses the approach taken by Hildine in areas related to their competitive advantages, which include information, knowledge, or sourcing. Although there is an opportunity to delve deeply into structured credit, the focus remains on elucidating Hildine's current strategies.
• 21:00 - 26:00: Hildan and Cross Country Mortgage Relationship The chapter discusses the relationship between Hildan and Cross Country Mortgage, focusing on recent topics in the mortgage space such as the impact of upcoming elections on housing and interest rates. It highlights Hildan's approach in the housing market, emphasizing their strategy of offering products only when there is a clear competitive advantage.
• 26:00 - 31:00: Life Cycle of a Non-QM Mortgage The chapter discusses the life cycle of a Non-QM mortgage. It highlights the importance of sourcing and understanding systems to streamline processes in the mortgage industry. The focus is on Non-QM mortgages, emphasizing strategic partnerships, such as the one with Cross Country Mortgage, which is a leading retail lender. The chapter also notes that over $3.7 billion worth of loans have been purchased to date.
• 31:00 - 35:00: Future of the Non-QM Space and Closing Remarks The chapter discusses the involvement of CrossCountry Mortgage in the affordable multifamily housing market, specifically through collaboration with Freddie Mac. The focus is on a small group working with Freddie Mac on small balance multifamily 'B pieces.' As of the current date, there have been 11 deals completed, amounting to a total market value of $240 million. These deals are characterized by a 70% loan-to-value (LTV) ratio issued by Freddie Mac. The chapter explores this strategic partnership and its impact on the non-qualified mortgage (non-QM) space, highlighting future prospects and concluding remarks.
• 35:00 - 39:00: Team Impact and Hildan Capital Support The chapter discusses the strategic moves made by a competitive investment group, including selling off the bottom 10% of their portfolio. It highlights the company's involvement with HELOCs and second leads, and their partnership with Figure Technologies, a recognized HELOC originator. The chapter also mentions the company's equity interest in Button Finance, which enhances their capacity to invest in securitizations consistently.

Structurally Speaking: Non-Qualified Mortgages Transcription

• 00:00 - 00:30 [Music] [Music] good afternoon everyone welcome to the inaugural episode of the structurely speaking podcast series at hildan we're excited to use this new platform to discuss investment opportunities and current trends in the industry in a more laid-back and friendlier way today I'm joined by my boss and good friend Brett
• 00:30 - 01:00 Jefferson the founder of hildan capital we'll be talking about non-qm mortgages a large and attractive asset class in the structured space we'll also speak about what gives hildine a competitive advantage in this product welcome Brett let's start with a little background can you tell us what sets hildine AP Jason thanks for taking time out of your busy day we're really excited about this new platform we help it's going to educate you know people in the market and just let people know who hildine really is but who is hild we are a structured
• 01:00 - 01:30 credit asset manager what is structured credit we invest or create things like Clos mortgage back Securities trust preferred cdos consumer receivables and when you think about structured credit what you really should be thinking about is a CDO or a clo is in essence a standalone Finance Company whereas in a clo the underlying assets are corporate leverage loans broadly syndicated Leverage aage loans it's governed by an
• 01:30 - 02:00 indenture so it's self-governed and you're issuing debt to create a good return just as a bank or any Finance Company would do so we're either buying creating breaking nurturing all these different Structured Products assets and unlike you know when I think about how we have been labeled because of our involvement with trust preferred cdos many people think that we are expert in trust preferred and we are experts in Trust referred cdos but my background is
• 02:00 - 02:30 not an expert in Banks and when you think about how you look at a CDO or any structured product it's you're looking at three things the value of the assets the value of the structure the value of the option the value of the option is how can you break or how can this deal be retired early very important and you take those three components and you figure out am I being compensated well enough for the risk that I'm taking now
• 02:30 - 03:00 like an equity manager who can say I'm an expert in technology or I'm an expert in retail stocks we understand the underlying credits but by no means are we on saying like we go in and break down every single underlying credit there's just not enough time in the day what we do is is we have a system where we go through and we break down the assets understanding the risk that it takes and the risk associated with these structures and then we make an assessment is are we being comp compensated well for this risk
• 03:00 - 03:30 everything we do at hillan though we do it because we have a competitive advantage and that competitive Advantage can fall under three different ways it can be information it can be knowledge or it can be sourcing although we could talk about structured credit for a long time real question and for this topic for this podcast I really want to understand what is hildine doing
• 03:30 - 04:00 in the mortgage space a topic that has really come to the Forefront recently um there's especially with the election coming up you hear a lot of stuff about housing and what's going to happen with interest rates what are we doing in that space sure sure so what we're doing in housing is really a few different types of we'll call it products um like everything else I spoke about before we don't do things unless we have a competitive advantage and the competive
• 04:00 - 04:30 Advantage here in many ways is sourcing sourcing and understanding creating a system to basically streamline a process and we're really involved with a few different products one product that we're involved with are non-qm mortgages at hilding we have a we have a strategic relationship with cross country mortgage cross country is the number one retail lender in the country bank or non-bank we have purchased over $3.7 billion of loan to date with
• 04:30 - 05:00 CrossCountry mortgage the next product that we're involved with is aordable multifam this is a small group which works with Freddy Mack with the small balance multif family B pieces to date hildine accounts have purchased 11 deals representing $240 million of market value to think about what this is Freddy Mack issues at a 70 loan Dev
• 05:00 - 05:30 they then sell off the bottom 10% or the 63 to 70 that is what we purchase it is a very competitive group to be a part of and we're very fortunate to be one of three other people who are in this group the next thing we're doing are helocs and second leads we have a relationship with figure Technologies a HELOC originator and sponsor of securitizations and we have an equity interest in button finance and an ability to purchase all
• 05:30 - 06:00 of their originated assets we also are doing things with CrossCountry mortgage on the HELOC and secondly in space so that's it's a lot of different products um and I'd love to delve into you with you on all of them but for today's podcast I would really like to focus on just one non-qm mortgages can you explain what those are so I think the first thing that we need to talk about Jason is what was subprime okay subprime mortgages back in the Golden Age of
• 06:00 - 06:30 regulation um were very low FICO scores so your non-qm mortgages usually have a FICO score of 740 um and as opposed to a low 600 FICO score for subprime I think the real driving fact is two things one is the amount of money down that goes into a subprime your average subprime mortgage had between 0o and 5% money invest Ed in the house okay so
• 06:30 - 07:00 the ability to walk away was very easy the financial commitment was very very low this non-qm mortgages that we're purchasing today have 30 plus per down so for a million dooll home there's $300,000 down and there are larger balances than the subprime mortgages were also the other important fact is these are structured to the worst case scenario the nqm whereas sub mortgages
• 07:00 - 07:30 had teaser rates where for two years it was very low interest and then the payments would escalate forcing people to basically walk away from their homes and when you have no money invested in your home it's very easy to just walk away so are you saying non-qm mortgages are for low-income houses or in terms of this you're saying there's a higher FICO score but are these a very similar type of housing owner to the subprime crisis or is it
• 07:30 - 08:00 different very different very different so your non-qm buyers really fall into four categories we would say the first one would be someone who is self-employed um there their income is verified unlike subprime which there was no verification um but think of it as a doctor or a lawyer who's self-employed um this is a good example of what the requirements are so a 740 FICO loan to
• 08:00 - 08:30 value of 70% meaning 30% down and debt to income ratio of 30% so that's one type of person who would be buying a non-qm mortgage Fanny doesn't allow those people to buy because they want people who have instead of W2 they have $199 type income the next type of person would be they call it your local land landlord who is basically using this as
• 08:30 - 09:00 a rental property um the basically you're going in it's a non-owner occupied property that is underwritten based on the property's ability to generate cash flow through the rental income so you're looking at it just as we would look at in the securitization what is the cash flow that is being generated going to put a little bit more money down for this one so this one has a 65% loan to value and these are ones which it's not the highest portion of non-qm but there's a large portion that
• 09:00 - 09:30 are doing these for these uh non-owner occupied type properties the next type would be somebody like we say they had a little bump in the road and people have bumps in the road but unlike subprime where you'd put no money down these are people that are putting 35% down and maybe their FICO score is a little bit lower 710 but you know right now they don't qualify for we'll call it a prime jumbo but they're going to put enough
• 09:30 - 10:00 money down where they can basically um you know purchase a home through a non-qm mortgage the other person is a foreign National and that's something that Freddy and Fanny mandate that you have to be a US citizen to go and borrow from a gsse the last one would be we'll call it your retired couple with a healthy Investment Portfolio in 401K meaning you don't really have much income but you have a lot of assets and because you have them assets they're going to look
• 10:00 - 10:30 at those they're going to Value those got a good FICO score maybe you're going to put a little bit less down load to Value but remember these people are putting anywhere from 25 to 35% down their financial commitment is quite great they're not just going to get up and walk away so it seems as though these mortgages are significantly safer and I mean I always looked at it as these are types of mortgages you always expected to be
• 10:30 - 11:00 issued so I guess how does how does hildan approach this asset class and what are they looking for specifically how do they not get into the old traps of what happened during a subprime crisis and can this become a non-qm crisis sure sure so where it's different right now is you know we'll call it then and now right back in the no regulation
• 11:00 - 11:30 times we'll call it 2003 to 2007 you know you they had things called liar loans basically you didn't have to validate how much money you had and now with non-qm they're only using verified income so you have to go out and you have to actually verify your income so if you think about it and you look at the chart below there you've got a subprime mortgage smaller loan size lower FICO no money down okay what we're looking at is more commitment higher
• 11:30 - 12:00 FICO so it's for the person that doesn't qualify the best time to be investing in mortgages is right now because you had the biggest problem in the mortgage space in the history of money and now mortgages are gone from no regulation to highly regulated and this has come with time this has taken some time to do it but now we're getting to the point where we're creating these mortgages which are good pieces of paper and these mortgages
• 12:00 - 12:30 have to be sold somewhere and that's what we're doing here we're buying them and securitizing them so some of the other things that are different is you have income verification which we just talked about and the other thing that we also have is property appraisals so back in the Golden Age of no regulation subprime mortgages were created with teaser rates and option arm rates and they pushed borrowers into
• 12:30 - 13:00 products or properties which were over they were over their means now with non-qm there's simpler loan structures offered to borrowers who qualify based on worst case payment shocks so they're very simple straightforward mortgages that are being created and sold to qualified buyers very interesting and and in fact I think that's one of the the tenants that you always said you always want to
• 13:00 - 13:30 invest with somebody with skin in the game and it appears as those these mortgages unlike the subprime crisis where you're putting no money down you have real skin in the game or the investors have real skin in the game on these mortgages and don't walk away that easily that's exactly right you know the one thing which I always remember is my father in 2010 he asked me he goes how did we get into this problem my father was 85 years old at the time and he was a retired Merchant Marine Captain I should have gone to see like everybody else in my
• 13:30 - 14:00 family and I said to him people are buying homes with no money down and he was shocked he goes I don't understand and he goes when I went and bought 79 ulet Avenue where I grew up he goes I I put on my suit I put on my hat this is showing you how old he was got all the information he had all the money he had put 25% down to buy this house and it was the biggest investment he had and he told me the happiest day he had was when he paid that mortgage off but he was
• 14:00 - 14:30 just shocked to hear that and it was just that simplistic thing of how could we ever let that happen and you know we've regulated a lot of things we're invested in two big assets here Banks and mortgages and what was the driving force of the financial crisis Banks and mortgages what are the two most highly regulated asset or or Industries there are right now Banks and mortgages and we're not investing in the equity of
• 14:30 - 15:00 these Banks and mortgage companies we're investing in the credit of them and they're making sure that these Banks aren't going to fail and that these mortgages aren't going to go create another crisis but Brett there still is and there seems there'll always be a push by the government to make sure that people own houses it's it's always been a people dream own a house and okay we could say the subprime crisis was the perfect store how can we be certain or how can we make
• 15:00 - 15:30 sure our investments are not setting up for another perfect store well I think when you have commitment and real commitment meaning Capital down I think that's the first driving for us I think the other one is is the amount of Regulation now in the mortgage space gives me a lot of comfort so Brett you said it before and you've said it numerous times during this podcast already you only invest in spaces where you have a competitive Advantage why do you feel hilding has a competitive advantage in the non-qm space so when
• 15:30 - 16:00 you think about our competitive advantage in non-qm a lot of it is driven from or sourcing channels that we have we've created a relationship with cross-country mortgage and who is cross country mortgage cross country mortgage is I I like to say there an old school mortgage broker when I say old school I'm going to talk a little bit about now so with the change in the fintech and that space A lot of people are Focus focusing on being a wholesaler meaning
• 16:00 - 16:30 they go out you go onto an app you look you say what you want and they will go and sell that mortgage for you through some of their channels where cross country is different and that that works that strategy works well if you're just dealing with agency mortgages because those agency mortgages are going to be sold where cross country is different is is that they are licensed in all 50 states they have more than 900 retail locations 2200 loan officers meaning
• 16:30 - 17:00 when you're going to go get a mortgage from cross country you're going to go in and sit with a human and that human's going to walk you through the process he's looking to when I say he you know Ron lionard who runs cross country mortgage is looking to build that relationship so you come back to him over and over and over but what they wanted is they wanted somebody who is going to be there to buy their non-qm pip P line and what we've created is is
• 17:00 - 17:30 a systematic approach and we're going to go out and talk to Justin Justin's going to walk us through that but it's a systematic approach where they can streamline the process and their Brokers their agents can go out with high confidence and tell someone where they can issue a non-qm mortgage let's go out and see Justin next [Music]
• 17:30 - 18:00 Brett brought up a number of points and summarized the qm market but he really never went into what is the life cycle of a non-qa mortgage sure we start with a home buyer looking for financing to purchase his home in this case let's use a doctor with a private practice as an example the doctor's realtor refers him to his local CCM salesperson who chooses a loan program that best fits his situation the borrow provides income documentation to CCM but due to the nature of his business being a sole proprietorship he's only able to prove
• 18:00 - 18:30 his income using business bank statements rather than traditional W2s since he doesn't qualify for an agency loan we present him with a non-qm loan option so Justin explain to me because there's no defined off take for this type of product how does cross country know what to charge the consumer for a mortgage like this that's dictated by our rate sheet which is effectively a matrix we sent out to the CCM Salesforce daily it presents the price hildine will pay for a given coupon with adjustments for different credit characteristics
• 18:30 - 19:00 like FICO and Deb to income ratio the rate sheet allows the loan officer to offer a mortgage to the borrower with a defined loan amount and coupon and also provides a high level of certainty that the loan's actually going to fund it also provides certainty of sale to CCM is at that point hildine is obligated to buy the loan upon closing CCM then underwrites the borrower in the property collecting all needed documentation and if it meets our guidelines it funds thanks Justin so in this process what happens
• 19:00 - 19:30 next after performing due diligence hildine buys it into one of our nonmarket tomarket warehouses used to aggregate for securitization we then employ Banks and rating agencies to structure and Market our new issue securitizations which are usually 350 to 450 million in size we Market the rated bonds to money managers and insurance companies and then retain the bottom of the capital stack so this is all great and informative but based on this how has the relationship with cross country
• 19:30 - 20:00 played out to date it's working great we've done over nine deals and bought 7,000 loans representing roughly 3.7 billion of collateral bals and at this point we're buying about 400 million of new loans every month thanks Justin I really appreciate it thanks Jason so Brett looking ahead where do you see the non-qm space going well it took a long time for The Regulators to figure out what mortgages were going to be after 2008 so for a long time getting any type of mortgage was difficult but with way
• 20:00 - 20:30 the way the product is working now I see this continued growth of this product the American dream is to own a home I don't think that's going away I know all these Millennials talk about renting and everything else people want to own home someone's got to own that home and people are more people are self-employed and more people are doing but people are putting the money down to own a home and that's the difference so I see a continued growth in this asset class I know we're running out of time thanks for breaking this down I'm really
• 20:30 - 21:00 excited about this because I do believe you've made this a lot more accessible for people to understand what everybody else considers complex products I know we don't but it always has that stigma this has been real exciting I'm really exciting we had our first discussion and I look forward to many more that's going to come out of this thank you hi this is Brett Jefferson president and founder of hilan capital and today I want to talk to you about a
• 21:00 - 21:30 very special organization one that hilding Capital supports it's an organization called team impact team impact has a very very simple message they take very sick young kids and they align them they actually put them on college sports teams and just so you understand when you're a sick kid you usually spent a lot of time in the hospital you don't have a lot of friends you don't go to birthday parties you don't have a normal life so for these kids this first interaction with this
• 21:30 - 22:00 team is the first time that they've actually been a part of something and they take it one step further where these kids have a signing day they're on the roster they're part of the team but it really helps benefit three different people which is very unique for an organization one is it benefits the young child that now is part of an organization next is it really benefits the parents cuz for once they get to meet other parents they get to see their child happy they get to see their child
• 22:00 - 22:30 part of something and the third is the student athletes they get to see exactly what this child is going through and maybe some days when they're having a tough day they can look at this young child and say my day is really not that bad so hild we're supporting team impact and I encourage you to go to their website look about what they do and if you feel it in your heart to make a donation please put the word hildan in your
• 22:30 - 23:00 donation cuz we're going to match every donation that comes in up to $100,000 to help support this great cause thank you