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Dan Perl, Chairman & CEO of Citadel Servicing Corporation & Managing Investment Partner for CMMI, LLC leads the charge back into non-prime lending.
As recently featured in the LA Times, Dan discusses the proof of concept and capital raise phase as well as defines today's non-prime lending landscape, the market size and his path to the first private securitzation. Like Redwood taking the lead on private jumbo secruitization, watch for Dan/Citadel to pave the way for others in the non-prime market.
Good morning and welcome to the live broadcast of Capital Markets Today. CMT is where experts come to discuss capital markets, trading, real estate and lending related topic. You may participate in online discussions by joining the Capital Markets Today group on LinkedIn and on Twitter to obtain more information on CMT's guest and their companies, go to capital-mt.com and click on the path show contact in full length. Podcast of the show and the past shows are also available on the web at capital-mt.com. Now, your host of Capital Markets Today, Louis Amaya.
Welcome to Capital Markets Today. My name is Louis Amaya, host of CMT. Today is May 1st 2013 and we are broadcasting live from San Diego, California. We have made several improvements for our website at capital-mt.com. We are offering free housing mortgage and keep all data on the web. In addition, our Listen On Demand has been improved. We also just released a new mobile application. Distant search reblog right from your smart phone. Just go to capital-mt.com. We put two blogs on the web, The Morning Report hosted by Brent Nyitray, Director of Capital Markets of iServe Lending. Brent is the regular guest on the CMT broadcast and right from the latest economic need, financial markets, and real estate trends. And Econbrowser authored by James Hamilton, Professor of Economics at the University of California, San Diego. And Menzie Chinn, Professor of Public Affairs and Economic at the University of Wisconsin, Madison. Econbrowser by benevolent analysis of current economic additions and policies. Please visit capital-mt.com daily for the latest relevant news, discussion, and data. Upcoming broadcast includes Matt Martin, founder and CEO of Matt Martin Real Estate Management and Steven Cinelli, founder and CEO of PRIMARQ on the new postpaid exchange, paradigm shift, and how to do it. Posted the dates, times, and topic on the web for your reference. Today our guest is Dan Perl, chairman and CEO of Citadel Servicing Corporation and managing investment partner for CMMI-LLC. Dan is responsible for all aspects of the nationwide acquisition and servicing the residential mortgage assets as well as the reintroduction of mortgage lending and servicing for non-prime mortgage loans. Prior to his current position in throughout much of the 2000s, Dan founded and managed as chairman and CEO First Street Financial Inc. and Citadel Servicing Corporation. First three with the top 30 nationwide lenders specializing and the origination of mortgage assets with Citadel Servicing Corporation as the servicing vehicle for the collection and administration of those assets. Throughout most out of the decade of the 90s, Dan was Chairman and CEO of LIFE Bank and it is publicly treated parent LIFE Financial Corporation. LIFE was a multibrand federally chartered institution that finances and invested in the variety of real estate assets as well as issuing credit cards and marketing consumer loans on a nationwide basis. Dan has recently raised capital bring non-prime lending back to the market place. Dan is taking a unique approach to lending and filling at much needed niche in the industry. Leading the way back to non-prime lending, we will be right back with Dan Perl.
Dan, thank you for taking the time to join the broadcast.
I appreciate it Louis. Thanks for inviting me on.
So before we get into the concept of what non-prime means today. You have an interesting story on how you prove the concept in today's new lending of non-prime assets or non-prime mortgages. Why do not you give us a little bit of a background of what you have gone to for the last year and a half.
Well, this is kind of an interesting story. Citadel Servicing has since 2007 are on tremendous amount of assets that other people dealing to being non-financeable. So by about 2010, we were looking at the market place based on our portfolio. We noticed that real estate value just started to form up. The declines were not happening, Oreo seem to be moving. And it might be a good time at that particular moment to start lending again. So we survey what the competition was doing outside the Fannie and Freddie hide government or raid off. And discovered that there was nobody out there, but there was also no concept. You had hard money lenders and that was it. So I set up a program of 30-year short term balloons, 5-7 years and went into market place with an attempt to try and put together a very Dodd-Frank CFPB friendly mortgage program which funded about, I do not know, 12-15 million of that product on turn on and fell into private investors that would buy from us. So with that in mind, the concept was now proven that there is an economic base for those products and with that certainly we started to approach money funds, joint venture partners of a previous incarnation with the idea of there might be in fact a secure invasion exit for this in volume. And we have discovered that there is a potential for that. That entire time frame to approximately 18 months to come provision and this genesis of the business model that we put into marketplace effective of first week of April.
So you know my next question was going to be how difficult was the capital rates. But I would imagine once you proved the concept it was not too hard of a sale for investors who are looking for yield. And they kind of seen the world in the same viewfinder as you are and seen that you know values are stabilized, start to increase, there are certainly high demand for this type of products. So I imagine that once you went through the proof of concept, the capital raise was probably a lot easier than you anticipated.
You know you think self. The least that is why I thought but I would tell you that I have -- I could have get arrested. I have more rejections than you ever imagine. We got down to term sheets, to deal memos with a couple of folks who would then call me up and say we do not believe this loans exist even after proving it. It took about another 9 to 10 months before folks finally realized that in fact, this mortgage did exist. Strangely, it was not a compliance aspect that needed the thought process. It was the "Oh gee! Where are all those people today?". And obviously since 2007, if you have a credit score below 620, you are persona non grata at a bank, in a mortgage company Fannie Mae and Freddie Mac HUD. So you know it is almost like looking at buffalo and saying there is no buffalo out there. But you are seeing them. They just do not compute. So once we got through the mine field that the loans still need to exist and prove it did, I was still under 18 throughout 12 to 14 months before our partner emerge. And ironically that capital partner of ours is a group that I have known for almost 20 years and their major concern was, is there an exit strategy for these and having shattered with the raging agencies as well as bond sales folks on private investors. Yes. There is a market for this and we do believe that we will be able to get a securitization of first of next year to the end of spring of next year.
Yeah that is a -- you know you really when I have mentioned my entry you are leading the way back to non-primate. It such a true statement because we are seeing a lot of nonconforming -- well not a lot, but more than non-conformance private securitization being done, but they are all jumbo product. It is nothing to the extent of the type of product that I look at into. But what I think you are doing, you would be one of the first ones out there doing that and I agree with that. I think non-prime is gonna come back more quickly than everybody thinks. And as soon as -- again your first securitization is gonna be kind of the proof concepts for the industry, I would imagine. And once investors start understanding where the market is going, I think it is an excellent opportunity. So let us get into the definition. What is exactly a non-prime mortgage today?
Well you know I do not prefer the term sole prime. Because it just -- it connotes something that is owns risk, below subhuman and that is every bad generation will thought that you could ever imagine. So we point the term non-prime and basically, a non-prime mortgage is any loan that conforms to the Dodd-Frank requirements of 2010 as currently administered by the CFPB. So what else of what you have is a fully documented ability to repay by the borrow or loan and after the assessment of collateral value, a fixed term of 7 years will lead to some sort of full 30-year round organization or kids would say libel-based storm, and no pre-payment penalty. The key take away fully documented accurate assessment of collateral. Those are the two big drivers.
So what is the difference between a subprime mortgage circa 1985 to 93, 95 to 99 and late or say early 2000s and now in 2013. You touched on a little bit fully documented, but what are some of the other differences.
Well I am kind of -- I am probably one of the true people that uniquely qualified to answer that question because I was surrounded with a lot of zeros. In the 85 to 93 year, which we have was lower LTVs or a focus on bar capacity to service their debt. The key driver was consumer finance companies, or associates, HFC-Beneficial, Afcor to name a few, and they function primarily as a portfolio under. Most every one of these mortgages of the 30 or 15 year fixed rate.
I want to know that.
We have a mortgage company. We sold this stuff, but we could not portfolio. We in fact does sell to these folks. But 1995 and Lifebank was one of the initial folks to do it asset-backed securitization market gave rise to a lot of competition for the finance companies and so on expansion of loan-to-values. Not to the hundred percent number, but to the ninety number. Specially financed companies such as county aims, First Plus took advantage of investor interest and gain on sale economics were born. The new mortgage type also emerge which gave me this. I never could figure out how effectively had 2, 3, 5 year fixed term up against a remaining term that was adjustable with equivalent prepaid penalties. That all kind of came to a whole 98 to 99 Russian crisis. Created a large number of those companies gain on sale, was exposed to the county gimmick. The __12:14__ if it was cash in or cash out. The reality was you could not count on getting the cash. And the cash of those companies were financed in such a matter that they could not sustain their growth. The next figure of -- one that created all the problems, 2001 and 2007. Rising home values were embedded by stated income loans, pay option mortgages, piggyback 80-20 offerings of credit scores as low as 580. And sometimes when I turn the leap of combination of all three of these, the initial terms of 2 to 3 years with prepaid penalties still prevail. When the crash came in 2007-2008, residential values plumb it, companies that fail included some very big names like Leeman. And what you have let was a -- or Marshall McGraw might call barren wasteland. No mortgage range companies other than Fannie-Freddie or HUD.
So since 2007, because of all the loses in the securitizations as well as embedded for mortgage-backed securitizations that were in history, there has been a low in investor for somebody in lending because of depreciation of value in real estate has created a lack of trust and the ability to securitized service and effectively earning, come on. So what you have left is subsidize loans, Fannie-Freddie HUD. The one exemption on my friends over why would trust, you mentioned earlier, the jumbo product alignment that fabulous, fabulous thought process and they put it together early in the marketplace. But any of market loans to folks who did not qualify for those of type loan programs. Program is confined to either private or hard money lenders and to bank balance sheet finance will rise up as well. You know mortgage lending was game to be toxic. And if you are a mortgage lender, you know maybe you are a criminal first and lender second, hard to say.
Yeah, that is funny.
To use that term Louis but sometimes what I feel like.
You know I clearly understand you. We have a subsidiary iServe Residential Lending that does all the prime stuff only. And it is amazing you know on what we have to do to retrofit to today's world. And you are right, I mean lenders looked at to a certain extent as you know you did something wrong. So you must you know that is why you are in the business or you are in the business to do something wrong. And it is a -- I think the people that are still here today that have gone through the past 3 or 4 years retrofitting the business doing what you did and identifying opportunities to function in a new landscape or in a good position. Because like you, many companies that still exist that went through this, spent the last 2-3 years retrofitting or changing their business model expectations of what the compliance come -- landscape looks like its kind of there for the most part. And you know, expectations on returns and products and exits are kinda there, so I think people are ready to get back out there and do it. But we have to go through a paradigm shift on who is the lender and what is a lender. And if you are a lender today, that you are one of the good guys -- oh I should not be around.
Why do you think that? You know...
The key take was is to return to improve lending practices. You know the ability to repay that accurate evaluation of collateral for a long -- I came up on the banking side. So my thought process was a little different than folks that came up on the mortgage side. The ability to discern what is the state in Federal rules are of lending and servicing are really important. You know, the key issues that existed in 1985 have been resurrected today. You make a case for this so, you know, or back to the past routine. The thought process of giving the borrower a no pre-payment penalty and a seven-year fixed term or longer to in fact which way of a specific payment option based on an income stream that is pretty powerful stuff and somehow another got kicked to the curb in the 2000. It's a shame it happened, but it did happen and maybe we learn from it.
So you coin the term non-prime when subprime still seems to be the primary description of the product. Can you explain how--what your plans are in growing the use of that term or if--you kind of touch on a little bit there's a difference between nonprime and subprime and then also what are the key differences between a prime mortgage borrower and a nonprime mortgage borrower?
Well, first of, your listening audience. We are not going to trademark or copyright the term non-prime. We have an urge to do so. We are not going to do it for the simple reason that the term subprime, it's a pejorative, it's an ugly word that denotes that anybody that has the type of a loan is less than fit to be human. You know, basically what are the difference? Like I said a few minutes ago, it's a return to the proving and lending activities that the consumer finance companies exercised in the 50s, 60s, 70s and 80s. You know, as a friend of mine once said their economic secret was that there was a tremendous amount of borrowers out there __18:19__ that will make their payments, will in fact do the right thing which regard to talking to you when they have a problem, provided that you have given them a fair loan, given them a fair term to that loan and more appropriately, that they have something at risk, you know, everybody likes to call skin in the game. So, when you're lend somebody a 100% or 97% or anything of that nature, there is always a risk of some sort of dislocation in the borrower's economics are going to make payback hard, but when you lend somebody 75%, 80% of value or less, they have the ability to sell and move and do whatever they need to do. So, the focus today, you know, is as I said. What is the ability to repay? What is their job stability factor going to look like to the best of your ability in the future? What's the collateral really were, I mean in an up market or down market, you know, what's the variations of value is.
Can that borrower sustain a fixed term of seven years or something of that nature and will like give him an economic incentive to do so. The key differences between a prime borrower and non-prime borrower, well, predominantly, the non-prime borrowers have some sort of economic shortfall or dislocation. It's either a death ratio issue or job stability issue. Perhaps, they have--there is a lot of folks that we finance during the recent months that had had short sales. Will they pay their shorts all the way down until the short sale has in fact occurred? They are good borrowers, it's unfortunate that their property values failed to sustain themselves, but at the end of the end of the day, they have all their obligations. We've also seen foreclosures and bankruptcies that will result of this dislocation. So, in every respect of prime and a nonprime borrower, we're going to be put through the same thought process pursued to Dodd-Frank and CFPB's thoughts on it. You know, they are still going to have to qualify. They still are going to have to show stability and they have to have a piece of collateral that measures up. The only key takeaway is my company, Citadel Services acceptance of a slight hired DTI. We go down to income rate ratio. We go to 50, both residual income impacts calculated in there and the definition of credit worthiness is different. We have seen borrowers kicked out of Fannie and Freddie deals, who mainly how a judgment or a collection, 36 months ago. We have seen them kicked out were in fact that short sale has in fact occurred last year or two, but they are, you know, 700 credits for, everything else is paid as agreed and so on and so forth.
So, the evaluation difference is strictly with regard to our ability to accept that DTI and the definition of what we consider to be credit worthiness.
Is there any--it doesn't sound like it, but just to clarify there is no difference in the evaluation process between a prime and non-prime borrower. It is merely expanding your definition of credit worthiness.
Exactly. On an owner occupied residence, our package will look very, very similar to a Fannie-Freddie HUD style package. The only difference that occurs there is in what we call asset depletion and what regards of Dodd-Frank of CFPB, if you have a significant amount of capital that is not deployed in the purchase or the refinance of your property, we can in fact give you credit for that capital over the initial seven-year term in the form of income. Other than that is the Fannie-Freddie package with no deviations. We are still going to want to see 10-03s. 10-08s, 10-40s, W2, you know, things of that nature. We are still going to get the VOMs, the VORs, and the VOEs. This is an assured package plan by any means where you get to come in and show us your credit score, get an appraisal, that so many basically glances over and then from there, here's your loan __22:58__, let's get it funded, not like that. On the appraisal side, we are using an AMC, as a matter-of-fact we have three of them that are validated with us and on the whole sale side, you know, remember with our wholesale folks, appraising brokers, appraising a loan or a correspondence has got to in fact use an AMC. Go to the same exact thought process. The compliance aspects, the only difference there is we are required to give a seven-day shopping period upon acceptance of initial disclosures and obviously with regard to our interest rates, we fall outside of the QM definition. Other than that everything else is the same.
A couple--a couple of points that I just want to ask on before I forget, you have mentioned wholesale or correspondence, so to lenders that maybe listening, you know, traditional lenders, they have the opportunity to correspond with you or wholesale to you. For example, there are potential loan, you know, rejects. They can repackage them and send them to you potentially, is that kind of what that business looks like?
Yeah, we have a correspondent product that we put into play. We are going to keep it very limited, its only retail only in select states that we are doing business. On the wholesale side, brokers are welcome, you know, I have been a wholesaler since the wholesale originated or I should say since the mid 80s. We are not very interested in retails specifically because of the way that is setup and the licensing issues. So, if you're an MLO registered with the National Mortgage Licensing System, we have got a package that will fit you on the correspondence side or on the broker wholesale side. There is one __25:06__ up there and that is there isn't much if any in the way of warehousing available for bankers to in fact finance the people that were going to approve or going to have to for the initial six or seven months funding on their balance sheet and then sell it to us, but we will buy within 72 hours, we will prior approve, we will do all the necessary things to get them comfortable with doing business with us.
Excellent. That sounds like a great opportunity for some lenders. You are touch based. These are not qualified mortgage. So if they are not qualified mortgages, how are they defined by Dodd-Frank and enforced by the CFPB?
Well, it is interesting the term qualified mortgage is so narrow that virtually anything that today involved about 4 and 3/8 rate falls into a revocable presumption. These loans were already known as section 35 and a couple of our various formats--sections or format will fall into section 32. By rebuttable presumption, they meet the ability to repay, the collateral evaluation, the amortization of the term requirements, but because the economics are more expensive on the risk of adjusting basis, then the CFPB Dodd-Frank definition, they don't get QM status. Additionally, they are not going to go into a Fannie-Freddie or HUD securitization, you know, MBS or whatever the connotations are today, so falling outside of this status, you got to be able to justify that you can form with Dodd Frank as administered by CFPB to validate all of those aforementioned tenets.
So, you had a really interesting article or I'm not saying you, but you are featured in a really interesting article in LA times earlier this week and you talked a little bit about what the future of non-prime looks like and I would recommend all the listeners to pull that up on the internet because it gets some really good detailed information and a summary of what the market looks like, but why don't you tell us. We've got a few minutes left, why don't you tell us what the future of nonprime looks like.
Well, you know its funny at the bottom of that article, I don't remember who they quoted but I think it's from inside Mortgage Finance saying this is about an $8 billion market. That alone we feel is an often send off for lender to come in to the market. However, we think that numbers understated possibly by multiple five to eight. So, what is the future, well I think it's quite bright. You know, I'm not putting my on a sunglasses yet but I could give you a close. If we can do this is proper and prudent manner, it's a great in franchising area, you know, that is going to allow for more borrowers who did shut out of the lending act, a really different from the past six years participating at an American dream. You know, not everyone should own a home, I get that, I understand that. If you are transient or if you are looking, you know, making money maybe the economics of living in a house shouldn't be for you, but for most people, I mean that is why they are brought up, you know, I want a place, I want to call it as my own. I want to be able to afford it. This is what subprime is trying to and failed out. We hope the nonprime will in fact do. We can provide a stepping stone or an intermediate move, you know, to repair credit. We can allow certain first time home buyers, who possibly don't have the exact requirements of Fannie Mae and Freddie Mac but have in fact inherited a house or inherited money, and want to buy a house to get into the game, you know, to get into the habitation that they want. So, with regard to this, you know, I'm looking at this strictly the way the consumer finance companies did in the 50s, 60s, 70s and 90s
It's a great way for us to facilitate the borrowing of people that had been shut out of the borrowing arena and it's a great way for us to satisfy and invest our demand for increased yield in the market that currently does not have any yield in it. Its kind of a win-win for everybody if its exercised right. What's ironic is the LA Times writer of that article interviewed without our knowledge. One of our borrowers, the Poland Family and, you know, Poland hit the nail on the head when he said "Look it was a stepping stone for us" I assumed in the next 18 months that they will go out and get a Fannie Mae and Freddie Mac loan. Perfect dislocation issue with them with regards to a job status in 2007, 2008, 2009 from what I remember and which the article alluded to. So, yeah the future is bright, we are looking for a competition to come into the market place. We think it's a value. Right now, there is nothing like us in the market place. Lot of folks are talking about it, but we welcome, come on down, start lending. Let's see what we can do to make investor acceptance of this product similar to the Redwood Fall process. The Redwood started three years ago, they were hit and now you got everybody from Credit Suisse, to Union Bank, to Pennymac, to God knows who else jumping into that. I will feel this is going go the same way and I have an equal feeling that the depth of this market particularly with the beginning of the immigration back into the US will be significant.
Excellent, I think you're spot on. I think you're the Redwood of this product and you're taking the leadership role and I think you'll have several other players close on your heels as soon as you do your first deal and so. Dan I appreciate you coming on to the broadcast a lot of great information and congratulation on getting this up and running.
Well, thank you very much and, you know, your program does an effective job of getting the message out and educating folks and we're happy to participate and invite me back whenever you need me. I appreciate Louis thank you.
Will do. When you do your first coruscation we will have you back on because I'd love to get some call on that.
God bless. We will be there.
That wraps up today's broadcast. Please connect through the Capital Markets Group on LinkedIn, Facebook and Twitter, tag name catmarkettoday and thanks for listening, we will talk to you next time.
It's good to talk.