New Low-Interest Mortgages Are On the Way for Investors

Dave:
What’s up everyone? This is Dave Meyer, your host for On the Market and today we have a super cool show for you. We are bringing on three different super experienced lenders to help us all understand the state of the borrowing and lending market for 2023. As we all know, we’ve talked about ad nauseam for the last year or whatever, interest rates have been going up and that has really shifted the types of loans that are available, the way that mortgage companies are working. And as an investor, it’s really helpful to understand the intricacies of the mortgage industry because it helps you get better loans and just become a better borrower, find better products that are more aligned with your real estate investing strategy. So it’s a super cool episode. We have a great lineup of people who are on. And just as a recommendation, if you are looking for a lender or want to understand more, check out biggerpockets.com/loans.
It’s completely free. There’s great places where you can connect with lenders who are specifically working and geared towards investors. So it’s not just conventional loans where you can find things like a debt service coverage ratio loan or different bridge financing options. So definitely check that out because you’re going to hear about some of these different loan products that are available for investors that aren’t really meant for conventional home buyers. And if you hear something on this episode that you’re really interested in and want to learn more about, biggerpockets.com/loans is a great way to do that. So with that, I’m going to take a quick break and then we’ll be back with our lender panel.
Let’s all welcome in our lending panel today, I’d love you all to just go and explain a little bit about your specialty and who you are and Christian Bachelder, could you please, let’s start with you.

Christian:
Yeah, absolutely. First foremost, appreciate you inviting me here, and happy to take part in it. I’m Christian, I am David Green’s business partner, co-owner and founder and managing broker of The One Brokerage, which it’s been mentioned a number of times, but I think I’m the only broker here, so kind of cool we’re getting a kind of varying stance on the market, so excited to take part in it.

Dave:
Awesome, great. And in that role, do you mostly focus on residential real estate or lending, or do you have any particular niche?

Christian:
Yeah, we’re definitely a little bit of… We got a lot of tree branches kind of branching off from the main one. If I had to say what our trunk was, so to speak though, absolutely one-to-four residential is the majority of our business. While we do have commercial programs and kind of a wide variety of kind of niches that we can branch off into, one-to-four, anywhere from conventional through DSCR and kind of more creative loan products when someone doesn’t qualify conventionally, is definitely your brand and butter.

Dave:
All right, awesome. Matt Neisser, how about you?

Matt:
Yeah, thanks for having us. Appreciate it Dave. Thank you. Matt Neisser, I’m CEO and co-founder of Lending One. We’re a national lender for investors around the country, so 40 some states. We specialize both in it’s all one-to-four family, largely a little bit of multi-family, but let’s assume all one-to-four and a lot of long-term rentals. So we specialize in lending to landlords and also a little bit of fix and flip and short-term type lending programs. I think where we probably excel is the long-term lending 30-year fixed rate loans, comparable to a little bit different than a conventional lender, a little bit easier to get qualified. And then we have a larger program for large investors, non-recourse, large portfolios of properties up to say $50 million.

Dave:
Awesome. Great. And then for our final guest today we have Bill Tessar.

Bill:
Thank you, Dave. Bill Tessar, President and CEO of Civic Financial. Similar to Matt’s company, we’re a national lender, specialized really in a handful of products, your DSCR products, which is really 5, 7 and 10/1 I/Os, your bridge and fix and flip and multifamily as well. Balance is probably 45% bridge, 45% rental and about 10% multifamily. And I think it’s just under 40 states.

Dave:
Wow, that’s awesome. Well, it sounds like we have a great wealth of experience here for lending and this is something we’ve really wanted to dive into on the show. As investors, we deal with lenders and work with lenders all the time, but hearing from you, we’d love to know your insights into the industry and sort of what we can expect over the coming year or so. So Bill, let’s start with you. How would you say the rising interest rate environment over the last nine months has impacted your business?

Bill:
I think the first thing I’d say is it had a huge impact on our industry. So not just, when I say industry, I mean the whole lending industry. So if you think about it, from a conventional side, and I spent the first 30 years of my career on the conventional side and developed a lot of long-term relationships there, and it literally gutted that industry, probably second only to the financial crisis. And in many of these instances they had volume levels down 80 to 90 percent. They couldn’t cut their way out of those problems. I think that continues. As it relates to our space, I think Matt would agree that a lot of the smaller folks, medium-sized folks, really took it on the chin. They had a whole bunch of loans sitting on their warehouse lines that got re-traded by their capital partners and so they go into those trades above par and they come out significantly under.
So some of those trades are still taking place right now as Wall Street picks through those portfolios. So I think it really screwed up the capital markets on the BPL side and forced the companies that are still around really to reset and find a pricing level that could at least be at par. So they were originating for origination fees and junk fees and I think the level is there now. I think you’re starting to see, it’s the beginning of the year, more of those Wall Street guys coming back into the market and I think it’s actually pretty darn good for some of the folks that are still around. But yeah, I mean, big shake up, Dave. And probably still a little more to come on some of those peripheral lenders that hanging on by a thread.

Dave:
Matt, are you seeing something similar?

Matt:
Yeah, I mean, I largely agree with Bill. I think the fortunate part for probably both of us is there’s been a sort of demise line of large lenders and smaller lenders and the in between, probably… If you were small or large, you’re probably okay. If you were in between, those are probably much more challenging for those folks. But as it relates to borrowers, I think it’s a big reset on the way that you look to underwrite a deal. And probably for the audience here, if I rewind 12 months ago, maybe started in January of last year, and we had rates in the fours basically, 30-year fixed, which I guess when I started the business I thought would’ve been crazy. And then that ended up happening, and people were excited and people were buying stuff and could afford to probably pay the premiums that were out there to buy properties.
And I think the big shift that’s happened is now that rates not just ours, it’s really across the whole mortgage industry as we… A conventional rate tipping to 7% last year is a huge shakeup both for us as lenders and investors as a whole as to, how do we navigate? And I think that’s really what a lot of investors were struggling with of what do I do with my strategy? Does it have to shift? How do I navigate rates going from four and a half to seven? And that happening very quickly. I think probably the quickest that’s ever happened in history. So that’s what I think really this uncertainty is what created so much uncertainty for borrowers and investors understanding what am I going to do into 2022. We do feel like most people have now sort of come to the realization this is a new normal at this point and are adjusting their strategy. And we’ve started seeing that last quarter, I think Q2, Q3 people were just confused and didn’t know what to do really, frankly. So that’s what we’re seeing.

Bill:
You think about what Matt says, so I think the stats are… A typical investor going into the rate increase was making about 67,000 a transaction, in-and-out all-in return on their investments. So if you think about rates going up, let’s just say 200 basis points, and in some cases more, but at 200 basis points on a half a million bucks, it’s $10,000 of carry for the year. And so now they’re making 57,000 and at least what our experience has been is that the investors are still in there, they got people on their payrolls, the bigger firm, the bigger groups, and so they’re still going in and making trades. They’re negotiating better deals on the buy side. Yeah, their cost of capital’s cheaper, but now contractors are coming back into the space and supply chains are a little bit better. So they pick up on some areas, lose on cost of capital, and 57 isn’t a bad number if that’s the average return on your investment or transaction.
And so we haven’t really seen a lot of our investors, Matt, I don’t know about you or Christian, if you guys have seen a lot of your investors completely get out. I think they’ve just reset expectations, as you mentioned earlier. And from a volume perspective now you have these new rate levels. We really haven’t seen a dip off, which is, that’s probably the biggest surprise for me. At least mentally, I was rethinking the way 23 would look like from a volume perspective, but I actually think it’s still going to be good. And I think just everyone’s reset expectations and living with the new norm.

Christian:
Yeah, I was thinking as you were talking, and I think there’s a added layer to it, too, that especially us three, I know we’re all very investor focused. With BiggerPockets, we’re like trying to be in this realm and I think that there’s been a concentration of buyers into the people who are knowledgeable and not everybody’s able to just, oh, I have $10,000 increased carrying cost. Not everybody’s capable of adjusting their plans to accomplish still success in that realm. And that’s why I think when we’re talking about the large and the small lenders, typically, it’s all the people who just did the in between loans as well, not just the volume wise, but it’s the in between loans of maybe the intermediate experience, maybe the non-experience, but really fine-tuning systems like you said, they may be making extra premium on, maybe they’re saving on contractors, maybe they’re saving on the supply chain’s cheaper, the cost of wood is cheap or whatever it is.
And experienced investors and people who have been through the trials and tribulations of what… I know you guys do a lot of fixing and flips. With me, it’s running accurate numbers on rentals, running accurate numbers on maybe short-term rentals, being able to educate yourself on, man, is this market compacted or is there something unique that can be taken advantage of here with the right staging? I think I haven’t seen a pullback, but I’ve definitely seen a concentration into a fewer number of hands, which I think is a really interesting market trend.

Dave:
So Christian, you’re saying that total volume is remaining at a pretty steady state, but it’s just fewer people taking on higher volume per person, per investor?

Christian:
I don’t want to misconvey. Volume just on a grand total is down, but volume per investor if that’s a metric that I could use, is definitely-

Dave:
It is now.

Christian:
Yeah, so I just think there’s a larger amount happening per person that we work with, which is kind of interesting when you think of total volume being down, but volume per person… I can’t think of a whole lot of people that we’re doing our very first loan for. So many of our clients are repeat, so many of our clients are experienced, they know what they’re doing, they’ve run their numbers and just like Bill shared, that extra $10,000 holding cost if they’re making 57 versus 67, a lot of investors still take that, right? And they just pivot their numbers a little bit and they find a way to make it work. So that’s an interesting trend that I’ve seen kind of take place and our firm kind of encapsulated there.

Dave:
One thing I’m curious about, given what you’re saying about investor activity, all three of you, is are the types of loans and loan products that investors are interested in changing at all? Matt, let’s start with you.

Matt:
Yeah, I think a little bit is the answer. And it depends… Again, depending on their strategy coming into the year last year and what… If they were building a rental portfolio and relying on what a lot of clients and I see on BiggerPockets quite a bit is sort of like the BRRRR strategy coming in, buying, renovating, hopefully refinancing and then pulling equity out. I think the biggest shift I’ve seen is the challenge of them actually getting equity out, at this point, to keep that velocity going that they had before or got a little bit accustomed to. Whereas I think three or four years ago, I don’t think the perception was that every deal I did I’d pull out all my equity. I think it was every deal at least I kept some equity in the deal. And I think that mentality changed a little bit, particularly with COVID, when prices were appreciating so rapidly that people got accustomed, for 2022, it’s basically I got to pull out equity on every single deal and just keep on going.
Now that isn’t a true, true product shift, but I’ve seen that shift of on the backend, refinance then trying to evaluate, okay, can I keep this same deal level up on the buy side that I kept up a year or two years ago effectively? So that’s the one thing I am noticing a little bit. And honestly, values are down in some markets five or ten percent already. I don’t think it’s on all markets, clearly, but you’re seeing both values in a little bit or at least more conservative values from appraisers. And then you have this LTVs and they’re… They might have to bring a little bit of money to close and that’s a strange concept for a lot of people that have been doing transactions the last few years. Although-

Dave:
Imagine that.

Matt:
You go back five years ago that was like, you expected it.

Christian:
Yeah, I can piggyback on that for sure. I can’t tell you how many times we’ve had the conversation of is a BRRRR a fail if I don’t a hundred percent cash out the funds I invested. It’s like, no man, you’re getting 60% of it back, make that keep rolling. It doesn’t make the strategy completely null and void. It’s just, it’s a pivot, right?

Bill:
Yeah, I think, Dave, what we’ve seen is if I do a 24-month look back, we were heavy bridge and fix and flip and then really became super heavy on the rental. I think part of the success, and Matt you probably saw this too, but we inherited a bunch of loans and customers where lenders just couldn’t deliver at the closing table. And so, was that really organic growth or did we have staying power right place, right time, probably the latter, right? And so we saw a big swing in the rental units, not volume, units through 2022, almost to like 65%. So I think we closed just about three billion last year and 65% of that was rental. The last quarter, and going into this quarter, looking at the pipeline, what we’re seeing our investors do right now is they’re just paying the higher WAC on the bridge because they don’t want to get locked into a prepay in these high coupon rental loans, believing that rates are going to come down in the very near future.
And whether that’s true or not, I mean I do get it. Matt, I don’t know if you or Christian heard the last conference. I was at the IMN conference, and they were talking about new products. And one of the products that’s been floated around there is kind of a hybrid between the rental with the prepay and the bridge. So a little bit lower WAC than bridge, a little higher than rental, no prepaid component. So people could kind of go into nomad land for a little bit and decide whether rates are going up or down. Probably going down long-term, but this quarter, little rocky. But yeah, so right now we’re 50/50 on bridge to rental. We’ve seen a big swing recently.

Dave:
And WAC just for listeners is weighted average cost of capital, right?

Bill:
Yeah, weighted average coupon. Sorry. Yeah.

Dave:
Oh, coupon. Yeah. Okay.

Bill:
My wife always, as I’m talking to my boys that are in this… We’re talking at the table and she goes, “You guys sound like you’re foreigners.”

Dave:
No, I just want to make sure I’m tracking. And then with… Christian, I’m especially curious in the residential space, I hear a lot about sellers buying down rates for people. Are you seeing that pretty frequently?

Christian:
Oh yeah. I think, last month, we did a little internal audit. I think we got… On our purchases, I think we got seller credits on 90% of them.

Dave:
Oh wow.

Christian:
I mean it was that level where… And I mean granted that’s like the realtors that we work with, we help coach them too. Hey, we have a 2/1 buydown program, like go negotiate seller credit. The sellers, the house has been on the market for 90 days. It kind of becomes the obvious trend once a couple realtors pick up on it. But especially if… Our borrowers are also coached, so they’re advising the realtor, “Hey, I want to get the interest rate from eight months ago, 12 months ago,” whatever it is. And even though the 2/1 buydown program is a temporary buydown, right? So that’s a really big product right now in the conventional space, where the first year you’re 2% lower, the second year you’re 1% lower. And there’s even a 3/2/1 buydown that gets a little expensive at that point.
But they’re really cool products and we’re utilizing it a lot. And I know, I think even you guys, Bill, I don’t know if Civic’s got a buydown. So everybody understands, I’m a broker. I actually work with both Civic and Lending One, so we’re on their wholesale space, so I’m somewhat familiar with their products, but I don’t know if you guys are seeing more of those. I don’t know if you guys are implementing buydown programs, but that’s my experience.

Bill:
The loans are expensive on the BPL side anyways. On the conventional side, if you start with a little bit of rebate, then you get the par, then you buy into through points. It’s a little different than maybe what Matt or I get to see, because people are paying quite a bit of points if they’re going to buy that rate down. Loan still has to have value somewhere. So yeah, I don’t see a lot of it. I do believe that on your side, Christian, just having links to some of the biggest firms in the nation, they have to come out with new products and they have to come out with new products like right now, or you’ll see big companies, publicly traded companies fall.

Christian:
A hundred percent.

Bill:
They have to come… The 3/2/1 buydown graduated payment mortgages, qualifying at the start rate I/Os. If real estate values weren’t so uncertain right now, in some areas you’d see NegAm loans work their way back in for the market, like back in the ’06, ’08 time. So I think they have… The only thing conventional space can do to save the majority of the conventional spaces is come out with products that are exciting for the marketplace to get back in there and buy. And you’re doing it right now, Christian, with what you mentioned. More is coming, and way to lead the group, but more’s coming,

Christian:
I want to make sure I point that out for any borrowers. That’s probably the best said that I’ve heard it is that these programs aren’t… A lot of people have told us the programs are to save the housing market, have these temporary rate buydowns so people can still pay exorbitant prices. That’s not the goal. It’s exactly what Bill said. This is what has to happen. There has to be a loan-

Dave:
To save the lenders. That’s what you’re saying. Not to save… Yeah.

Christian:
In some capacity. Yeah. And granted, I mean, these guys are in different spaces and then in non-QM and bridge and fix and flip. But the big… I mean, I don’t know if you guys heard LoanDepot Wholesale went under, right? I mean, they don’t work with brokers anymore. I mean, there’s these very, very large lenders, we were talking about large and small kind of state. There are some big lenders they got out of the space too, the AmeriSaves and LoanDepot Wholesales. So there’s a little bit to that, Dave. They got to come up with these programs to save face at some point when they go in the right direction.

Dave:
So it sounds like, just to make sure everyone’s tracking this, there are programs right now, like a 2/1, where basically you can buy down your interest rate. Christian gave an example where you can buy down your rate by 2% for a year and then 1%. And the trend that, as a listener or as a borrower you can consider, is that costs money. You have to buy points to get those reduced interest rates. But the trend is that you have this seller who’s usually a motivated seller in this type of market, buy down those points for you, so you’re able to get your purchase and get a lower interest rate on the seller’s dime. But it sounds like what Bill and Christian are saying is that this is just the beginning, potentially, and there might be other borrower attractive loan products that come out for borrowers in the next couple of months. So I’m curious if any of you have recommendations for where listeners can stay on top of this information. What type of incentives and what type of new products are coming out that might be useful to investors?

Bill:
I think Christian’s doing a pretty good job with his company, but the fact is you won’t have to look very far. They’ll find you.

Christian:
That’s exactly what I was going to say. I mean, all of us are on BiggerPockets. If you’re just in a network or an environment, I mean, the information’s going to find you if you’re even relatively searching for it. So get with a broker, get with a loan officer for one of these guys from one with my company. It’s really something where if you want to stay on… I mean, Dave and I had an episode on our series that we were doing where a new program came out when he was in escrow. That was for the deal.
Dave, I don’t know, I think you were in the background that episode after I think they brought you in. But literally as he was in escrow, a program came out and I was like, this is a perfect match for you. And we pivoted, we completely canceled the loan, opened up a new one on an entirely separate product, and we only knew that because he was so fine-tuned into what I had to offer and obviously we’re business partners, but I knew what he was looking for. So communication is key with your loan officers

Bill:
And I don’t actually think it’s just lenders trying to solve this. This is being solved at Wall Street. You got a lot of bond traders that don’t know what the hell to do with their time. Just think about the green backwards. Matt and I were talking about golf earlier, but think about the green backwards. This stuff is being solved in Wall Street right now because there’s just no trades on the conventional side. There’s no trades. It is tumbleweeds, the way you would think about an old Western.
And so yeah, I do think they will come out with products. I’m actually quite blown away that the fourth quarter didn’t show that, but I think there was so much trauma and some of that trauma’s leaked… It kind of leaked into the first quarter that if I’m a gambling man, I would say you’re going to see stuff this quarter that is going to be good for the market. And Dave, when I think about 3/2/1 buydowns or 2/1 buydowns, I’m thinking about that as a product. Then you could employ Christian’s strategy and you could buy that start rate down, but the product is a 3/2/1 then Am for the rest of the 27 years. But you could buy that loan down and now you’re talking about a rate that people can get their arms around and live with, right?

Dave:
Yeah, absolutely. Two things about that. First, I think this conversation just underscores the idea that you shouldn’t assume, just because you’ve seen a headline, what interest rates are right now that that’s what you would be paying, and you should actually go out and talk to a broker and see what you can actually get and learn about some of these new products. Let me ask you this, Matt, and I guess all of you, is there an interest rate that you’re seeing through some of these new products where people are comfortable? Because it seems like just looking at the market, once it hits 7%, things were going crazy. I mean, things really just halted. Is there… Do you have a sense of what the sweet spot is where buyers and borrowers are feeling like that’s a tolerable rate?

Matt:
I think it also, like I was indicating before, is that if you pencil your deal to start… If I’m underwriting a deal, and I’m talking on an investor side, then we’ll talk about conventional sort of like I’m a home purchaser looking for my house. If I’m an investor and I underwrite from day one and say the rate’s going to be 7% and I’m able to get 10% off on that deal now that I was overpaying by 5% nine months ago or six months ago, it’s tolerable, it’s just more of a mental thing of getting comfortable actually doing that. Now three or four months ago, I would say that if the rate was in the sixes when it got into sevens, people started to get jumpy because they were used to paying four and five. And then it jumped to seven or eight, and then when that came back underneath seven, that was a mental trigger, as you’re talking about to say, okay, I’m interested again.
But practically, my personal view is if someone’s underwriting day one, they can get comfortable with any rate, as long as it values that they can apply the deal right. And that was the sellers hadn’t adjusted yet. I think you’re starting to see sellers adjust now. And then on the conventional side, I mean you’re starting to see it. It’s like there’s not much inventory at all, but you’re seeing all the things that were… You are, at least in my markets that I follow, seeing price reductions on the listing side. I don’t think there’s any screaming deals yet, but at least you’re directionally going the right way.
So I think some of it is just a mental breaking point with people and saying, okay, I get it now. I know rates aren’t going to all of a sudden going to be 5% again. It was six months ago, I really… Half of our borrowers believed, as Bill was sort of indicating, when things were in sevens or greater, they were still in their minds thinking things would be high fives again somehow in three months, until the Fed sort of laid out what’s happening. And then I think people started, okay, this is not going to randomly go back down 200 basis points in three months. So that’s what I’m seeing.

Bill:
I think, Matt, I think that’s a bullseye. Think about stock market, think about interest rates, think about real estate values. When things are moving around a lot, I always think the smart money just takes a step back and tries to figure out is this going to continue rattling back and forth or one way or the other, or has it just settled down and they have a new norm? And I think that’s right, Matt. Interest rate wise, it’s perspective. If you look the last 12 months, interest rates suck. If you look at the last five years, interest rates are good. If you look at the last 25 years, interest rates could arguably be great. But we lived for three years in the most incredible low interest rate market where all of us got to get fat and happy about the originations. And on the conventional side, they were rewriting customers five to seven times over 36 months.
Like, hey Bill, it’s Matt, just want to let you know I’m going to drop you from three and a quarter, 2.75, no point no fee, sending the documents, sign them. And you get a half a point rate reduction. And they would literally stairstep those borrowers down. Those borrowers, for the most part, most of them are never touching those loans unless there’s a death, a divorce or some move up or move down. I actually think you’ll see seconds kind of expanding, because no one wants to touch the two or the threes. So there’ll both be… There’s seven or eight percent on a second, and then five years from now they’ll do the cash-out refi at the four and a half. So I think you’re spot on, Matt. We’re seeing… The Fed’s probably close to being done. This next time, whatever they’re going to do quarter and a half, it’s probably, probably it.
They just need to say that. Once they say it, then I think you’ll see some smart money come back. I mean, the 10-year is better right now, just thinking about it from perspective of overnight lending rate. We’re owned by a publicly traded bank. They’re overnight cost of funds have gone up significantly, but the 10-year, because I’m a mortgage guy, but it’s so much lower than it was three rate hikes ago. So it’s interesting that way, but I think it tells me that rates are going to come down. If you had a magic wand telling you, end of the year, you’re going to see lower rates than we have today, both BPL and the conventional space.

Dave:
That’s a good segue. And just to sort of clarify what Bill’s saying here too is that we’ve discussed this on the show many times, but what the Federal Reserve controls is the federal funds rate that is not controlled mortgage rates, and the much more highly correlated indicator for mortgage rates is the yield on the 10-year treasury. And as Bill was just saying, despite the Fed raising the federal funds rate, the 10-year is back below 4%. I don’t know where it’s today. I think it was at 3.7 yesterday or something like that. And so there are indications that loan rates are at least slowing down and could start coming down towards the end of 2023. That’s just sort of my take. And Bill, you just gave yours. Christian, where do you see rates heading over the course of 2023?

Christian:
Yeah, I’m in agreement with everybody. I think they’re a lot more on the capital market side, so I know you guys have a very intricate understanding, right? Me on the broker side, I’m much more client-facing. I obviously keep up with what’s going on. What I would say is I think… I want to draw it especially to demand and what’s really driving clients. I don’t think it’s an interest rate that everybody’s looking for. I think it’s just some amount of stability. We’ve been through this 12-month period where it’s like I get pre-approved and you guys know how long it takes to buy a house. A few days to get pre-approved, your credit’s only good for 60 days, you got to go find a realtor, you got to go tour 10 houses, you got to find one you like, you make an offer, right? There’s a process to it. And a lot of times it’s 60, 90, 120 days before you have a house.
Well, when rates are changing by a point and a half in that time period over a 12-month period, it’s like nobody wants to buy because they’re like, I go get in love with getting a loan, and by the time I actually get one, we’re talking about a one and a half, two percent difference in my rate. So I don’t think it’s a rate everybody’s looking for specifically. I don’t think it’s just a magic… If rates are back in the fives, we’re ready to go. I think it’s just like can I just have some confidence in what my rate will be at this point? I don’t want it changing this drastic amount in the time it goes and takes me to find a house.
And I do kind of double down on what everybody’s saying. I think obviously the Fed can’t do it forever. I do think they’re trying to build in wiggle room because I mean we got down to 0%, right, during COVID. I mean, historically, they’ve been able to use dropping interest rates to stimulate the economy and you can’t drop them unless there’s some margin to drop them by it, right? That’s where I’m thinking is that they’re building it up to a point where they have enough leverage maybe in the future to potentially stimulate again and we play this rollercoaster on and on and on, right?

Dave:
Absolutely. Yeah. So Matt, one of the other things about rates I’m curious if you have any insight on, is despite the Fed raising rates, they’re doing their thing, the spread between the federal funds rate and at least conventional mortgages, I’m less familiar with the commercial side, is abnormally high right now? Typically, it’s like 170, 190 basis points. I think it’s well above 200 still. Can you tell me, with you and Bill, your knowledge of the capital markets, can you tell me why it’s so much higher and if you think it’s going to change in the coming year?

Matt:
Yeah, there’s a number of things going on. As Bill indicated, generally bond investors and broadly Wall Street right now in the last Q3, Q4, if it’s a mortgage, there’s a little bit of uncertainty and that means buyer liquidity has drained out. Two, you have a historically large and probably unprecedented balance sheet of mortgages held by the government, which never has happened before in terms of the size and scale. So they own, I forget if it’s two or three trillion, whatever it is, Bill, maybe somewhere in that handle, I think, of mortgages. And of which at some point they’re going to need to sell down or let it wind off. People are unsure what that’s going to be. So you have this huge net seller of unprecedented size that has never existed before, sitting on this inventory that maybe they could sell at some point. That creates a lot of uncertainty. And then three, you have really high rates, which means that when rates are very high, people need to assume that that loan will prepay at some point and that creates this inverse.

Dave:
Wow.

Christian:
That’s the tricky part. Yes.

Bill:
That’s the bullseye right there.

Christian:
Yep. Couldn’t agree more.

Bill:
He’s right. That’s it. Matt, that’s bullseye. There’s just… Think about it, rates at 7%. Who believes that’s going to be on the books for 30 years? Who believes that’s going to be booked… I think you have to have a loan on the books for somewhere between 36 and 40 months to break even if you’re a purchaser of conventional loans. I think that’s the number-ish. Think about that. Who believes a 30-year six and three quarters or seven is going to be on the books? Those suckers are going to get a call from Christian the second rate’s got-

Christian:
The three and a half all got eaten up when rates went to 2.99. I couldn’t agree with that more.

Bill:
That’s right, though, Matt. It’s, man, it’s those… And here’s kind of the scary thing that Matt mentioned earlier. You think about the government, if they didn’t have that many loans at that low of interest rates, it goes back to what we were commenting on earlier, death, divorce, some life-changing event before those people are going to get out of those mortgages. They can’t afford a home equal to that. Most people can’t, when you go up to today’s interest rates. And so they just sit, which puts some pressure on real estate inventory and probably helps us with valuations with all the other crap going on it. It’s an interesting study, but I think the government’s going to have to take it on the chin if they try to start offing some of those mortgages.

Dave:
That’s fascinating what you said, 36 to 40 months to break even on a loan. And with almost everyone predicting that rates will go down, maybe not in ’23, but probably in ’24 at least, or even ’25. That’s why the lenders are baking in this extra spread to, I guess, accelerate that break-even point.

Matt:
And to clarify, just so you know, and everyone understands. The lenders themselves, this is not more profitable for them. Put us aside for a second, our little… We’re a sliver of the mortgage market. We all pump our chest and think we’re big, but we’re like a gnat on this whole mortgage market. So if you met the whole mortgage market, those folks are not more profitable right now, even with those spreads the way they are, they are the least profitable they’ve been in a long time, because they’re not the ones taking that margin, just a risk premium built into the market. And they’re selling their loans immediately and their margins are the worst they’ve ever been. So it’s a weird dynamic right now.

Bill:
It went from being the greatest business to be in if you were the LoanDepot Wholesale or the FOA biggies that were printing profits quarterly, printing hundreds of millions of dollars, they couldn’t cut quick enough. Yeah, the bigger ones are really suffering.

Christian:
Yeah. I mean, I can’t think of… There’s like three lenders that we partner with where we have the same account executive as 12 months ago. There’s not very many. Account executives are, I mean, we have over 150 lender partnerships.

Dave:
Wow.

Christian:
So I mean, it’s like account executives have gotten axed across the board. And it’s funny, both of these guys actually have the same person. But it’s just wild to me that, I mean, exactly like Bill said, there is just that… They cut, they just cut, cut, cut, the moment it turned. That’s definitely felt.

Bill:
Well, Matt’s right, if you take the biggest three lenders in our space, those lenders do as much in a year as some of these guys were doing in a week to two weeks. It’s just not apples and turnips.

Dave:
Yeah. Well, this has been fascinating and I’ve learned quite a lot, but unfortunately we do have to get out of here. But would love to hear just from each of you, advice you have for borrowers and investors heading into this year and how to navigate the rapidly changing debt markets here. So Christian, let’s start with you. Do you have any words of wisdom?

Christian:
Yeah, I think pretty much every time I’ve been asked, I’ve always answered the same way. While you hear less people are maybe successful in real estate, less people, crypto, stock market, whatever it is, if you are surrounding yourself with knowledge and people who are well-versed in the space, you’re going to have the right guidance to be in that top 10, 20% of producers. And those are the people who make money in the hard times. I mean, there’s still people having success on the stock market right now. It’s probably the better people, the people who are more knowledgeable, the people who are more informed, the people who have more access.
Whereas, I mean, there’s people still succeeding in short-term rentals, even though a lot of markets are impacted and a lot of markets are shutting them down. The people who are well-educated and well-versed on how to run them successfully thrive throughout those times. So surround yourself with it. Listen to stuff like this, get with me, get with Bill, get with Matt. I mean, get with people who are industry professionals in the space and they know what they’re doing and that’s all you can really do is put yourself in the best position to win. And if you win, then it’s not a surprise, right?

Dave:
Awesome. Great. What about you, bill?

Bill:
Yeah, so look, I’ve sat on so many of these panels throughout the year and at the last six months, I kind of felt like I was an individual on an island by myself. I’ve heard all the doom and gloom, heard the inflation, heard the recession, heard real estate values pulled back. I’ve heard all of that stuff. But we’re close to six million homes underwater in terms of supply and demand. And if you believe any of this stuff I said earlier about low interest rates and those people not refinancing or selling out of those transactions, I think it’ll exasperate the problem.
So I am really bullish on real estate, short and long-term. I think you can get a better deal today than you could six months. You can negotiate a little bit, you could demand a little bit more. You’re not paying over list price, you’re getting contingencies on your deals, you’re getting seller concessions on points, you’re getting all that stuff. That’s great. So I’m bullish on real estate, and if I was to give a recommendation, I think you got to get your partnerships in line. So you hook up with a company like Matt’s or ours on the BPL side, you hook up with a company like Christians on the conventional. You get a kick ass realtor, you get some kick contractors, you get some good vendor relationships. And I think partnerships today will make a big difference as we go through ’23 and ’24 in terms of what investors believe is successful or not.

Dave:
Awesome. Great. Well, Matt, take us out. What’s your advice for any borrowers this coming year?

Matt:
The one thing I’d say to borrowers I say to myself is I try not to bet on interest rates. Okay. Because it’s one of the craziest things in the world of to bet on. So it’s not an all or nothing decision you’re making. If you’re out there buying 10 properties over the next two years, or multiply that by however big you are, you can spread that decision over 10 or 20 decisions over the next two years. So you don’t have to… You’re not making one big bet. Okay. This month, I don’t know, maybe my rate’s a little bit higher than it should have been, but maybe next month or three months from now, it’s a little bit lower than it was. And you’re really just like, if you’ve heard the concept of dollar cost averaging in stock market, I don’t look at it that dissimilarly to borrowing is that you just need to look at it over a couple year period and say, all right, I won some, I lost some. What’s my average over that timeframe, am I comfortable in the deals, still pencil. That’s the way I look at it.

Dave:
That’s great advice. I like that a lot. All right. Well, thank you all. Matt, where can people connect with you if they want to learn more?

Matt:
Sure, lendingone.com. We’ll take care of you. Just call in. You can call in. You’ll get someone live. We’re staffed all the time, so it’s probably the easiest.

Dave:
All right, great. What about you, Bill?

Bill:
civicfs.com.

Dave:
All right. And Christian?

Christian:
Same thing, the1brokerage.com. All of us are just company name.com. Yeah, all of us are pretty easy find. We’re all on BiggerPockets too.

Dave:
Making it easy.

Christian:
Yeah, we’re all on BiggerPockets. If you go to the find-a-lender tool as well on BiggerPockets, an awesome resource to get to find someone.

Dave:
All right, thank you. Well, appreciate you all being here and sharing your insight and experience, and hopefully we’ll have you on again sometime soon.

Bill:
Good stuff, guys. Thank you.

Matt:
Awesome. Thanks guys. Appreciate it.

Christian:
Appreciate you guys.

Dave:
All right, thanks to Christian, Bill and Matt for sharing their insight and knowledge with us. That was super interesting. I learned a lot. And I think the main thing I want to reiterate, and this is something people ask me all the time, they’re like, what interest rates should I be looking for, or I don’t think I qualify for this kind of loan or this kind of loan? And they ask me and I have no idea. So I really think that, in this type of environment, it’s super important to just connect with a lender. Even if you don’t do a deal, just go call two or three of them. As we just learned on this show, people are getting interest rates in the 5% using seller buydowns and buying points. And there’s all these different products that lenders are coming up with to incentivize people to buy right now and to borrow right now.
And so don’t just assume because you see some headline either in the media or in the newspaper or whatever that says that interest rates are at 7%. There are different products available, especially for investors, than just those top-line things. So that was my number one takeaway from this, is just talk to someone and see if your assumptions are right or learn more about some creative ways to potentially borrow on any of the deals that you’re looking to do over the coming year. So that’s it for us today. I hope you found this episode helpful. If you did, we really appreciate a five-star review on either Apple or Spotify. If you have any questions about this episode, you can find me on either BiggerPockets or on Instagram where I’m @thedatadeli. Thank you all so much for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.