Meritize’s Chris Keaveney on Credit Markets, Risk, and the Retrenching Economy

SA Ibrahim: Morning Chris.

Chris Keaveney: Morning SA.

SA Ibrahim: Thank you for agreeing to be one of our subjects on a new startup video magazine, Mortgage Media, where we hope to share interesting personalities and events in the mortgage and related lending spaces with our audience. And we hope to leverage video streaming and social media to share what we believe are exciting messages and interesting people to the world.

Chris Keaveney: Well thank you, I’m glad to be here. Hopefully I can live up to being an interesting subject.

SA Ibrahim: Chris, you’re in many ways, one of our experts in the credit risk area, having worked in so many aspects of credit risk. So share a little bit about your background with others. And then, after you do that, I’d like to ask you what took you from that background to starting Meritize.

Chris Keaveney: Sure. So, I’m now at the point in my career where it’s a little longer than I would probably like it to be. Spent over twenty years now in consumer finance. All of it is in consumer finance. Almost all of it in credit. And I’ve worked across pretty much across every consumer asset class there is. I’ve done credit card, home equity, mortgage, auto, unsecured lending, and obviously student lending. I started as a statistical modeler. I was trained in statistics and modeling. And a whole bunch of math stuff. Spent several years building predictive models, whether it be origination score cards, behavioral score cards, some other interesting projects. I remember one I did was building residual value models on automobiles for back when lease was a very, very popular product. From there, I moved into portfolio analysis. And then eventually moved into kind of a credit officer role where I was responsible for the performance of portfolios. One of the first credit officer jobs I had was in the student lending area. So, I was responsible for a very large student loan portfolio that was both federal and private loans. And learned a lot about it. It was very, very different than anything I had done before. In the course of that time, I developed some ideas around student lending and how different it was from other consumer asset classes. Largely because you’re essentially trying to help a student build collateral, which is an education. Develop some views that it should be treated very differently than a lot of other types of consumer lending. Some of those ideas have become what is Meritize today. I’ve had some great people who have taken interest in those ideas and kind of helped us percolate it to the point where we were able to start the company and try to execute on some of that.

SA Ibrahim: Chris, that’s very interesting because I spent a lot of time in my career on and off in risk management. It was in the early days where people actually started to realize that risk management, slicing and dicing risks, also had a marketing angle where you could identify unserved leads and gaps, and balance them off with gaps that were related to good credit risk opportunities. With that in mind, tell us how you identified the Meritize opportunity and what is Meritize all about?

Chris Keaveney: Yeah, sure. I think over the course of time credit really has evolved. I think certainly the early part of my career, was a time period where people as data became much more easily stored and you had access to more and more of it, credit became a much more powerful vehicle to understand that customer. I agree exactly with what you were saying. In terms of the ideas I had as credit officer of the student lending business, I actually borrowed some concepts from mortgage. In terms of construction projects, construction loans in the mortgage industry, which I’m sure most of your viewers will understand at least to a very good degree. The idea of being that, as a student goes to school, they’re building collateral, piece by piece. Stage by stage. As a very simple example, if a student goes to a traditional school, typically they take all of their pre-reqs, right? So, they go and kind of take general education courses. That’s kind of stage one of building the collateral. It shows you a lot about who they are and what they’re capable of. And so forth. And that’s a lot like building the foundation of a home, right? The foundation is done and the bank that’s managing the construction loan is going to say, “yep, this looks good. We’re now ready to fund the next stage.” Which would be a student moving on to their intermediate course and so forth. The concept around Meritize is that how someone is doing in their academic progression, and how they’re performing in the classroom, is going to have a large impact on the credit performance of financing that education for them. We were lucky to work with some people, Measure One, largely, who had gathered a tremendous amount of information over the course of time on students academic progression and outcomes, positive outcomes, that allowed us to quantify the exact relationships that hold between someone’s academic performance and the outcomes that you’d be interested in. So we’ve been able to truly, for the first time I know of, have a very grounded model that allows you to include a student’s academic performance in decisioning and pricing around a loan. Which is, what we’ve found so far, is very much to the benefit of students.

SA Ibrahim: And you’re doing it for non-traditional students. My understanding of Meritize is you’re not focusing on the one to four year pure academic type college education, but on highly specialized skills that are very instantly translatable into jobs and through that, also serving the need for reviving the middle class or the working class in our country. The professional job categories, the … that have disappeared. Talk to me about how that model of academic success translates into success as a plumber, or welder, of whatever … Also talk about some of the unique disciplines that you’re focusing on lending in Meritize.

Chris Keaveney: Yeah, sure thanks. We have focused on what we call “skills based education.” There’s a couple of … As we’ve kind of developed our business, there’s a couple of reasons why we’ve been drawn to that. One is, exactly what you said. We have recognized that there is a skills gap in this country. Estimates range pretty widely, but we firmly believe that it’s millions of jobs that are unfilled today. Because employers can’t find people with the skills they need to just kind of plug those folks in. And so there’s a bit of a mission that we have, which is the good of the country is going to rely on our ability to train people for the jobs that are in demand. The second one is that it actually has benefits to the credit model in a number of ways. One is that when you think about funding someone’s education, in kind of traditional higher-ed. Someone goes to a traditional four year school, there’s a fair amount of variability into what they’re actually going to do when they’re done. For a lot of disciplines. Someone majors in sociology or English, or whatnot. The world needs people to do that, but there’s a tremendous amount of variability in what they’re going to do when they’re done. Which, from a credit perspective, makes the modeling tough. With the skills-based education, it’s much more linear. You understand what skills the student is going to get. You understand what jobs they’re going to fill with those jobs on the backend. Not only that, but you understand what the demand is for those skills in terms of employment. And further, you understand what the income that they should expect to get is. That allows you to make sure that the decision to get that education is a positive ROI decision for them. Which we firmly believe is the right thing, and the right approach for students.

SA Ibrahim: So what are some of the most interesting professions, or very exotic professions that you are finding yourself financing education?

Chris Keaveney: So that’s one of the most interesting parts of our business is that we constantly use the term, “skills-based education” has a very wide range of applications. At one end of the spectrum, we have schools that are what people think of when they think of vocations. HVAC technicians, diesel mechanics, welders. And then, we have schools that are kind of at the other end of the spectrum. Which are high-end, medical technology programs. I’ve gotten to learn all sorts of cool things, that I had no idea existed. Profusion technology, diagnostic medical sonography. Electro-cardiography. These are programs that don’t exist within traditional schools. We found that people who are interested in doing these things have had a very hard time figuring out how to actually access that education. And so, we serve that broad range. As far as your question, some interesting things. One of the ones that I love the most is we work with some schools that train people to work on our power grid and power infrastructure. These are fantastic jobs, in high demand. A lot of these schools … I had a chance to visit several of them. The equipment and the technology that they have is spectacular. You go and you see these, in many cases, pretty young folks in a span of eight months or so, getting an education that’s going to give them a great job for the rest of their lives, or for as long as they want it. Makes us feel pretty good about what we’re doing.

SA Ibrahim: I’m glad you said that, because given the interest of our viewers, in the mortgage and home ownership space, by financing education that is very specific to job skills and therefore, the presumption is that the graduates will find jobs very quickly and start earning money. You are, in a sense, helping create prospects for first time home buyers and mortgage loans that everybody in the mortgage space is looking for. That’s a very attractive space to be in. Do you agree with that view?

Chris Keaveney: Yeah, I do. I think that … I’m sure that everyone … All of your viewers have heard of what’s being called, “the student loan debt crisis.” Frankly, maybe there is one. But, I would classify it a little bit differently. I think that the real crisis is that … Whether a student has debt or not when they leave school, I think there’s a mismatch in the skills that students are getting with the jobs that are available. Right? And so, regardless of whether a student has debt at that point, if they’re not finding a good job that gives them good income, they’re not good prospects for a mortgage. Then you layer on top of that that you have a lot of people taking on debt, which actually kind of puts them in a bigger hole. That also puts stress on their ability to probably think about buying a home. With Meritize, and the way we approach things, we like to think that we’re putting people in a position to go find those next level products. Whether it be them getting a job and needing a new car. Or, a year down the line thinking about starting a family and buying a home. It goes back to what I mentioned before, is that if you’re helping people get skills that you know are in demand, and you know that there are going to be job opportunities on the back end, and you know that the debt they may take on to get those skills is a positive ROI decision, we firmly believe that we’re setting people up to be successful in going and getting those cars, and homes, and whatever else they might need.

SA Ibrahim: So, as someone who’s observed successful startups and businesses over the years, I’ve found that the people who run these companies, not only are capable of dealing with balancing right opportunities with risks, and not getting ahead of themselves so they create a business that’s on a solid foundation, but they also are very expert in navigating the space and finding … As you go on this journey, you find new opportunities in new areas. Meritize is a relatively young company, but have you found new opportunities in new areas that you think are very exciting and could be bigger than what you were aiming for?

Chris Keaveney: Yeah, so the answer to your question … We have found a couple of things as we’ve moved along that we’re pretty excited about. Probably first and foremost is, as I mentioned, we’ve been trying to address this skills gap. And that there are a tremendous number of jobs that are going unfilled because there are folks that don’t have the skills. Whether it be CNC machinists in the manufacturing space, to medical technology jobs. Power infrastructure, et cetera. And so, as we’ve gone through this, and we’ve developed our products, and we’ve tried to be thoughtful about how we’re positioning ourselves. What we realized is that, at the end of the day, the skills gap … People that are feeling the most pain are employers who are trying to fill these jobs and they’re not able to. And so, through the schools that we’ve worked with, we’ve actually asked to spend some time with some of the employers that they’ve gotten to know. Long story short, what we’ve realized is that there are employers out there that are spending a lot of money trying to find the right people. We believe that Meritize could be a vehicle that really links everything together. Individuals who are looking for skills, they’re going to give them that great job. Schools that are looking for good students who want to be trained and can fill those jobs. And then ultimately, the employers who need those people desperately. The role that we can play is that we can provide the credit and the finance expertise to link all three of those constituents together and create a financial product that is attractive to people in the markets.

SA Ibrahim: So, are you saying that, in partnership with an employer, looking to fill certain, very specialize skill jobs, you can go jointly with the employer to a job fair at a high school and … if students are selected by the employer, or graduates are selected … Potential high school graduates are selected, you can offer them training, and financing for the training that makes them instantly hireable by that employer?

Chris Keaveney: Yes, that’s the basic idea. Right? We’re still playing around with a couple of permutations of how this might work. But generally speaking, yes. We partner with employers who are in need of skills-based folks. We source the schools onto our platform that can provide those skills. Schools are usually, very very interested when you tell them that you have employers who are looking for folks that are right in their wheelhouse. And then, certainly going and finding these good students who maybe aren’t aware of the opportunities in some of these fields. Is something that we’re actively working on. So we create basically a value chain throughout the entire process.

SA Ibrahim: Chris, this is fascinating. We could talk forever. But let me try and wrap it up by leveraging your credit expertise across the board and say that, are you nervous about … We’ve had a great economy for such a long time, are you nervous about what might be happening with rising rates? I know many mortgage lenders are feeling … With the refi having gone away and rates going up, they’re feeling that the world is getting more competitive and tighter. And the number of borrowers limited. Do you see this translating into potentially home prices leveling off? Or minor correction in the housing market and credit markets? And how do you believe Meritize is positioned to fair when that happens?

Chris Keaveney: Sure. Yeah, so having been through a couple of economic cycles, I had a lot more hair before the financial crisis of a decade ago.

SA Ibrahim: Me too.

Chris Keaveney: And so, some of those lessons are still pretty much burned into my frontal lobe. We look at that stuff pretty carefully. Although I couldn’t tell you exactly what the timing is, I think our view here at Meritize is that there would definitely be a bit of turbulence and probably a bit of an ebb in the economy in the not too distant future. So we’re preparing for it here. We look very, very carefully three, five, ten years out in terms of what we think are areas of the economy that could be impacted. And we adjust kind of our strategy that way. In terms of the housing market, I think that based on what I’m seeing … I think that there will, at a minimum, be some geographic issues given what’s happened in the last five years or so in terms of housing price appreciation. When you see the interest rates rising, some of the other macro-economic factors such as issues … What people are calling trade wars. What we’re seeing with the yield curves. I think there will definitely be some issues. Hopefully they’re geographically isolated. And then, in terms of Meritize, we’re in a business that … One of the reasons I like it is that it does have some counter-cyclicality to it. Not that we would ever want an economic downturn, but when that happens, and folks lose jobs, it’s actually, in a lot respects, a situation where the economy is retrenching. It’s self-correcting in that it’s trying to find what are the new areas of growth? Those are usually areas where people need to be trained or re-trained. Which feeds right into our mission. So, if we’re smart about it, and we prepare for it, it actually presents a bit of an opportunity for us.

SA Ibrahim: Thanks Chris, and good luck to you as you continue to expand the business and grow the business. And hopefully we’ll have an opportunity a year or two from now, coming back to you and talking about how your borrowers who are borrowing from you now are interested in buying homes and becoming … And taking out mortgage loans. And how some of our viewers can access those borrowers as future customers. Good luck to you in creating the future, first-time home buyers and mortgage buyers. And productive members of the economy.

Chris Keaveney: We appreciate it. We absolutely would love to sit down and visit with you again. Good luck with your endeavor here.

SA Ibrahim: Chris, thank you for joining us this morning. I know you’ve got a busy schedule. Thank you for being with us.