Steve Abreu has seen tough markets before. And while the current one is unique in its perfect storm of challenges, he sees a light on the horizon.
Abreu has been on the front lines of mortgage product innovation since the late 80s and 90s, when he helped pioneer Alt-A loans at Headlands Mortgage in Marin County, CA; and then as President and CEO of GreenPoint Mortgage and President of GMAC. In 2014, he co-founded Newfi Lending, where he is president and CEO. Newfi is backed by a large private equity firm, Warburg Pincus.
He talked recently with SA Ibrahim – his predecessor as GreenPoint CEO – about the issues making the space tight, and what Newfi is doing differently to have a pull-through rate nearly three times higher than its competitors. And on the horizon for 2019 … M&As.
Fewer Buyers, Margin Compression and Tougher Deals
One major challenge facing lenders today is a reduced applicant pool – fewer people are refinancing and buying homes since rates have been rising. “They’re very comfortable with their three-and-a-half note rate, and they don’t want to move into a 5-percent note rate on buying up,” Abreu said. “Valuations have peaked. So even at times, the houses are not appraising for what they bought them for, so they have to put more money down.”
He points to margin compression as another hurdle for mortgage originators to overcome. There’s a lot of thin pricing on the generic mortgages, Agency and FHAs, Abreu said. “So you’re dealing with some margin compression.”
Also, the deals that are coming in are harder, with higher costs to produce these mortgages, just because the easier refi rate and term deals are not out there. “You’re doing the more sophisticated cash out type of transaction,” Abreu said. “So overall, the market is challenging, but we’ve seen a little light here in the past few weeks.”
Innovation in the DNA
Newfi has grown quickly to be a top performer in the Non-QM space. But it has required flexibility for Newfi to find those niches. When rates rose, Abreu decided that competing mainly in the agency FHA space was too difficult. “With the DNA in the company’s history, with respect to GreenPoint, and understanding credit and rate risk, we went out and created our own non-QM set of products, which is not easy to do as a small company.”
Having the relationships and history helped, as the lender had to get warehouse banks and buyers of these mortgages comfortable with them and the decisions they were making.
And now, nine months later, about two-thirds of Newfi’s business is in the non-QM space. Abreu says that allows them to offers something of value – to underwrite and make the desicions in-house. For the size of the company, Newfi is pretty unique doing this type of business. “We’ve been able to carve out a nice position in the origination market with respect to the non-QM space.”
Abreu points to effectiveness once a loan is in the door, compared to competitors whose pull-through rate on this paper is around 25 to 30 percent. “It’s harder to make money if your pull-through rates are at 25 to 30 percent, because the labor costs are so high,” he said. “So we work really, really hard up front with the mortgage broker and the consumer, making sure that we have a viable mortgage that’s going to close, prior to hitting underwriting.
And Newfi’s pull-through in the non-agency, non-QM space, is upwards of 70%. “It’s pretty unheard of in this market.”
To get new business and be cost-effective in in a tight environment, Abreu points to the importance of seasoned wholesale reps. “You’ve got to really understand this collateral and how to originate,” he said. Some of the people on the Newfi team were top producers for GreenPoint in its heyday, and intimately familiar with Abreu and honing original product guidelines. This has helped them as they have trained mortgage brokers to have a more efficient process through the pipeline.
The cost is another factor for which borrowers need to be prepared. “Prior to getting that loan to underwriting, we’re making sure that there’s a high likelihood of that loan closing.” Abreu stressed the importance that the brokers understand the rate and all the things needed from that borrower to present to the underwriter. “We have to make sure two-fold that they understand in the conditions and the packaging of that loan, and that the borrower has all the required documentations, and that they’re comfortable with the rate.”
Predictions for 2019
Many small lenders aren’t able to offer the kind of boutique flexibility that Newfi can, being owned by a large private equity firm. Many of them will have to face some tough decisions. Abreu predicts in 2019, they would “see a lot of M and A happening out there.”
“There’s quite a few players that are either for sale or looking to do something more strategic with respect to the business,” Abreu said. “I do see some consolidation happening.”
He doesn’t expect rates to go where they were three or four years ago.
“It’s just going to be a tough slog. My hope is that the purchase market kicks back in here a little bit again as we come out of the holiday season here and after the Superbowl.”
Technology Platform – Global Innovators Past and Present
While certain market elements might be outside a company’s control, its infrastructure and investment in technology can make a huge difference in a company’s ability to make it through those ‘tough slogs.’ One thing Abreu pushes is investment in technology. “What we’ve built here is pretty unique, especially with our consumer portal where we own the rights and the codes with respect to what we built, and when we go out and give demos to either new employees or our investors out there, they really view what we’ve built as quite unique,” Abreu said. “I’ve showed it to large FinTech multi-consumer finance type companies here in the Bay area, and they’ve raised billions of dollars, and I’ve raised a fraction of a billions of dollars, and I think we’ve built something that is either superior, or really much better than what they’ve been able to create with a lot more capital and talented engineers.”
But technology won’t mean anything if they can’t separate themselves from the slew of startups trying to come out on top. That’s where the innovation comes in.
It’s about “going out and creating products … going out and finding buyers with a reputation the team has here, and our knowledge and relationships we have on Wall Street, for being a smaller company, being able to really talk to all of the bigger players and get approved with a lot of the big aggregators of the non-QM loans. It allows us to bring products to the street and to our reps that most guys our size are unable to do.”
Ibrahim recalled a time about 15 years ago where GreenPoint had, out of necessity, created a loan pricing engine and product selection system.
“We created one from scratch in less than a year for a tiny budget, which I recall was a little over a million dollars, and we were surprised when somebody recommended us, remember? For that global innovation award, and we actually won the award.” The CEOs reminisced, and Ibrahim congratulated him “on continuing with that tradition.”
A Light Ahead
“I do see a light in the tunnel here over the next few weeks, and I expect the business will pick up, and everybody will prosper again,” Abreu concluded. “But there definitely will be some M and A, a little bit more things happening out there with respect to how people view their ownership in the businesses. But overall, I expect this market that turn around here, and it should turn into hopefully a decent year.”