How non-QM and smart securitization are reshaping lending with Jennifer McGuinness

HousingWire

On today’s sponsored episode, HousingWire president and returning Power House host Clayton Collins sits down with Jennifer McGuinness, the CEO of Pivot Financial. With her extensive Wall Street background and her experience at Deutsche Bank, CoreVest, and WinWater, Jennifer brings unparalleled expertise to today’s conversation about non-QM products and the future of mortgage securitization   Clayton and Jennifer dive deep into product diversification strategies, the importance of prudent underwriting, and the innovative securitization framework that Pivot is developing to level the playing field for small and mid-sized lenders. They also tackle persistent non-QM misconceptions, explore the untapped potential of first and second lien HELOCs, and discuss how VantageScore 4.0 could reshape credit evaluation.   Here’s what you’ll learn:   Why non-QM products are essential for lender survival in today's market, not risky subprime lending   How first lien HELOCs can serve as game-changing cash management tools for borrowers   The real story behind VantageScore vs. FICO and what bond markets aren't telling you   Pivot's revolutionary securitization framework could democratize liquidity for smaller lenders   Why product innovation — not just rates and asset prices — holds the key to housing affordability   Related to this episode:⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠   ⁠⁠Jennifer McGuinness | LinkedIn⁠  http://linkedin.com/in/jennifer-mcguinness-lubbert-2275b012  ⁠Pivot Financial⁠  https://pivotfinancial.com/  Pivot Financial | LinkedIn⁠  https://www.linkedin.com/company/pivot-financial-llc/  ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠HousingWire | YouTube⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q   The Power House podcast brings the biggest names in housing to answer hard-hitting questions about industry trends, operational and growth strategy, and leadership. Join HousingWire president Diego Sanchez every Thursday morning for candid conversations with industry leaders to learn how they’re differentiating themselves from the competition. Hosted and produced by the HousingWire Content Studio.

Transcript

00:00Products, services, components of manufacturing loans, they're all going to change over time,

00:06just like any vendor or any tech offering. But at the end of the day, liquidity is king.

00:19Hey folks, hopefully my voice sounds familiar. I'm Clayton Collins,

00:23the CEO at HousingWire, and I'm back to host an episode of Powerhouse.

00:26Today, I have an awesome friend and industry expert who has done some incredible things in

00:33housing and mortgage, Jen McGinnis. So Jen has been around Wall Street and the capital markets

00:39world of mortgage for quite a bit. She's been at Deutsche Bank and Corvest. She even spent some

00:44time at Premium Point Windwater, where she built the first hedge fund that issued AAA RMBS. Her

00:50expertise ranges from origination to capital markets, to technology, to credit data. And

00:57we hit a lot of those topics in today's conversation. We start out with non-QM. We end

01:02with frameworks for securitization. There was a lot of knowledge in here that applies to leaders in the

01:07mortgage industry, originators, and folks in real estate who are out there trying to work

01:13with homebuyers who may need more creative product in the future. I hope you enjoyed this conversation

01:18with Jen McGinnis, the CEO of Pivot Financial. I am shaking off the cobwebs here. It's been a bit

01:25since I've recorded an episode of Powerhouse, but today, Jen, thank you so much for joining me

01:30back on Powerhouse, the podcast that I started, and I'm thrilled to be back on the air with you.

01:35Well, I am honored to be the first guest that you are interviewing in a long time,

01:40and God knows you don't have cobwebs. You're just a busy guy.

01:43No, but I do have cobwebs on the podcast hosting. I literally had to go pull this mic out of a box

01:49and get ready for this one. But I'm excited, and I am energized, and we're recording this episode on

01:55Halloween Friday, October 31st. But we're going to keep this optimistic and not make it too scary

02:04despite being Halloween. Does that feel like a good path?

02:07Yeah, absolutely.

02:08All right, Jen. So we've been on stages before at HousingWire events. We've done lots of content.

02:14So I'm going to jump right into this conversation with you and talk about non-QM. So we just came

02:20out of NBA Annual a few weeks ago in the HousingWire Mortgage Banking Summit, and the topic of non-QM

02:26is on a hot streak. What's pushing non-QM into the spotlight right now?

02:33I think product diversification and being able to serve your entire customer base as a lender

02:40is making non-QM more and more important. I mean, if you think about it, non-QM has always been

02:46important. It's really just non-agency product. And I think that sometimes it gets a bad name where

02:53people call it subprime. This is not subprime. This is non-agency, all day, all to be at best

02:59from yesteryear. And they're prudent products and necessary for liquidity and borrowers getting

03:06the lending products that they need.

03:08Yeah. We've done a lot of content on non-QM over the years with experts from DeepAven and AngelOak

03:16and yourself. And that comment that non-QM is not subprime is something that I feel like we keep

03:24having to address year in and year out. So for the uninitiated, the folks who haven't heard this story

03:31before, what are the products that fit inside of this non-agency slash non-QM category?

03:37Yeah. So, you know, you're going to have jumbo loans. You're going to have

03:42first lien non-QM. So let's call it a bank statement underwrite loan, or quite frankly,

03:47just slightly a step out from agency allowables. You're going to have first and second lien HELOC.

03:53You're going to have DSCR, bridge, fix and flip, ground up construction, business purpose loans.

03:57And, you know, you'll have a couple other little products here and there. But, you know, I think that,

04:02you know, the market kind of goes, uh-oh, should we do these? Because they hear like one bad story

04:06here and there, you know, look in any product, there's going to be good and bad underwriting

04:10guidelines and lenders just need to make, you know, uh, prudent decisions on which products

04:15they're choosing to originate. We've heard talk tracks from originators that want increasingly

04:21diverse product suites, like you just mentioned. And we've also heard from other lenders who say,

04:26hey, my superpower is being, you know, really focused in a, in a tight lane. We've also heard

04:32that narrative like change at different, um, at different points in a market cycle based on

04:38origination volume and, and interest rates. What do you, what do you think is driving originators to

04:43seek this more diverse product suite today? And are there specific products inside of the non-agency

04:50suite that are really gaining the most traction? Yeah. I mean, I think originators are finally coming

04:57to the conclusion that if they don't start to offer a more diversified, you know, menu of products that

05:03they're not going to be able to hit their volume targets, nor service the customer base base and the

05:09geographies that they're located most effectively and efficiently. The other thing is, is, you know,

05:14I think this took as long as it did in some instances because, um, the lenders really got to become

05:20an AUS only world. And most of their underwriters became an AUS automated underwriting system only

05:26set of underwriters, you know, certain non-QM products are still an overlay with DUS, AUS,

05:31excuse me. Um, and, um, you know, some are not, you really need to manually underwrite some of these

05:37products. So, you know, I always say, and I've been quoted saying this a lot, like get back to

05:42underwriting loans for real. Okay. You know, and, and, you know, the GSEs just because you have a DU

05:48approved eligible doesn't mean that if you check the boxes on that, you know, DU that your loan is

05:54going to qualify. You've got to look at their, you know, seller service or guide as well. So I think

05:57that's important. Products that I think, um, are very important today. I know everybody's a huge fan

06:03of that second lean HELOC. First lean HELOC, in my opinion, needs to become a much larger focus. Um,

06:11yeah, a little self-serving because we do first lean HELOC, but we do second lean HELOC as well.

06:15But, um, firstly in HELOC, if you really think about it, first lean and only lean on the property,

06:22right? You are, um, you could be done for purchase rate and term or a cash out refi,

06:27but if you pay down your balance, you can still draw it up over the course of 10 years.

06:32Now think about that in like a COVID scenario, instead of people having to leverage, you know,

06:36their 20 something percent credit cards, they may have been able to leverage, you know,

06:40they're at the time 6% first lean HELOC, right? 7% first lean HELOC. That's a big game changing

06:47feature. And it's, uh, you know, also more like a cash management account with regard to,

06:53you know, non-QM other types of first liens, dynamic income exists and the GSE protocols don't

07:00always work well with it. You know, understanding self-employed or heavy commission based underwrites,

07:07quite frankly, non-QM products are also two year tax return products, very similar

07:12to GSE products at times, but maybe have slightly more give, but that give isn't necessarily a bad

07:19thing, right? It's maybe just something that's a little bit more detailed, but trust me, the large

07:25majority of the non-QM products, if they take a little bit more credit risk in one aspect of the

07:29guidelines, they're insulating for that risk somewhere else in the structure of those loans.

07:35So again, they're prudently underwritten loans. And if you take the time to look at the stats on the

07:40loans, a lot of the time, the non-QM credit characteristics are significantly better than

07:46the GSE Fannie Freddie characteristics of loans. The, um, actual max LTVs are not as high. I mean,

07:53Fannie Freddie goes over a hundred, right? There's no over a hundred non-QM products, right? And, um,

07:59based on primary, second, and investor, you know, you see restricted LTVs and listen, everybody likes

08:06to talk about underwriting guidelines and secret sauce. What happened in the 08 housing crisis?

08:11What was one of the most important things that you needed to have to be insulated? Your valuations

08:17needed to be correct. So at the end of the day, in a doomsday scenario, and there wasn't a doomsday

08:23scenario everywhere. Then that's what you got. You have a house. Okay. And that's what you're

08:29going to have to liquidate in that doomsday scenario. So I think let's, let's focus on that

08:34a little bit, right? So the market needs to, you know, understand the credit world again, not,

08:40oh, well, there's an implicit guarantee from, you know, the GSEs. So let's just buy it up no matter

08:45what the credit characteristics are. So you mentioned the first lane HELOC. So from the originator point of

08:50view, who is a first lane HELOC a strong product for? Does that need to be the homeowner who's

08:58already paid off their mortgage or was a cash buyer? No, you can, like I said, you can do a

09:03purchase with a first lane HELOC, a rate and term refi or cash out refi, right? You don't have to use

09:09the optionality of a first lane HELOC of being able to take additional draws, but think about the

09:14fact that you can. So instead of going out and taking out a personal loan, or instead of getting a

09:19second lane HELOC at a higher rate, right? Now you got one payment. If you pay that balance down,

09:25that payment's going to come down with it. If you need a little bit more money, because I don't know,

09:30your water heater broke or something like that, and you don't have enough cushion. Now you can take

09:35that from, you know, your first lane HELOC for that 10 year duration. And I think that's important.

09:40Also, most first lane HELOCs are 10 year interest only loan. Lots of people go, oh my god,

09:46the rise of the interest only loan again. Guess what? I don't care what product we're talking

09:51about. I don't care what duration. All loans generally last 7 to 11 years on average. Let's

09:57stop spooking ourselves on things that are not spooky. I see what you did there. That's spooky

10:02on Halloween. I got it. I got you. Yeah, I'm going to give you the, that's my ghosty of the day.

10:06So, all right. So historically, depositories, the depository banks have been really strong on the,

10:15on the HELOC side. We have seen some of the IMBs and wholesale lenders start to introduce more

10:21home equity products. Tell us about that trend. What are we seeing there and how are they doing that?

10:27Well, one of the reasons they were locked up in, you know, the banks themselves is because they had a

10:31very wonky sweep account structure where, you know, the mortgage lender needed to sell a bank account

10:36in order to actually get those draws through. Years ago in 2018, we built a custom servicing structure

10:42for it where you don't have to sell a bank account. And I think that's very important. You know, now a

10:49borrower can just, you know, interact with their servicer on these products. And I think that's,

10:55that's an important feature. Again, it's just like a first lien mortgage, but you have much better

11:00optionality. Yeah. I also, I mean, I'll bring it back to an earlier comment you made about like

11:05serving the, serving the borrower. And it feels like, you know, in this environment where homeowners

11:13are staying in homes longer, significantly longer than they have historically, the access to equity

11:20has become an increasingly important consumer demand. And if the IMBs aren't able to, to help with

11:27that, that's a, you know, that's a relationship that's potentially walking out the door and,

11:32and killing potential for recapture at refi as those, you know, borrowers go elsewhere.

11:39But I would add one, I'd add, I'd add one thing there. And I would say not everybody should go take

11:44out only a second lien HELOC. I think, you know, LOs and lenders also need to do the work. You know,

11:49everybody says, oh, we need the second lien HELOC because, you know, everybody's got a 3% rate.

11:53Well, even if you have like a three, three or 4% rate, and you're going to go take out that second

12:00lien HELOC, if you blended that balance in the rate market we're in today, you may actually be

12:05better off refinancing that first lien. I think everybody just looks at it kind of like sticker

12:11shock, you know, like if you're in Walmart and you see like, you know, a blue and light special on,

12:15you know, line two or whatever, like just because you have 3% rate doesn't mean you want to go take

12:20out this, you know, higher rate product, let's call it an eight, blend them together,

12:24you're going to be better off refining that first lien. Okay, do the math, everybody and teach your

12:30clients, you know, how these things really work. One of the things I'd love to see happen in mortgage,

12:34and I talk about this all the time, you know how if you're, you know, working with your investment

12:38manager, you know, they ask you, you know, what's your risk today? You know, when are you going to

12:41retire? If you're older, they tell you to go a little bit into lower risk assets. Well, have that

12:46conversation with your borrower? What are you thinking about this house? Like, are you being

12:51relocated here, you know, only to work here for three years? And, you know, therefore, you know,

12:56in three years, you're planning to sell this house and move? What are you really looking to do with

13:01this? And to touch upon what you asked me, which I didn't answer earlier. Yes, people are staying in

13:06their homes longer, but it's not always your first borrower. There's been a lot of generational,

13:11you know, share of homes, you know, where the parents are a little bit older, and then the kids take

13:16over the primary residence. But I think you have to keep in mind, but that doesn't mean that the

13:21kids while the parents are alive have, you know, the open, you know, carte blanche to go refi that

13:26house. So I think we also need to, you know, think about those things as well. Is it really that that

13:31original borrower is staying in the homes longer? Or is it really that you're seeing that, you know,

13:36enhanced well from people that have let their 35 year old children continue to live in the home?

13:42See where I'm going? Such a important and interesting topic. We just had our focus on

13:48excellence home builders conference out in Denver earlier this week. And one of the hot topics with

13:54with home builders right now is how much demand for certain types of inventory is changing. And like

14:01the industry has wanted to talk about the need for affordable housing, which builders and a lot of

14:07people have equated to smaller housing, like like two twos, and builders are seeing the opposite shift

14:12right now. The demand is coming for larger three and four bedroom houses because one, people have

14:18waited longer to start to buy their first homes. So they're more likely to be have a family or be

14:23starting a family when they are moving into that first house or their multi-generational living.

14:29So like the quote unquote affordable, like two twos is not the product that's in demand by,

14:35by buyers. And builders are really having to contend with, you know, like this, like kind of narrative

14:41gap that like, Hey, if you want affordable, it needs to be small, but people don't want small.

14:46Yeah, no, I mean, from the builders that we know, and we work with, you know, the average house has

14:51now become a three, two and a half. Yep. Right. So they want that at least three bedrooms, two bathrooms,

14:56plus the half bath. And, you know, I think that's very important. And it's awesome that you talked

15:01about that at the launch of the builders and congrats on that, Clayton. Thank you. It was, it was cool. I was,

15:07you would like this event, Jennifer. It was, you know, I've been to builder shows before and it's,

15:12it's about like, you know, innovation and like in roofing materials or like installation. And this

15:21was not that this was a kind of a finance event. And like everybody, like the topics were debt capital

15:27markets, equity capital markets, M&A, margin management. It was a sophisticated group of private

15:34home builder owners. And then like the public co like CFO, chief strategy officer types. But I was

15:41super impressed with the people who joined us for this one. No, I think that sounds great. And we had

15:47a conflict or maybe we would have attended, but next time we're in. Well, we'll get you there.

15:52All right. So let's, let's pivot over and talk about credit data for a minute. So when we were at NBA,

15:57actually hosted a few podcast episodes with in the Equifax booth on the trade show floor. And I,

16:04got to talk to leaders from Equifax experience and TransUnion about Vantage score, but I think

16:11there's still some like elements of the conversation of like things that are being overlooked when the

16:16industry talks about the, the introduction of Vantage score under, under Pulte's directive and

16:22FICO direct. So I want to get your perspective. What should lenders be paying attention to as the

16:28future of credit data makes a, a, a, a pretty significant change.

16:33Well, I'm going to take that in two points because, you know, there's obviously the credit

16:36score and then there's credit data as a whole, you know, from a credit score perspective,

16:41I get why the market is saying, you know, we need competition, bring in other parties like this and

16:47that. But I think that they're missing the boat on the fact that this is not competition,

16:51right? The same credit bureaus have been providing the credit data and then FICO goes in, fixes all

16:59the problems with it, does additional calculations, produces the credit score, et cetera. Well, those

17:05same credit bureaus. So again, you see this, the same thing, credit bureau, credit bureau. Okay.

17:11Now are the owners in joint venture on Vantage score 4.0 and then Vantage score is going in and

17:19creating, you know, their score. Now I think there are, you know, in Vantage 4, there are some really

17:24good, you know, optionality there, but I think, you know, the market is not focusing on also the

17:31fact that FICO has a FICO 10T. So the weirdness here is that Pulte approved, you know, Vantage 4,

17:38but at the same time, a couple of years ago, FICO 10T and Vantage 4 were approved at the same time.

17:44But now the GSEs are building for FICO Classic and Vantage 4.0, right? And they're not the same

17:52thing, right? They have different, you know, adjustments to them. They have different data

17:58components to them. So the first thing that makes absolutely no sense to me is why wouldn't you put

18:03two of the most recent models in play side by side? So my opinion is FICO 10T and Vantage 4,

18:09put them side by side, and now we have the more current models. So that's my first thought.

18:15Additionally, a 700 FICO from FICO or a 700 credit score and a 700 from Vantage 4.0 are not the same

18:23thing. The models need to be looked at. They need to, you know, understand that. The other thing is

18:29there's, I forget what the exact verbiage is, but there's a quote going around, you know,

18:33additional borrower inclusivity, I think is what they're saying, using Vantage because allegedly

18:39it's going to score borrowers and bring more borrowers to the lending market. Well, my question

18:44is just because you can score a borrower does not necessarily mean that that score is going to

18:49qualify them for a mortgage. So, you know, I'm really one of those that gets into the weeds and

18:54gets black and white. My whole thing is let's stop with the big verbiage use cases here and let's

18:59take the two most recent models, do the work on them, and really figure out who's adding the most

19:05value. The other thing is nobody's thinking about the downstream and the upstream impact of this

19:10change. You know, the bond buyer has to get comfortable with new scoring tools, and they're

19:15going to need to understand if those tools are the same. Rating agencies putting out write-ups, just

19:20literally putting a footnote in the bottom that says, we just assumed that Vantage 4 and FICO's credit

19:27score is the same in this analysis, doesn't help anyone, right? Let's actually do the work

19:33and, you know, and focus on that. The other thing, you know, the evil, you know, it costs too much

19:40factor, right? Yeah, well, if you combine all of the credit bureau data and then you throw FICO or

19:46advantages cost on top of that, right, it costs X dollars. But you have to remember that the third

19:53party aggregators selling it to you also are putting a spliff into that number. So there's the real

19:59base costs from the bureaus, there's the real base costs from FICO or Vantage, and then they're putting

20:04in a margin on top of that. It's kind of like appraisals. The appraiser does not get paid the

20:09dollar amount that the lender pays the appraisal management company. They're making a margin on that

20:14as well. So I think we need to tease that out. FICO put out that they're charging $4.95 a score,

20:20okay? Then if you actually look, Vantage just decided they were going to undercut that. That's

20:24before this latest and greatest change. And they went, all right, ours is going to be $4.50.

20:29Guys, I mean, like, you know, $1.20 across three scores is not going to move the needle on anything.

20:35And there's bigger fish to fry on the cost to originate. And then, you know, with regard to

20:41FICO's new offering, you know, the compilers are going to put it together. Great. My problem

20:46overall with credit scores is credit bureaus. Could we please get the data consistent and clean,

20:54okay? If you look before, you know, Trump started shutting down the CFPB, credit bureau and credit

21:00inquiry was one of the largest complaint pieces that the CFPB received. But instead of focusing on that,

21:07and the fact that it increased almost 70% over like five years, right, they focused on getting

21:13more money out of the mortgage industry. So let's clean up the bureau data. For your humor,

21:19my own credit bureaus, one of the three in the TriMerge says that I work at a job that I left in

21:232009. That's a problem when you're really using a credit score to be the predictability of will your

21:32debt get repaid. The other thing is, if I see it one more time, if FICO is so great, why couldn't

21:37they have, you know, predicted the housing crisis? That is not what credit scores do, okay? That is

21:44not what we do with the credit score, right? So I think, you know, hey, here's an idea for Clayton.

21:51Let's do a, you know, webinar on what a FICO and credit score really is and what it should be used

21:57for versus what everybody keeps talking about. And I think that would be awesome. And I bet you,

22:02you would get a credit advantage and FICO to take part in that.

22:06Well, let's give it a quick, a quick punch right now before we move on and talk about,

22:09you mentioned the bond market. I want to get into securitization, but earlier you talked about like

22:14the importance of valuation. So like there were, we're underwriting the asset credit score is

22:18helping us understand borrower risk. Like when you say that the utilization of credit score is

22:22misunderstood, like how, how are lenders using credit score? And, and, and I'm sure that answer

22:28is a little bit different across non-QM and, and agency, but I'm just curious in your, in your quick

22:33take there. I mean, credit score will generally drive pricing categories for mortgages because it

22:38really is a predictor of possible risk of repayment or not, right? So a 660 FICO versus a 740 FICO is

22:46always seen as a different borrower type. But if we really, you know, tease out the weeds,

22:52I'll tell you straight up that if all of a sudden you went and took your credit cards and took them

22:55to over 51% utilization, your credit score is going to swing by a hundred to 200 points. And then if

23:02all of a sudden you paid it down, right, it's going to swing right back to where it was. Let's call it

23:07the high 700 range. So I think, look, there's work that can absolutely be done in credit scores. And I

23:13would love to see them actually put income data into credit modeling, but that is not what they do

23:18today. Right. They only look at, you know, what has been your debt profile? What is your credit

23:23availability? What is your use of credit? You know, and those types of features and how have

23:29you performed on that credit to then, you know, actually produce that credit score. So, so again,

23:37but you have to understand that the models all have swings without additional data inputs that have

23:41never been considered in credit scores. It's not going to change. So, right. So, so I think that's

23:47important. Is the bond market kind of on their toes with like, with, with knowing what to expect

23:54once we start to see securitizations? Absolutely not. The bond market will start worrying about it

24:01when it really looks like it might possibly go live. Right. I mean, you do have the rating

24:06agencies putting out some write-ups on it, but the bond market's not going to worry about it until

24:10they actually have to take it into consideration on execution. And, you know, listen, there'll be a

24:15couple of research guys that'll disagree with me, you know, that have been quoted on this,

24:19but the guys on the desks still pricing bonds today sees it as business as usual because they're not

24:25using the information now. Therefore there's no need for them to focus on it. So do you think like

24:30specifically in like small and midsize size lenders, who I think you work with very frequently,

24:35are they going to have securitization challenges if they start originating vantage score loans and the

24:40bond market's not ready for it? Or like, what does that world look like come 2026?

24:43So today, you know, we're very much locked in an aggregator model, right? So that smaller to

24:49midsize lender is generally selling their loans or delivering their loans. So they'll deliver them,

24:54you know, the GSE, FHA, et cetera. Or they're selling their loans to, you know, aggregators,

25:00whether you're a midsize aggregator all the way up to the largest aggregators, and those parties are then

25:04securitizing the assets. I think, you know, no smaller or midsize lender is going to go 100%

25:12onto vantage score unless the aggregators that give them liquidity today are going to say that

25:18it's okay, right? And I think that that's, that's important. And the aggregators have to be thinking

25:24about it as well from their liquidity workout on that securitization model as well. If I make this

25:30change, what is going to be the outcome of the change? Will that change be priced in at some point?

25:36Will Vantage or FICO be seen as better or worse? You know, I think there's a lot that remains to be seen

25:41on that.

25:43So when I do these podcasts and I shake off the cobwebs, Jen, I always remember to ask my guests,

25:48if there's one thing we leave the show and don't talk about, what would you regret? Then you quickly said

25:54a new securitization framework that you're working on at Pivot. Tell me about this securitization

25:59framework. Yeah. So Pivot is working on a structure that will allow for that small to

26:06midsize lender and larger lender, but not the largest lender per se, to actually achieve

26:11securitization liquidity for themselves. We're going to marry multiple lenders together and we're

26:17not going to do it in M&A. And we're going to allow them to issue their own bonds and we're going

26:21to achieve a AAA rating. And you want to talk about competition in the market? That's how you do it.

26:26Okay. Products, services, components of manufacturing loans, they're all going to

26:33change over time, just like any vendor or any, you know, tech offering. But at the end of the day,

26:38liquidity is king. If you can get liquidity as a smaller and midsize lender, that's as good

26:43as those larger guys, it is game changing for the lending market and really important.

26:50So does that mean, all right, so today that small midsize lender is going to sell to an aggregator

26:55in the future or when the pivot securitization framework is in market, they have the option,

27:01hey, we could sell to an aggregator or we could partner with peers and securitize directly through

27:07this pivot framework. Right. And the best part about the new structure is the lender will take

27:11no additional risk than they take today. If they sell a loan, a non-agency loan, for example,

27:17to an aggregator, they all make reps and warrants, an agency loan as well, standard reps and warrants.

27:22Well, one of the things that bondholders or bond buyers, excuse me, have, you know,

27:27really focused on is get me diversification across lenders. Well, a lot of the time,

27:33even those larger issuers really are not achieving that diversification. They're buying a bunch of

27:38loans from another aggregator or a lender, but they're getting those loans from a bunch of other

27:42guys, but their real recourse risk is one place or maybe three. Okay. But they tease out on purpose

27:49who the originators were so that to the bond buyer, it looks like a diversified, more unsaturated pool.

27:58Well, what I'm going to do is actually create that unsaturated pool where you actually have the

28:03right recourse to the right places to multiple lenders that are really going to stand behind

28:08those loans. And at the end of the day, you know, that's actually the way this market should work.

28:13So for the lender, does that result in better gain on sale margin, like pricing advantages? Like

28:21what's the financial benefit?

28:22You know, like loan sale 101, right? If I'm the originating lender and I'm selling to a larger

28:27aggregator, do you think that the larger aggregator who delivers it to the GSE or securitize it

28:32himself is doing it for free? Or do you think that the pricing differential is there so they get,

28:37they make a significant margin? Well, I'm going to give the margin back to the guys that actually do the

28:41work. Okay. Yeah. I mean, it's, it's kind of similar to the, you know, the conversation about

28:46the like credit data providers, like, no, like nobody should be doing work for free. Like we

28:52don't expect FICO or the bureaus or the resellers to do work for free. But if there's an option to

28:57make a market more efficient, more direct, that, that takes a stakeholder out.

29:03Yeah. And again, that's what the bond buyer wants. They want a diversified set of lenders.

29:09They want a diversified set of underwriting and they want that, you know, piece. Right. And I,

29:16and I think that's really important. Um, the other thing, you know, you just said the word for free,

29:21just because somebody says the word for free out loud doesn't mean it's free. So like, for example,

29:26um, I forget which one of the bureaus came out and said, we'll give the vantage for free.

29:30They're not really giving it to you for free because they're saying, we'll give it to you for free.

29:34If you buy FICO, well, guess what? The bureaus still get paid if you buy FICO. So let's be

29:39careful on what the word for free really means. Well, yeah. I mean, it's like the long standing,

29:44like business lesson. If, you know, if, if something's free, then you're the product,

29:48um, or, or like, or some variant of it. Um, your, your, your costs are getting subsidized

29:53somewhere in the game. All right. So what are the, what are the hurdles to this, um, direct

29:58securitization framework? Like what, why hasn't this been done sooner? What's the significance

30:03of this happening now? Why has it not been done sooner is because the mortgage market likes the

30:08little monopoly that we live in. And also the markets that we've been sitting in have been so

30:13agency driven for a very long time. I would not be shocked if you start to see agency eligible loans

30:19get securitized away from Fannie and Freddie in the future. Okay. And I think, you know, believe it or

30:25not, those aggregators would get better liquidity. Um, also, you know, look, the market was a little

30:30bit crazy for the last couple of years, Clayton, like think about the uptick of the rates in 2022,

30:34et cetera, et cetera. We're starting to see some alleviation, but I mean, I know Powell didn't give

30:38anybody the warm and fuzzy about December, you know, in the meeting that just passed either.

30:43So look again, I think, um, different product structures as well. You know, um, the other thing is

30:51why aren't we done yet with the structure? It takes time to build a structure like

30:55that. You want the buy-in of, you know, vast array of stakeholders in the market. You want the

31:00bond buyer to be ready for it. You want the rating agencies to be on board with it. You want

31:05the mortgage bankers association, for example, to approve it. And you need the lenders to

31:10understand it. Nothing that is worth creating happens in 10 seconds. Now I, I'm still chuckling

31:16on the Powell mentioned. I feel like most politicians and business leaders know how to

31:21deliver bad news and make it sound good. Powell's the guy who delivers good news and makes it sound

31:27bad. And it's like his, uh, that, that presser this week was, um, that was a tough one to listen

31:34to.

31:34You guys got to remember though, Powell was not trained as a public speaker, right? That's not

31:40who he is. He's, he's an economist lawyer, right? And, um, you know, if, if you really want

31:46somebody who's going to give everybody the warm and fuzzy, you don't generally put that field and

31:50background in front of people, but he's the head of the fed. So what are you going to do? That's who

31:54he is.

31:55I think he's also doing what he intends to do. Like, I think he meant to come out and like,

32:00Hey, we're going to, we're going to lower rates. We, you know, we're, we're going to hold the

32:03balance sheet steady, but I don't want you to get too happy about that. So I'm going to, um,

32:07you know, put some sandpaper in my voice on this one.

32:10But you know what? I think, um, the comment about, you know, yeah, you know, housing needs

32:16to recover, but we're not going to be that focused on that. They may need to wait a little

32:19longer is wrong. Um, he said a very important nugget that I think is beneficial to think about

32:25for housing, that the roll off of the mortgage backed securities that they have on their balance

32:31sheet, he's going to reinvest that cash in short, short term treasuries. Okay. Well, that means

32:37that the mortgage market is going to, in his mind, be recovering on its own. It doesn't need

32:42to be propped up as much. And everybody is focusing on, Oh, you know, housing will recover

32:47is what he said. But again, they're not going to go put another slug of capital into mortgage

32:54backed securities. That's actually a good thing. It means that the competition on the market from

32:59buyers should be sufficient for the mortgage industry. And, you know, and you're right. He's

33:04not the most politically correct guy in the world, but he's saying certain things that

33:08people need to also hear and pay attention to. And I think that's important.

33:13So he said that they, the, they, they start investing in treasure, 10 year treasuries.

33:18He could have said, and he did not. So let's be really clear here that they could invest in

33:22mortgage backed securities, but if they, even if capital is going into treasuries and they

33:28hold the balance sheet steady, does that imply that they'll keep, do you, do you think,

33:33I know you're not like on the federal reserve board here, Jen, but like, do you think that

33:36means they'll hold the, the volume of mortgages steady on the, on the balance sheet and that like

33:42results in less selling? I mean, if you go and you really look at all the details of what was

33:49written and said, they're really only rolling off what's coming to a maturity event, right. Or,

33:56or, or, or clean up. So it's not that they're going to do like a fire sale of every MBS on their,

34:03you know, balance sheet or treasuries for that matter, things that are naturally rolling off.

34:08Now he's going to take that capital and reinvest in something else. And I think that's important.

34:13He's not saying MBS is a bad holding. He's saying, you know, I've got this roll off cash coming and I

34:18think I can put it into treasuries now. Yeah, no, that's a, you know, important,

34:25important nuance to hear in the, in the messaging. So as you, you know, you interpret that,

34:31that presser and in this move, what do you, what do you think that mortgage originators or mortgage

34:38investors might be missing or anticipating as they think about the next few months?

34:42I don't, I don't know if it's necessarily a missing or not anticipating. I think, again,

34:49I think too much discussion happens regarding rates. Okay. Every rate market. I mean, my

34:56grandparents' first mortgage was like 16.75, right? So every rate environment can be productized.

35:04Borrowers can be lent to, but again, we're stuck very much. Actually, I just wrote a editorial about

35:10it. We are stuck in a very, you know, still 30 year fixed world, even though there are some arm

35:16products out there, you know, five, one to seven, one, 10, one arm, but we are very much stuck in

35:20that 30 year fixed world. That's why it's not working as well for everybody. Okay. Get back to

35:26proper product design there. You know, and I didn't say go create the option arm loan and give it to

35:32everybody. Right. But again, the option arm loan for who it was designed for was not a predatory product.

35:38Right. But when they started giving it to like $25,000 a year wage earners, that's not good.

35:43Right. So again, create products for specific use cases for, you know, what it's meant and needed for

35:52give that home ownership back. Floating rate loans are also in a market like this where rates may

35:59pothole a little bit like they did. I call it the pothole effect, right? Going over on a road,

36:04you know, are not a bad product, especially for that borrower sitting on the sidelines thinking

36:10that the rates are going to go down still. So give them the floating rate loan.

36:15But that kind of product innovation and product creativity requires private capital that that

36:21wants to buy and invest in that. There is more private capital out there screaming

36:26to invest in non-QM than I care to mention. Right. And again, non-QM is not a bad word.

36:32Some of non-QM is identical to a full dock underwrite of a GSE loan, but they'll allow

36:37a different product, like a different property. You know, I mean, it's not it's there's a ton

36:42of money out there, but there is absolutely no interest in creativity, you know, and in

36:48a big way, there's creativity in certain silos. But like, you know, before, you know, I've seen

36:54some things come out now and, you know, Tom's going to call me and scream at me for this.

36:57I don't want to see a second lien DSCR loan. I don't want to see it. I helped create the DSCR

37:03loan. I know those borrowers. Well, I know those guidelines. That's not creativity. Creativity

37:09is bringing more borrowers to homeownership. OK, making it so that they can actually afford

37:16the payments. Right. And, you know, non-affordability is really more product driven right now than

37:24anything else. And I think that that's important. The housing market was not usually more affordable

37:30before. The rates were just lower. A little more work. Everybody can own homes. That's a

37:35that's a swing. We talk about affordability so much. We talk about two things, asset price

37:39and interest rate. We don't talk about product. Right. Wrong. Right. Hey, rates, unless there's

37:47a global pandemic. And yes, Clayton, you can use this video against me if I'm wrong. Right.

37:51Are not going down to two percent again for a very long time. And they should not have stayed

37:57in that village of that, you know, two to four percent as long as they did. You know, I've heard

38:03and had people in, you know, sitting on trading desks in charge of billions of dollars of loans.

38:08Look at me and go. Rates of this level are unprecedented. No, they're not. These rates are actually

38:15at a decent level to historical norms. And we're on our way to that, you know, mid to high fives

38:21village. And I think that, you know, everybody needs to come to Jesus, that that's actually

38:25more normal than where we've been. Well, Jennifer, if we post this clip on Twitter,

38:30you'll be joining Logan Modashami with the crowd of doomsayers with pitchforks chasing you

38:36down and saying, no, no, no, it's all rates. But I agree with you. And I think you're onto

38:40something here that needs to be a bigger conversation. Agreed. Yeah. Jim.

38:45I'm with Logan. They can chase us down with the pitchforks. It's OK. Yeah. Especially on this

38:49Halloween recording. We're still going to outrun them, Clayton. My money's on me and Logan.

38:55I'm right there with you. We'll draw the Hordor line right behind you and hold them back

39:00in a true Logan Modashami-ism. Jim McGinnis, Pivot Financial, thank you so much for joining us. I

39:06think we dropped some knowledge today and got into some topics that haven't been hit in quite a while

39:11on the Powerhouse podcast. So thank you. You're welcome. And thanks for having me,

39:16Clayton. And greatly appreciate that you did this one-on-one. Have a great day.

39:19You too. Have a great one.

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