EPISODES
Episode 39.
Barrett Clayton, Director of Secondary Markets at Lima One Capital
How does a private lender price loans? This is a tricky topic to cover, but Barrett Clayton of lemoin capital gave me a crash course. Buckle up. Securitization, macroeconomics, yield curve, tigers and lions and bears. Oh My, I’m Dalton Elliott. This is the real estate of things podcast. Thanks for listening. You’re listening to the real estate of things podcast. Welcome to the real estate of things podcast. I’m your host, Dalton Elliott. I’m joined today by a dear colleague and dear friend, Barrett Clayton. Barrett is the director of what are you? Director of secondary markets at Leem one capital. Very lofty title you have. That’s right. Yeah, it sounds like very important. Bear the the more words in the title, the more important the person. So you beat me out on that today. I’m a simple boy, but, Barrett, thank you for carving out time to chat with me. I’m going to pick your brain for the next little bit and I think the best way to kick this off is tell me about you. You’ve you like me. We were trying about this the other day. Right now we’re in June, two thousand and twenty two this is seven years of me being at Leemoon capital. Started here six weeks after I graduated college, and you’re not terribly different story, right, your your yeah, so talk to me about yeah, that’s right. Yeah, I’m coming up seven years in the company as well this fall. Joined in two thousand and fifteen, really kind of my first real job out of college as well. Started and our rental thirty underwriting team, similar to you as well. It’s been a little bit more time in there than you did, I think. But yeah, worked and Renal thirty underwriting for a few years then got the opportunity to move over to secondary markets, capital markets, in two thousand and seventeen and have been in this role ever since. Yeah, and so much has happened for us as a company in that time and our capital relationships and it just that’s right. As you know, a lot of waters to navigate. Really like, as I think about it now, like we’re you and I young, like I’m twenty nine. How old are you? Twenty, twenty nine, turn turn thirty and a few days there you go, old man bear walking around here. But you think about so much wildness has happened. Like you were in the capital markets world when covid hit, and I know that was a that was a true of roller coaster ride, and us one capital being fully acquired by MFA, publicly traded, read like you’ve you’ve so early in our careers, to be able to be part of these massive moving beasts is such a cool thing. And so all that to say, yeah, it has been. It’s been a blessing for sure and really cool to see.
So, you know, I’ve we’ve seen the company grows so much. My starting capital markets we were probably funding twenty million a month and now we’re, you know, upwards of two hundred million to three hundred million a month and and so it’s been really, really cool to see so much has change. You know, I I credit a lot to you, to my mentor here, who was had forty years of experience. Really took me under his wing and helped me, you know, grow a lot and learn a lot of how to structure deals and and different ways of financing our loans, and so it’s been really cool. Yeah, shout out the treas. more is right, a beacon of the mortgage industry. I think he created the mortgage. So all right, we will not continue down memory lane too much I although I want to. Let’s talk about how private lenders price right. So a constant. It’s a constant. I’m on the sale side and our inside sales retail team or broker team outside sales like constantly pricing. That’s a major factor in every single conversation, every single relationship and at landers are there are similarities, but like it’s such a mixed bag on how does a private lender price their auduct right? That’s not just one person saying now, let’s move it up, let’s move it down. You have major macroeconomic factors that come into play all the way down to like our, you know, corporate philosophy on credit risk and pricing. So if I ask you the question, how does a private lender price it’s loans? How they come up with pricing, explain it to me like I’m a five year old. How would you take a stab at that from a very high level? I know it’s a big question. Boil the ocean for me. Yeah, so the first and foremost how a private lender would price would totally be dictated on what they’re financing strategy is and their cost of capital. Right. And so in our industry specifically you’ve got, you know, established lenders who have, you know, been around for ten, fifteen years, and then there’s also still a lot of you know, mom and pop, our money guys who are, you know, at twelve thirteen percent, you know interest right for fixing foot plun right. So it all really depends on your financing structure and your cost of capital and how you would price. And then also, clearly the product type. Here at Lima One, you know, we’ve been I’ve been blessed to see all the different produc types that we offer. Right. So you know, a value ad multi family loans different, and then you know mom pop sing…
…lass at rental loans. So the those all get, you know, treated differently. But but on a high level, like what’s the private lender doing? Are they holding all their loans in cash, right, and you know, just taking in that cupon? You know that’s going to be very expensive. Are they trading their loans to a third party, right? And if they’re doing that’s that third party doing that? Are they? Are they financing it with warehouse lines? Are They securitizing right? And then, yeah, also be like as a lender, what are you doing with those loans? is going to be kind of how you price price your book. Yeah, and looking at I think of it in three buckets, like selling low whole loans, you’re holding whole loans, or your like securitizations, of another method to move stuff off your balance sheet. Of those three, like is there just from like where you sit philosophically, not necessarily through the lens of your job, but just philosophically, what what are your thoughts on each of those and kind of prose cons? Are there any kind of glaring big pros or cons with those? Yes, yeah, I mean, if if you’re funding, you know everything, holding it on balance sheet, if you’re financing it or or not. Right. So, if you’re not, you can kind of do whatever you want from regrets standpoint, whatever you’re comfortable with. You know, if you’re good going to a hundred percent LTC, no appraisal, you know you can do that, right, and it’s going to be expensive for you to hold it. If you know, depending on the partners you work with. Right, if you’re whole own trading, what are they doing with it? Right? So you know if if they’re financing of the warehouse lines, that’s that’s great. You can you know you can get your cupons lower. But but what are they going to allow? Right? So the more the more people have their hands and and they’re in the cookie jar, right, like, the more restricted you kind of get from a credit standpoint. But in turn that allows you to get typically a lot more competitive with your pricing, you know, given the institutions that you may or may not be working with, right all the way up into, you know, SMP rated securitization, that that, you know, is going to have loads of constraints. So what you can or cannot put in that what you have to do versus, you know, what may not may or may not make a ton of sense from a you know, operation standpoint. But you know, check the box exercise you might you’re going to get great execution on that, depending on the market, of course. You know right now out, particularly…
…with the interest rate environment, markets have been a little shit here, little way beer in the normal right, but the high level that that’s how I wouldn’t answer that question. Yeah, and then the last few years really, you think, leading up to covid and through covid like, securitization in this space has increased, I think, drastically. Is that fair? Yeah, and and what’s you know, I think the driver of that is more institutional level involvement in this space. But how has the how does that whenever a company like Le More capital or ABC lending, like whenever a company dips their towe in the water of security securitizing loans? And because you can’t, you don’t just go out and say we’re going to securitize. If you’re doing twenty million a month, you know, okay, we’re going to securitize twenty million dollars worth of loans. Right, like these are these are much larger traunches. It’s like, what is it? What does that look like and how, over the last twelve months has that changed? I know that the market is very different, like fall of last year compared to, you know, as we sit in June of two thousand and twenty two. So what’s the evolution of that looked like as well? Yeah, so, you know, we’ve been in post covid artificially low interest rates for the past two years, which was, you know, really fun from a lenders perspective and, I think, fun for for everyone in our space. Right, I know that are, you know, rental Barrowers love being able to get those you know, mid to low for saw on their portfolios, right, and that’s that’s awesome. But you know, we haven’t operated in a space like that or a a right environment like that ever. And so, you know, doing that for two years it was great. We originated a lot of loans and a lot of people did right. And and as we’ve seen the rates fight go up, you know, there’s a lot of loans out there that are lower cupons and people need to do something with them, right, and so it’s been it’s been really interesting to see kind of how things have changed and kind of, you know, the pressure to do stuff with all those loans that the inventory in our space, in the securization market’s been now very favorable for bond buyers, right, because there’s all these loans out there that lenders need to do so do something with. And so, yeah, it’s it’s gone from a you know, it’s a lenders market and more too, I guess, investors or bond bond buyers market, for sure. Yeah, and then another shift, like you talked about the rate environment, right, like we had a couple years of of for investors, for lenders, like everybody,…
…it was kind of shooting fish in a barrel. That low rate environment was just a positive for everybody. And one thing I keep reminding myself like we are still at pretty close to historically low rates and like what you mentioned. You mentioned you and I both started as a rental thirty underwriterers and I remember I was underwriting thirty year fixed debt for rental, rental portfolios eight and a half, close to nine percent, and people were people are doing it. We were growing, we were growing at the company. That department was exploding. Of people are absolutely happy to do that. Now we’ll have people showing up burning down the building if we send out that. But all that said, like we’re still it. It benefits everyone to keep that perspective of yeah, rates of going up, but comparatively, still pretty low. That’s that’s a really good point. I think that’s a really good thing to keep in mind for a real estate investor. Right. So someone who’s been more seasons and has been investing and real estate for ten, fifteen years, they’ve their accustomed to finance. They they’ve seen financing their their rental portfolios at seventy percent. That they’re used to that, right. And so you know, the the environment that we have in and I think that it was, you know, sort of like crack for those guys, right, to get a rental rates that, it means, seemed like free money to them, right. So so what I would say to, you know, a newer real estate messter who maybe only been doing that in this environment or look over the last two years, that we’re still at a place or rates are historically low for for our space, and to maybe not be scared of that or diving into to getting a thirty year, you know, mortgage now because they’ve been used to seeing these you know, crazy little race like Oh wow, like this mine is really expensive. It’s really not, you know, from the macro perspective of where our business and where our industry has been, you know, as a whole. Yeah, Super Fair. And thinking back to like February, whenever rates started to move, like whenever we as an industry, and not us as a company, like we as a mortgage industry, rates jumped right compared to where they were and they moved very quickly, insanely quickly, to where, you know, nobody in this space or outside of the space was anticipating rate movement like that and such a short window. I don’t think. I hadn’t heard any expectation about jumps like that and you had so talk a little bit about like what happened February, March, and now it’s…
…now it’s a little more of a stabilized movement, if that makes any sense. But it was very it was fast there for a minute. So what in the world happened? And why did you keep telling me that everything was getting more expensive and us on the fourth floor had to go tell all the clients the hey, money’s getting more expensive, bear it. Why did you do that to us? Yeah, I mean that’s a great question and I think if if we knew the answer that back in in January, we would have been enabled to make a lot of money. But so, you know, we were all anticipating rates for going to increase, right, everyone at fed had made that very, very, very clear. We were expecting it. We, we think everyone thought that it would happen in a smoother, you know, smoother way. Our guess, slower right, and you know, fed indicated they’re going to move up rates and I think that people started pricing in interest rate increases that haven’t happened yet, and so it market just got a little little nervous, little nervy and and you know, we saw it spike and we’ve seen it kind of stable out over the last two months. Right at the both kind of gotten, you know, a custom to our rates are at which are similar to where they were, you know, three years ago. But you know, with that being said, I think that that initial way was really tough, but these next couple of months it should be a little bit smoothers. But I would anticipate, and you know, if you were telling me to read the dlist tea leaves, I would tell you that rates are going to continue to go up. If that’s going to move interest rates a few more times this year, if I were to guess, and so you know, another reason from a real esty investor perspective, to continue to get deals in now rather than later. Yeah, sounds right. I want to pick your brain a little bit about differences between fix and flip and rental pricing, right, because we’ll take will take our example here, because you and I knew this example best. February march rental rates, we were increasing them in pretty quick succession. Fix and flip. We didn’t touch fix and flip rates. I don’t think we touched them in February. I don’t think we touched them in March. Maybe it was early April, the first time that we tweaked the novel on fix and flip pricing a little bit, and the movement there has been materially less volatile than movement in…
…the rental world. So what drives the difference between? WHAT IS THE DIFFERENCE BETWEEN PRICING? You know, is the difference in fixing, flip and rental pricing? Let’s call it short term Rehab, short term construction loans, versus long term rental loans. We started the industry had pricing movement upward on rental loans in February and March, but using the example that you and I both know, it Lee more in capital, I don’t think we touched short term product rates until maybe the beginning of April. So why in the world is that? What are the differences there that make those two products operate so differently from a pricing standpoint? Yeah, sure, so a few major components that in. The first one you short touchdown is duration, right. So we need by that is the length of the loan. So your rental alone, your long term mortgage. Right, it’s going to be out there for potentially thirty years, right, and you’re fixing flip loan short term your from a lender’s perspective, you’re holding that. You’ll hold that from for eight twelve months, right, and half the bar be successful and get out of that, right. And so, Um, long term rates moved a lot quicker than short term rates, and so the the the spread between the two year and ten your Treasury got pretty flat there, and so that’s why we were, you know, kind of forced to move those rates quicker. holistically, the differences as well just kind of like keep in mind rise your credit profile. Between those two are pretty different, right on kind of the risk you’re willing to take. Typically, you know, those fix some flip loans are priced a little higher than the reals, you know, because some of that exists right the there’s some unknown with that project versus, you know, cash flowing performing. Rental property is, you know, relatively safe asset, especially as we mature as an industry, and kind of seeing that come to fruition, which you know, was why, you know, we’ve seen secured securization market, you know, blow up and rental thirty because, and by blow up I really just mean like grows so much. We could because the asset has is one of the strongest performing assets that you know, an investor can own and and just been very safe and performed well. Yeah, that makes sense. Very you’re busy, man. I’m gonna let you get back to it.
I can’t thank you enough for joining. This was fun. It was a good crash course in high level pricing from private understand point. We dove into some examples, wealth of knowledge. We’re going to have you back here again and we’re going to hold you to the concept that it’s going to be smooth sale and from here on out. Sure rates you’re going to go up, but smooth sale. And I finally got you on video and audio recorded. I don’t think I’m no exactly smooth sailing, but but hopefully it won’t be as quick the rate increases. All be is as as as Spiky as it were. I you can’t. Can’t walk it back now. Sorry, it’s already recorded, but no. Thanks again. I really appreciate you sitting down with me. Yeah, problem. Thanks all. Thanks. Thanks everybody for listening. Take care. Are you a real estate investor looking for the right lender that can finance all your deals? And help you scale. Lima one capital has the best suite of loan products in the industry, Barnet, whether that’s fix and flips, fix and holds, building new construction or buying rental properties. They have incredible financing solutions for it all. A reliable comments, since Linder, is one of the most important parts of your investment team, and that’s exactly what you get with Lima one. Let Lima one capital show you how they’ve helped thousands of real estate investor scale and increase their wealth. Check out Lima onecom or call eight hundred two five nine, zero five ninety five to speak with the consultant and preparation for your next project. Thank you for joining us today on the real estate of things podcast. Subscribe and tune in weekly for new content from the industry’s best while we continue to unpack the nuances of this dynamic market. Follow US across social media for additional insights and analysis on the topics covered in each episode, and remember to rate, review and share the show.
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