In this issue of The Institutional Risk Analyst, we speak to Sanjiv Das, CEO of Lonestar’s Caliber Home Loans, a home mortgage originator and servicer established in 2013 by the merger of Caliber Funding and Vericrest Financial. Prior to joining Caliber, Das served as Executive Vice President, Global Financial Solutions at First Data Corporation (NYSE:FDC), where he led the international business and played an instrumental role in taking the company public. He has also held executive management positions at several other companies, including the CitiMortgage unit of Citigroup (NYSE:C) Das spoke with The IRA’s Chris Whalen last week.
RCW: Sanjiv, thank you for talking to us. We first met you back in your days at CitiMortgage and since then you’ve done a lot of great things. Bring us up to speed on Lone Star/Caliber Mortgage and this new platform you’ve created for loan originations and servicing.
SD: Thank you. Caliber is now among the top four non-bank lenders in the US mortgage market. We have a distributed model of sales professionals focused primarily on purchase loans. About three quarters of our volume is in purchase loans. Caliber's entire platform is engineered to partner with realtors, builders and brokers to enable financing home purchases across the nation.
RCW: It is notoriously difficult to build a true retail channel through realtors, for example, as opposed to the advertising driven, direct to consumer approach of say Quicken.
SD: Caliber's phenomenal growth is based on its dedicated loan officer distributed model, and is a testament to the fact that our Distributed Sales model and Quicken's Direct model, can both co-exist in a low-touch/high-touch world. Generally speaking, Direct lenders specialize in low touch refi's whereas Caliber specializes in Purchase.
Caliber leverages its technology and digital capabilities to help our loan officers provide Realtors, Builders and Brokers transparency and confidence for their customers who are a buying a home. Our Distributed Sales and Operations model eases the complexity of getting approved for a mortgage and gives homeowners and realtors/builders the highest confidence of closing on time. Our entire team works like a trusted home purchase advisor.
RCW: Well that is certainly a fortunate choice given that refinancing volumes have fallen by a third since the start of the year vs 2016. The MBA is looking for maybe 10% in purchase volumes, on the other hand, which is good news for Caliber.
SD: Caliber’s model has worked very well. By focusing on strong realtor and builder relationships, with a primary focus on purchase transactions, our growth remains very solid despite the cyclical nature of the mortgage industry. We grew from $12 billion in loan originations in 2014 to $26 billion in 2015 and $41 billion in 2016. This is a great testament to a well implemented and robust Distributed Sales model. We are confident we will continue to grow in 2017.
RCW: What drove your success? What took you down the road of focusing in home purchases?
SD: Quite simply, there were not that many firms specializing in helping people buy homes. People define themselves as either Mortgage companies, tech companies or fintech companies, whereas at Caliber we define ourselves as a home purchase company. In Caliber’s business model, technology and digital capabilities enable the loan officer and realtor to provide a best-in-class homebuying experience, instead of front running the loan officer. We realize that even today, buying a home can be a complex, intimidating process. We believe our distributed sales model with best in class technology and digital support creates a high-confidence environment for buying a home.
RCW: And I imagine that the realtors welcome your model as well. You are both focused on relationships.
SD: That’s absolutely correct. The realtors know that Caliber is singly focused on closing purchase loans and can handle complex transactions that require extra diligence in some situations. The realtor-loan officer relationship is extremely important in ensuring the homebuyer has all the confidence they need to close on a home, no matter how complex. By the way, despite what's said about millennial home buying behavior, it is interesting to note that approximately 35% of our customers are millennials. This means that while people shop for rates online, a vast majority still turn around and come to their broker, realtor or builder to get a mortgage during the process of buying a house.
The IRA: Given the enviable position you have created for Caliber in the purchase channel, how do you see the rest of the market adapting – or not – to fall-off in refinancing volumes?
SD: We anticipated that the refi boom would eventually subside. There is a lot of evidence that Q1 was difficult for many refi players. We expect that many smaller, less-capitalized players will exit the market. Caliber has the advantage of scale and capital. As part of this, we fully expect to see a number of acquisition opportunities with the right retail sales partners, this year.
The IRA: We have that situation now. We could see 10-20 percent of the seller/servicers in the GNMA market exit the space in the next 12 months. They’ve been hanging on by their fingernails as the cost of servicing trebled.
SD: That’s true. Non-bank players that will be successful in this coming cycle will be those that have capital, scale, efficiency and a robust business model. It sounds contrarian, but Caliber has been waiting for a year like 2017 to separate those of us that are extremely well capitalized from the rest.
The IRA: Well, you worked at Citi with some of the best minds in the risk business. But the idiosyncratic risk of smaller businesses sometimes makes the financial analysis irrelevant.
SD: Yes, as leaders in this sector, we understand capital and liquidity risk extremely well and have spent a considerable amount of time with the Agencies around how best to de-risk the industry in the event of a liquidity risk faced by smaller, less capitalized players. I'm delighted to report that the agencies and regulators understand the issues and are aligned with us in finding more robust solutions for the mortgage industry.
The IRA: It is interesting that you are focused on the consolidation opportunity in the mortgage industry. Certainly helps to have the folks at Lonestar behind you. Much like Apollo with Athene and their subsidiary Amerihome Mortgage and then Fortress with NationStar and New Residential. Do you retain your entire MSR? Do you think about alternative financing for the MSR, kind of “capital light” if you will?
SD: Yes we are very fortunate to have Lonestar behind us. They are extremely disciplined and assess us on our financial strength as a standalone company. We look at consolidation opportunities on the basis of the strength of our own balance sheet.
We retain our MSR. With regards to alternative financing structure, we are constantly evaluating the most efficient capital structure for the company. We are very fortunate to have some great anchor financing partners in helping us explore new, cheaper ways to financing.
The IRA: Do you sell any of your excess servicing strip (ESS)? Or do you carry the whole asset?
SD: We carry the whole MSR asset.
The IRA: How do you see the economy and the mortgage market going forward? The numbers from the MBA are pretty gloomy, both the loan origination numbers and their forward estimates for GDP.
SD: We are taking a wait-and-see attitude on the economy. I would have thought that home buying would have picked up more significantly by now. It's clear the supply-demand imbalance is causing stress on home affordability. It will be interesting to see how future interest rate increases will impact home buying behavior. I feel comfortable about how Caliber is positioned in the purchase market, but I do think that 2017 will be an important inflection year in purchase.
The IRA: The credit box is clearly opening.
SD: There are a large number of customers who were impacted in the 2008 crisis with a good credit history that want to get back into mainstream borrowing. Many bank lenders are not ready for that. Good quality, non-agency eligible borrowers who demonstrate the ability to repay are a newly emerging market. We see that as an opportunity to work with these customers in a responsible way.
The IRA: Are these scratch and dent sort of borrowers?
SD: These are people who’ve had an event that disqualified them for an agency loan. Of the production that we have done, the delinquency rate experience has been extremely low.
The IRA: How do you view the regulatory world? With the election of Donald Trump, the industry is hoping for some relief.
SD: I take a slightly different view of regulatory matters. I’ve always believed that as long as lenders continue the highest standards of underwriting and risk management, regulation can be a good ally.
The IRA: The simple answer is that by and large most large banks and non-banks are horribly inefficient. Platforms like Caliber and Amerihome are new, integrated operating and data platforms. The difference in efficiency, including avoiding errors, is staggering.
SD: That is absolutely correct. Large banks had multiple platforms in the mortgage business, as a result of acquisitions that never got integrated. Now at Caliber we have one platform. By definition, we get it right.
The IRA: Thanks for your time Sanjiv.