REI INK

Less Pain, More Gain

How Tech is Reshaping the Real Estate Transaction By Brien McMahon In recent years, the residential real estate industry has been moving faster than ever before by virtually every measure, from the number of days homes stay on the market to the transaction processing times homebuyers expect. That is a sign of a vibrant, in-demand industry — but it is also a reminder that some aspects of the real estate business are overdue for an upgrade. Although the U.S. real estate market is one of the largest and most developed markets in the world, it is largely served by legacy players, many of which are stuck in the past and struggling to reinvent their business models. As a result, real estate investors, agents, lenders and consumers have been frustrated by antiquated processes, unmet promises and a lack of high-quality, integrated digital solutions. That might sound like a gloomy state of affairs, but it makes the promising innovations on the horizon all the more exciting. The real estate market is primed for disruption by new entrants that are more agile in delivering innovative digital business models that address the challenges consumers and professionals must navigate. This article explores some of the key pain points market participants currently face, and previews how a new generation of tech solutions are poised to make things better in a big way. Key Pain Points for Consumers:Understanding and Navigating a Confusing, Antiquated Process HomeAdvisor recently found that 86% of house hunters agree that the homebuying process is stressful, thanks to its many structural pain points. According to a survey by the National Association of Realtors (NAR), 33% of buyers aged 22 to 30 report that simply understanding the process itself is the most challenging part. While an incredible amount of information is available to consumers online, it can still be difficult to navigate without professional assistance. People want expert professionals they can turn to; the NAR survey indicates that credibility and trustworthiness are the most important factors when hiring a real estate agent, and that it is especially important for younger consumers. For more than half of potential homebuyers, the most challenging part is finding the right property, according to NAR. Buyers typically search for eight weeks and look at a median of nine homes. Once prospective buyers find a home they love, they still must navigate the many, sometimes vexing or archaic, steps in the buying process. They are certain to encounter multiple sources of friction along the way, from digging up obscure documentation for the mortgage application to the sometimes-befuddling title and closing processes. Key Pain Points for Agents and Brokers:Frustrating Tech “Solutions” That Solve Little The number one challenge real estate agents and brokerages face is simply keeping up with technology, according to 2019 research by NAR. Many real estate agents end up spending far too much time dealing with the various workflow systems and portals they need, instead of doing what they do best: helping clients buy and sell real estate. Agents and brokers often must use 10 or more individual solutions, and there has not been a full-service option for transactions across the home buying journey. This requires agents to manage their relationships and data in a highly fragmented and frustrating way. For example, consider the process of creating a comparative market analysis (CMA) for a property, the traditional report that helps agents and their clients contextualize the value of a property based on recent sales in the surrounding area. Compiling this essential piece of research is a time-consuming and largely manual task – one that has not changed much in decades. According to a 2022 research survey conducted by homegenius, Inc. and the Residential Real Estate Council, the majority of real estate agents surveyed spend over half an hour on a single CMA, with 31% stating it takes them more than 45 minutes. While there are a lot of great CMA tools out there, agents still must access multiple sources to compile suitable information before organizing it in a professional format. Key Pain Points for Lenders:Rising Costs, Secular Business Risks Despite continual investment in technology, loan production costs have increased by more than two and a half times over the last decade to an all-time high of $9,470 per loan in the fourth quarter 2021, according to MBA mortgage performance report data. Similarly, these investments have not substantially shortened the time required to close a transaction or meaningfully facilitated the complex coordination of stakeholders involved in a closing. Lenders also continue struggling to develop relationships with local real estate agents in a purchase market, and many are concerned about disintermediation from their customers. Key Pain Points for Real Estate Investors:Managing Complexity in a Rapidly Changing World Every real estate investor has their own unique portfolio and complex set of issues to navigate. However, one capability that every successful investor has is an ability to manage a wide array of competing factors to ensure that time, capital and other resources are focused where they matter the most. That depends upon having access to the information and tools that help them make the best decisions and execute on those decisions as efficiently as possible. A Market Ready for Change Every participant in the real estate transaction process, from investors to prospective homebuyers, is eager to bid these pain points goodbye. The COVID-19 pandemic accelerated the enormous changes in our personal lives with the reliance on digital solutions. Both consumers and businesses are now increasingly comfortable with digital solutions like Amazon, DoorDash and Instacart, resulting in broad and enhanced changes to the way we used to do things. Now taking hold in real estate, the question is not whether, but when real estate transactions will be driven by companies delivering digital solutions that leverage big data and analytics powered by advanced technology. Real Estate 2.0:An All-in-One Approach, From Search to Close What does this new-and-improved digital future for real estate look like? At Radian, we believed the best way to overcome the

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Toorak Capital Partners

A Responsibility for Positive Impact By Carole VanSickle Ellis When John Beacham, CEO of Toorak Capital Partners, talks about the company he founded in 2016, he makes particular note of the reach of his platform — and the unusual and outsized impact of a company about which most investors know nearly nothing. “It’s really interesting because most real estate investors have never heard of Toorak, but ultimately most of them have been financed by Toorak,” Beacham said. “We are not a retail presence but instead partner with lenders to provide capital for their loans. We are probably the most impactful company in the industry that people have never heard of.” Beacham recalled the moment he realized there was a need for Toorak, which is officially designated an “integrated correspondent lending platform,” to enable real estate investors and real estate lenders to access institutional capital. “Seven years ago, things were not standardized in this aspect of lending,” Beacham said. “Lenders in different markets had no standardized types of loans, no standardized types of credit guidelines, no standardized appraisal process, and no standardized loan documentation. Literally, every facet of every loan could be different lender by lender and market by market. It prevented access to institutional capital, and it made it hard for lenders to focus on making good loans because they had to worry so much about the capital side of things.” Beacham, already a veteran in the institutional capital sector, set a goal to find “the best lenders around the country in every market.” Then, via his new company, Toorak, he established a clear set of guidelines and credit criteria for loan purchases. This enabled lenders working with Toorak to know, in advance, whether loans they were making would qualify for purchase by Beacham’s new company. “It was a winning combination,” Beacham said proudly. “We have partnered with over 100 lenders and funded in excess of $8.5 billion worth of loans employing that original, basic model. It has changed the whole market.” Managing Risks & Maximizing Capital in Any Environment Toorak has made a significant impact in the lending industry in part because of the company’s dedication to analyzing and minimizing risks throughout the loan acquisition process. With more than $3 billion in assets under management at time of publication, the ability to accurately identify and evaluate risk in real time is crucial. Ketan Parekh, Toorak’s managing director and head of U.S. lender relations and capital markets, describes his job as a combination of risk analysis and mitigation and customer service. The key to Toorak’s wildly successful relationships with lenders, he says, is the company’s dedication to transparency. “We are determined to always be fully transparent about what we see as far as future changes in the market and how that will affect our ‘inflows,’ loans that we are bringing in,” Parekh explained. “Our top priority is making sure those loans make sense and will not default; we have a pretty wide credit box, but the loans must fit within it.” Parekh credits Toorak’s customized customer portal, Toorak Connect, for helping bring the whole process together for the company’s clients. The Toorak Connect portal is a proprietary platform that contains information about guidelines and pricing as well as providing clients with immediate feedback when they upload information to the system. “It helps our clients quickly and accurately identify what is important and what is not,” said Parekh. “This is obviously important to our lenders.” Parekh also spends a great deal of time managing risk on loans, which is a team effort at Toorak. “We have a loan acquisition team that goes through every single loan and compares the appraisal to the actual value of the property. We have an evaluation group focused on nothing but property values. We have dedicated valuation specialists with more than 25 years’ experience as licensed appraisers to review loan acquisitions. We are all part of a team,” he said. That team also evaluates the expertise and experience of the lenders who want to take out loans to make sure that their experience lines up with the loans they are proposing. “If a lender is focused in New York and then wanted to operate in Texas or Florida, we would screen very diligently because those states have very different permit and approval processes,” he explained. “Ultimately, I am always here to help our lenders move their paper and understand the risks from both sides of the equation.” A Team with a Long Track Record of Consistency & Partnership When Beacham founded Toorak, he did so with an eye toward improving the efficiency of the lending market and expanding available capital to real estate lenders. Frank Shiau, Toorak’s head of trading, takes particular pride in the company’s ongoing dedication to working with clients to create a lasting partnership that can stand the test of time. “Our ability to be nimble and navigate markets as they change is something I am very proud of,” said Shiau, citing Toorak’s recent adjustments during the COVID-19 pandemic as one instance in which the company had to carefully adjust how it evaluated markets. “There were ultimately a lot of opportunities for people in our space, but you have to be very careful about how much you are paying for assets so you are not overextended.” He added, “We prioritize keeping things stable even though we have also recently had some record months for acquisitions.” Shiau emphasized the importance of partnership with clients at Toorak, observing that the company values sustainability and consistency within its own customer base as well as in terms of company performance. “We are an ongoing business,” he said. “We are not looking for one trade from you; we are looking to build a partnership. We are in this for the long haul.” Beacham agreed, noting Toorak’s product mix is designed to address needs across the entire private lending spectrum. “We want our lenders to be able to offer multiple products to their customers and, ultimately, have the

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“Housing Crisis?”

Is the Fed Trying to Cool Down a Hot Housing Market? By Jennifer McGuinness Federal Reserve Governor Christopher Waller has stated “The housing market is definitely out of whack,” and even shared a personal story about how he recently sold his St. Louis home to an all-cash buyer with no inspection. He was further quoted as saying, “We’ll see how the interest rates start cooling things off going forward.” Low borrowing costs introduced to insulate the economy from COVID brought about a reported 35% rise in home prices over the past two years. While home prices are not part of the inflation indexes tracked by the Fed, they do feed into other factors, such as rents, and this is an influential component to inflation. Rising interest rates mean that borrowing for a house is suddenly more expensive. The 10-year Treasury note yield, a benchmark for mortgage rates, has risen due to expectations that the Fed is going to quickly increase rates. The average 30-year-fixed rate for a mortgage loan is now 5.42% as of May 19th, over a 2% increase since the year began. The last time mortgage rates rose this fast was in 1994. At that time, there was a 20% decline in home sales as the Fed increased rates and based on that, home price appreciation slowed. While many of the economists and Wall Street research teams predict a decrease in home sales again, they are much more conservative and have projected this at approximately 5% annualized by the end of the year. A Market Comparison The market however is very different than in 1994. Today, record-low housing stock, higher household savings, and a job market where there are approximately 1.5 jobs available for every person looking, not to mention the additional “mobile” or “remote” nature of today’s worker, are creating fundamentals that could materially impact many forecasts. The sale of homes that have been previously owned are at a two year low as of March, and mortgage applications were down as well. For the first time in a while, we have begun to see list price reductions on homes for sale with an average days on market of 17 and mortgage applications remain above pre-COVID levels. A review of housing data shows that the correlation between home price appreciation and mortgage rates, while still strongly correlated, has been decreasing the past 20 years. Record low inventory over the past couple of years also means there has been, and is, plenty of pent-up demand, particularly among Millennials ready to set up a home, whose share of purchases has been growing. Today, the average age of the first-time home buyer is 33 years old, and I believe we will see household formation numbers increase dramatically, as my opinion is that they have been under reported due to the pandemic and quarantine. Due to the rising cost of alternative housing, Baby Boomers have not downsized as quickly as anticipated and this is keeping, at times, larger homes from coming onto the market and these are generally the homes that are sought by the younger home buyer. In addition, too few new homes are being built. Pre-pandemic, we were already seeing millennials, who were renting in urban areas, moving out of those areas to more suburban locations and purchasing homes. However, the pandemic really accelerated those moves and we saw a lot of other people moving out of the cities and even moving to different states where, for example, the cost of living was/is better. The other thing that is very different now versus during the housing crisis, is that at that time there was over a 12-month supply of homes available for sale. In a healthy market, you will generally see a 6-to-7-month housing supply, and right now, we are generally seeing a 2-to-3-month supply. During the housing crisis, there was always the option of buying a home at foreclosure auction as many of the homes were underwater. But that is not the situation today. Approximately 90% of borrowers in foreclosure have positive equity, and over 20% of them sit in a 50% equity position. According to realtor research data, the share of all-cash sales was the largest in nearly eight years in March, a sign that much of the supply will be purchased by both investors and second home buyers. Another important note is that rent prices have gone up 14% year over year and we are seeing really strong housing permit numbers right now from builders. While this is positive, they have been under-building for approximately 10 years, so it will take them another four to five years to catch up. Foreclosure Activity Foreclosure activity dropped from March to April, but it was still up 160% year-over-year. One interesting data point is that while foreclosure starts were pretty much flat, foreclosure completions were much lower, as 90% of borrowers in foreclosure have positive equity. Based on this, many foreclosures will result in home sales rather than foreclosure auctions leading to less “distressed” real estate for purchase. According to ATTOM Data’s most recent Foreclosure report, “Lenders repossessed 2,830 U.S. properties through completed foreclosures (REOs) in April 2022, down 36% from last month but up 82% from last year. The states that had the greatest number of REOs in April 2022, included: »          Illinois (417 REOs) »          Pennsylvania (266 REOs) »          Michigan (187 REOs) »          Ohio (150 REOs) »          California (148 REOs) The major metropolitan statistical areas (MSAs) with a population greater than 1 million that saw the greatest number of REOs in April 2022 included: »          Chicago, IL (347 REOs) »          Philadelphia, PA (149 REOs) »          New York, NY (128 REOs) »          Detroit, MI (64 REOs) »          St. Louis, MO (53 REOs).” An interesting fact is that the homes we are seeing in active foreclosure were generally 120 days delinquent pre-pandemic and should have been foreclosed approximately two years ago. Also, the foreclosure rate today is still at about half of the normal level. What’s Next The Fed

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Fix-and-Flip Appraisals

Understanding the Process is Key to Success By Mark Cassidy With its latest acquisition of Nationwide Title Clearing, Covius has completed its third successful strategic acquisition in the past three years. Being part of such a diverse group of experts is both exciting and beneficial, with expertise across the mortgage lifecycle that benefits our clients and our industry. NTC’s capital markets solutions help mitigate risk post-closing while our Service 1st valuation solutions help lenders, and fix-and-flip investors, manage risk for an asset that is in transition. It behooves these investors to understand what lenders expect to see in fix-and-flip valuations. When qualifying a borrower for a traditional mortgage, a typical lender will focus on some combination of the 4Cs: capacity (to repay), capital, collateral and credit. While credit and capital do factor into fix-and-flip lending decisions, collateral, or the value of the property before and after renovations, plays an oversized role in determining whether or not a loan is approved. For this reason, investors need to understand how fix-and-flip lenders approach valuations, what to expect during the appraisal process and what some of the red flags are that can delay the decision or even kill a deal. Let’s start with the process. Different lenders take different approaches to valuations: Some have staff appraisers and others use local appraisers. Large national bridge lenders tend to rely on appraisal management companies (AMCs). In most cases, an AMC, like Covius’ valuation risk management solution Service 1st, does not do the actual appraisal. Instead, the AMC selects the right independent appraiser in a given market, assigns the work and then performs quality control reviews on that valuation. Selecting the right appraiser for a fix-and-flip assignment can be challenging because, as we will discuss, a fix-and-flip appraisal is often more complicated than the standard residential mortgage appraisal. Not One Appraisal, but Two A fix-and-flip appraisal is significantly broader in scope than a traditional residential appraisal. It requires the appraiser to produce two valuations: an initial value based on the current state of the property and then a post-renovation value, known as an after-repair value (ARV). Each of these valuations must be arrived at using Uniform Standards of Professional Appraisal Practice methodology and supported by separate sets of sales comparables. In addition to the valuations, the appraiser is also required to evaluate the investor’s renovation budget. To add another level of difficulty, there is no standard form for a fix-and-flip appraisal. Lenders often have customized requirements for how they want their valuation presented. From a practical standpoint, this means that the appraisals are completed using a combination of Fannie Mae appraisal forms. It also means that appraisal QC software can be less effective in reviewing these reports. Easier Said Than Done In order to produce a realistic ARV, the appraiser needs to be able to understand the investor’s vision for the project and also have the requisite construction knowledge to determine whether or not the project is viable, based on the proposed budget and anticipated end result. Finding comparable sales for both sets of the valuations can be challenging, particularly if the subject property is extremely distressed. Similarly, the appraiser must determine if the property does or does not conform to the current market. If not, can the non-conforming issues be addressed compliantly within the local zoning rules? This frequently arises with single-family properties being converted into multifamily, for example. Keep in mind that unlike typical construction projects, a full set of plans are often not available for the appraiser to review at this point in the process. Reviewing the budget is also a crucial step. Depending on the size of the project and the sophistication of the investor — and whether or not a builder or architect has been involved in the early stages — some budgets are well developed and clearly presented. Others may be more rudimentary and less detailed. Regardless, it is up to the appraiser to make a judgment call as to whether the proposed budget is realistic, can cover the planned improvements and will result in the expected increase in value. It is not unusual for the appraiser or the AMC to come back to the investor with questions about the budget or the proposed renovations if something appears to be confusing: for example, a $50,000 budget that is expected to cover the addition of a whole new second floor. The average fix-and-flip appraisal can be done in 10 to 15 business days, depending on the location of the property and whether it is occupied. How to Improve Your Odds Be as thorough as possible with plans and specifications and note any enhanced architectural features. For example, if a bathroom is being enlarged and upgraded, note the increase in size, additional windows and where higher cost trim and materials will be installed. Provide blueprints if available for changes to floorplans, and/or note before and after measurements and net increase in square footage. Elaborate on site improvements, such as additional parking, a larger driveway, gated parking or a fence. Fix-and-flip appraisals are more complicated than traditional appraisals and present a series of challenges for the appraiser. At the same time, however, they give appraisers an opportunity to think outside the box and to use their entire skill set. A large national fix-and-flip lender was recently interviewed by an appraisal publication and made some observations that are worth sharing. “It is true that these types of appraisal reports take additional time and effort, but these properties usually make a positive impact on the market,” he said. “Every time a distressed property is acquired and renovated it not only provides the potential buyers an opportunity for improved housing, but it also often has other positive impacts such as gentrification of the market, improving its value and marketability.” I could not have said it better myself.

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Capital Markets Update

Strong Fundamentals Make the Housing Market a Good Bet By Justin Parker For a second, imagine taking on one of the world’s most intense roller coaster rides. Now imagine doing that blindfolded, never knowing when the next flip or stomach drop will occur, and never knowing when it will end or where it is going. For many, that feeling is likely a similar sentiment to trying to understand the state of the housing market and what lies ahead. This article will help shed some light through that blindfold and provide a better understanding of where we are, how we got here, and what lies ahead. Housing Market Fundamentals To fully understand the current state of the housing market and what potentially lies ahead, it is important to understand some of the key fundamentals and some of the driving forces which have played a role in the last 24 months following the COVID pandemic. Housing Supply and Demand One of the most common fundamentals present over the last few years has been the imbalance of housing supply versus housing demand. As of the end of 2021, the US Housing Market was an estimated 5-6 million homes undersupplied compared to its respective demand. With this imbalance, we have witnessed more seller-friendly transactions, shorter days on market for listings, and unprecedented home price appreciation. Historically Low-Interest Rate Environment (Through EOY 2021) Stemming from COVID, the Fed opted to stimulate the US Economy and Financial Markets. Two areas, in particular, led to the rapid decline in mortgage rates: the Fed Fund Rate and purchasing of MBS Securities. Regarding the Fed Fund Rate, before COVID, the Federal Fund Rate ranged anywhere from 1.50% to 2.50%. In March of 2020, the rate was strategically cut down to 0.00-0.25%, which mirrored a similar tactic utilized during the ’07-’09 crisis. This decision was made to support spending and to lower the cost of capital to lending institutions nationwide (as of 2022, the Fed has begun raising the Fed Fund Rate via incremental increases in efforts to combat the inflationary environment we are in). As for purchasing MBS Securities, to help maintain a strong housing market, the Fed also set out an initiative to purchase tremendous volumes of Agency MBS paper in the secondary market. In doing so, this also drastically reduced the cost of capital to originate mortgage loans (in 2021, the Fed tapered back the purchasing of Agency MBS securities, slowing increasing the cost of capital for lending institutions). As the Fed put together initiatives to lower mortgage lenders’ cost of capital, this allowed for mortgage lenders to begin reducing interest rates for their customers, and as the market became more competitive, this led to what many considered a “race to the bottom.” Home Price Appreciation (“HPA”) In 2021, the median home value in the United States appreciated nearly 20% on average. For context, 2020 saw roughly 8.5% appreciation and 2019 roughly 4%. This is a direct result of an under-supplied housing market, as well as a historically low-interest-rate environment. This combination has given sellers immense power in transactions, allowing for bidding wars and continued price hikes across real estate nationwide. Overall Economy »          Inflation // A direct result of the Fed’s aggressive fiscal response to the COVID pandemic, demand surged and as a result, we have seen a steady rise in inflation figures, with recent data supporting ~8.5%. »          Employment // As the United States continued recovering from COVID, employment figures continued to strengthen, supporting unemployment rates in the mid-3% range in the first parts of 2022. »          Nominal Wages // While watching inflation and employment, it is also important to keep a close eye on if wages are keeping up with the increasedcost of living. As of April 2022, nominal wages grew 5.6%. While that figure is high, it is nearly 3% less than the increased cost of living as seen via inflation. Market Update The Fed did exactly what it had to do following COVID, and that was to make decisions that stimulated the economy and prevent a crash. That said, we all know that for every action there is a reaction. And that reaction is what brings us to the present day, which is as of April 30, 2022. In a market where volatility feels normal, interest rates are rising rapidly, and questions loom about where housing is going over the next few years. Let’s start with the hot topic so far, interest rates. Interest rates, as seen by many, have skyrocketed in the first part of 2022. This has been seen across both agency and non-agency mortgages in significant fashions, and while the interest rate increases were inevitable and expected, what has created some shock to the market is the speed in which these adjustments have occurred, particularly in the Non-QM and DSCR markets. Lenders within these two markets have been hit the hardest in 2022, particularly due to extremely heavy reliance on the securitization market (as compared to the conventional agency which has Fannie/Freddie). While most Non-QM and DSCR lenders were preparing for incremental increases to interest rates, what was unexpected to many was the drastic reduction in appetite from investors in AAA-rated bonds. For context, most AAA-paper coming into 2022 was printing in the context of swaps + 80-90bps. Within a 30-day period, as the Fed rolled out rate hikes and investors began their search for yield, the price of those deals quickly widened out to swaps + 175-195bps. Otherwise said, lenders throughout both markets had to adjust to an unexpected 100-150bps, all of which occurred within a few weeks. Couple that with the fluctuations seen in swaps/treasuries, and both markets quickly found themselves in one of the most volatile price discoveries seen since March of 2020. Additionally, as mortgage rates rose rapidly, sensitive variables which drive prices, such as prepayment speed and discount rate, began to fluctuate rapidly. In a historically low-rate environment, the expected prepay speed of a mortgage loan differs significantly from that of a higher

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