Editor’s note: This interview has been edited for length and clarity
Sarah Wolak: Tom, you shared with me before we sat down that September was a record month for Deephaven. Can you tell me more?
Tom Davis: We just came off a record month, and this month (October) is on pace for another all-time record. I would say the drivers have been non-agency loans or non-QM. So if you look at just non-agency estimates earlier in the year, people were forecasting a range of $60 billion to $70 billion in non-QM. We’re probably hit over $100 billion this year, so a 50% beat from the beginning of the year.
People were estimating securitizations were supposed to be maybe $50 billion; we’re at $58 billion already, and we’ll probably hit $70 billion. So the market is growing. There are a ton of capital investors. I would say second liens have been a big area of growth as well. So I think year to date, second liens, as of the first half of the year, hit about $125 billion, and that includes closed-end seconds and traditional HELOCs.
RTL will hit $35 billion; our sister company, Anchor Loans, does RTL. So just in those three products, you’re looking at like a $350 to $400 billion market in originations, and then you throw in jumbo too, it’s like 20% of overall mortgage originations.
SW: How can loan officers take advantage of this?
TD: So if you’re a loan officer today, you need access to these products, because if you don’t, you’re at a competitive disadvantage. It’s hard to recruit and retain talent if you don’t have these products. And the reality is, there are 18 million self-employed people in the United States that account for, let’s call it, 31 million businesses. There are 19 million investment properties in the United States that account for 49.5 million doors.
There are more self-employed people than veterans. So all these lenders who have a veteran program, they should have a solution for self-employed people. And they should have a solution for investors. Year to date, about 28% to 30% of purchase transactions are investor transactions — almost a third of the market. So if you’re a loan officer and you don’t have a full suite of investor solutions, you’re probably not maximizing the opportunity in the investor space.
SW: You mentioned that second liens have been a large driver of success for Deephaven this year.
TD: We have a full suite of second liens — I see second liens as a generational opportunity, because equity is at an all-time high, at $35 trillion. Consumer debt is at an all-time high, whether it’s credit card, auto loan and buy now, pay later and student loans.
The average age of a home in the United States is 40 to 50 years old, so we have an aging housing stock. Everyone who owns a home, 85% of them have a rate under 5%. A lot of these folks have rates in the twos and threes and fours, right? They can’t afford to trade up into a bigger house because of the higher note rate in the sixes and the higher taxes and insurance.
So what’s happening is people are staying in their homes longer because they can’t afford to trade up. Some of them plan to stay in their homes forever. They’re rehabbing their home to current market standards. More than 50% of second liens that are done are renovation deals, people taking money out to renovate their property, kitchen, maybe bathrooms, flooring, roof, pool, ADUs, whatever. The other piece is debt consolidation.
People are also tapping into their equity to fund their businesses and to buy more investment properties. The investors that have investment properties, if they have a loan on that and it’s a low note rate, and that property is cash flowing, they’re not going to refi out of a low rate right now. What we’re seeing is they’re taking $100,000 in cash out and buying two more investment properties.
SW: I’m assuming this explains the buildup in HELOCs too?
TD: Yeah, to build on that demand, we have some product expansions that are right around the corner here in November, in the HELOC space, and close-end seconds.
SW: Besides home equity being at an all-time high and inflation and debt consolidation opportunities being a factor, what drove the successful September?
TD: I think rates have to come down materially for second liens to be irrelevant. And when I say materially, like 150 basis points down, because then it might make sense to refinance the first with the second. But that’s all a financial equation, and a loan officer should help a borrower make that decision if they want to refinance.
It’s a great opportunity for the loan officer to pick up the phone and say, ‘Hey, we did a loan for you four years ago, you hit a home run with the 2.5% rate.’ And then you could say, ‘By the way, congrats on your equity. You have $150,000 in equity. How’s life? Are you looking to have kids? Or have you had any kids? Or are you looking to renovate your home? Have you thought about renovating your home?’ Those conversations allow the loan officer to understand where their financial goals are, congratulate them on equity, low interest rate, and then take on more of a financial advisor approach.
If the loan officer doesn’t offer the second lien, do you know who is offering the second lien? The servicer who bought the first lien. So not only did the loan officer lose the borrower in the second lien transaction, but when it’s time to do the refi cash out, when it makes sense to consolidate both of those loans, that borrower is going to go with the servicer.
SW: How is Deephaven preventing that loss from happening?
TD: The space is going to continue to grow. We’re already forecasting non-QM to be about a $100-$150 billion market next year. So for the originators out there that we work with, we’re their investor, and we do a lot of training. We educate a lot. We also do a lot of presenting on behalf of our clients to the referral sources too.
But for second liens, we’re building out a marketing playbook for our clients, where we’ll give them a resource with maybe 15 pieces of collateral, so that if they have a marketing team, or if they don’t have a marketing team, they can just leverage our content and use it in their marketing to their previous clients. Because while a loan officer could pick up the phone — I highly recommend picking up the phone, by the way — the marketing matters too.
