After two years of limited demand, private equity and insurance companies are increasing their allocations to single family residential mortgages. This increased flow of funds appears to be driven by strengthening macro factors that favor residential mortgages over other yield assets such as commercial real estate (CRE) and commercial (C&I) loans. These strong fund flows are resulting in tighter credit spreads, higher prices, and an increased focus on sourcing new originations.

Mortgage investors are pointing to several factors leading to increased demand for mortgages in the current environment, including: the end of the current rate-hike cycle, government subsidies for borrowers, favorable capital treatment by financial regulators, higher liquidity and finance-ability for mortgage assets, and superior risk-adjusted returns in a market where mortgage investors can find low LTV loans that carry yields 2.0-4.0% over SOFR.

This increased demand is resulting in tighter credit spreads for private label, non-QM RMBS securitizations; increased prices for a broad range of mortgage loans including seconds, home equity agreements, bridge loans, and alternative documentation loans; and strategic transactions between investors and originators.

It's a new day for lenders serving minority and low-income communities.

The United States Department of the Treasury recently took action to address one of the most persistent and frustrating structural problems facing America's minority and underbanked borrowers. By issuing clear guidance on fair lending practices, Treasury has addressed a hidden problem that has chased away investment in minority and low-income communities and illuminated a path for lenders and investors to provide capital to these borrowers fairly and responsibly.

The homeownership gap between Black and white Americans is wider today than it was during the Jim Crow era. This disparity has persisted over the past century despite a political interest in remediation. Congress has sought to address these inequities legislatively, including by passing the Community Reinvestment Act and the Riegle Community Development and Regulatory Improvement Act of 1994, which obligated banks to increase lending to the underbanked and created federally certified Community Development Financial Institutions to work with banks to serve these borrowers.

Is Change Lending a CDFI?

The Change Company CDFI, LLC and its subsidiary Change Lending, LLC (“Change Lending”) both remain community development financial institutions (CDFI) certified by the United States Department of the Treasury’s CDFI Fund (the “CDFI Fund”). Attached here, are recent communications from the CDFI Fund that document the active CDFI certification status at each entity.

Barron's magazine and its reporter, Jacob Adelman, have admitted to using the Consumer Financial Protection Bureau's (CFPB) public disclosure of Home Mortgage Disclosure Act (HMDA) data to identify individual Americans and investigate them. In an interview with The Change Company (Change), Adelman explained that he compares the CFPB's redacted and "anonymous" information with data available for purchase from private companies and municipalities to identify borrower names and personal information contained in confidential mortgage applications. Adelman explained that he then reverse engineers the identities of homeowners, focusing on those who self-identified as Black or Hispanic/Latino (Hispanic), in their mortgage loan applications in order to uncover their identities – which HMDA mandates must be anonymous.

To date, Adelman has focused his investigations on loans made by community lenders who disproportionately serve minority and low-income borrowers. Barron's actions threaten a chilling effect on underbanked Americans who already lack trust in financial institutions due to decades of mistreatment such as redlining.

There was great optimism amongst community advocates when the Biden Administration made equality in homeownership a cornerstone of its fiscal policy. However, over the past two years, the homeownership gap between Black and White Americans has widened. Today, this racial homeownership gap is wider than it was during the Jim Crow era, when explicit redlining was legal.

For the first time ever, to combat racial inequalities in housing, the Biden Administration staffed four key leadership positions at entities responsible for America's homeownership financing policy with Black women: Marcia Fudge (Secretary, Housing and Urban Development); Sandra L. Thompson (Director, Federal Housing Finance Agency) ("FHFA"); Jodie Harris (Director, Community Development Financial Institutions Fund) ("CDFI Fund"); and Theresa Bazemore (President & CEO, Federal Home Loan Bank of San Francisco) ("FHLB-SF").

The CDFI Fund’s decision now puts CDFIs at risk of losing their certification if they lend to Disabled veterans or other Disabled Americans. This is the very thing the ADA was adopted to prevent. For instance, a CDFI who makes 60% of their loans to Target Market borrowers can be decertified if they make a single additional loan to the Disabled, thereby dropping their Target Market lending to under 60%. By requiring CDFIs to make 60% of their loans to borrowers designated by the CDFI Fund as Target Market loans, CDFIs are being forced to choose between serving the Disabled (including Disabled veterans) or maintaining their CDFI certification. In fact, the CDFI Fund is threatening to decertify a CDFI that followed the CDFI Fund’s call to increase access to capital to the Disabled. The CDFI Fund simply needs to accept the very research they themselves have published which clearly demonstrates that the Disabled meet the statutory requirements to qualify as Target Market borrowers.

The Time Has Come for Investment in Residential Mortgages

Fed tightening and an inverted yield curve have cast a spotlight on a persistent problem for investment advisors: the challenging search for attractive yield investments. Over the 25 years preceding 2022, interest rates have been on a downward trend, leading to a scarcity of yield in fixed-income investments. However, the recent spike in interest rates has produced attractive risk-adjusted returns from certain products. First lien mortgages, in fact, are yielding 8-9% and can offer adjustable-rate features with inflation-protected returns. In contrast, the traditional low-risk options of treasuries, CDs, and municipal bonds now yield negative real returns. And while other traditional yield investments such as real estate investments trusts (REITs) and mortgage-backed securities (MBSs) offer higher returns, their fees and expenses moderate yields and, because these are levered, they represent significantly higher risk in an uncertain economic environment. Publicly traded REITs, for example, are permitted to lever up to 300% of their net asset value under SEC rules. MBS funds are similar in employing leverage to improve yield on their underlying assets. This additional leverage makes them susceptible to broad economic risk, as demonstrated in the 2007 financial crisis. And the value of these assets generally declines in an environment of increasing interest rates.

Meanwhile, there is an asset class that offers attractive yields and relative safety in the current environment, that is straightforward to underwrite, that is indexed to rising rates, and that has a deep market. These are direct investments in first deed-of-trust residential mortgages. First lien residential mortgages are a type of direct investment that involves lending money to a borrower to purchase or refinance a property. In return, the borrower provides the lender with a first lien, which is a legal document that gives the lender the right to foreclose on the property if the borrower fails to repay the loan. This means that the investment is secured by the property and offers the potential for a stable return with limited downside risk, provided the loan is overcollateralized (as residential mortgages are in most cases). Currently, first deed of trust residential mortgages can yield upwards of 9% and are typically overcollateralized by between 25% to 100% by with a tangible asset underwritten to regulatory standards.

Silicon Valley Bank and Signature Bank once represented the gold standard of “Relationship Banking.” Wall Street was enthralled by the ability of banks to attract low-cost deposits that could not be explained, or justified, by economics. Investors became convinced that the value of the banker-client relationship at these banks justified premium valuations. Over the past decade, the fantasy of relationship banking was rewarded as if it was a form of financial alchemy.

An effort encouraging investors to buy stock in Black-run banks could create new challenges for the leaders of those companies. The Buying Black movement, which took root last week, led to sharp increases in the shares of companies such as Broadway Financial in Los Angeles, Carver Bancorp in New York and M&F Bancorp in Durham, N.C.

An influx of new investors could increase pressure to improve shareholder returns, while any strategic effort designed to generate higher profits could also draw a backlash. At the same time, markets are fickle — most shares in Black-run banks have fallen significantly in recent days as some existing shareholders cashed out. Indeed, Broadway's biggest investor — who had been pushing for the company's sale — abruptly sold all of its stock after the value of its holdings soared. Leaders of Black-run banks contend that what they need more than capital is more partnerships with bigger banks to extend their reach to underserved customers.

I am proud to be here today to speak with you about two critical subjects central to solving the problems that continue to face the under-banked in America: the Community Reinvestment Act and the National Diversity Coalition. For 42 years our country has sought to expand access to capital to low income and other under-banked communities through the Community Reinvestment Act, called the CRA, and for the last 16 years the National Diversity Coalition and National Asian American Coalition have held this important Economic Development Conference to provide leadership for this crucial goal.

Unfortunately, the pace of progress has been slow and while the Community Reinvestment Act has resulted in numerous shining examples of success and progress, across America, on a macro level, the program as implemented has largely failed many of those communities and consumers who need it most.

Washington

The Forewarned Investor

While there have been many great investment books written about how to identify winning stock ideas, there are few that explain how to dodge the losers. It's a crucial lesson to learn.

The capitalist system regularly produces characters so destructive that they shake the nation's financial system to its very foundation. The losses these rogues generate extend well beyond those incurred by company stakeholders.

Corporate scandals sap investor confidence, savage the stock market, and often deal a blow to the whole economy. The Forewarned Investor identifies common manifestations of fraud visible to investors. The presence of a number of these danger signs should alert investors that the risk level associated with investing in a specific company's stock is elevated, and it is incrediby probable if something is amiss.

When an investor encounters a collection of these danger signs, he should follow the lead of a poker player with a lousy hand and fold.