11.11.26 Credit Costs; Splitero’s Stephanie Damsky on Home Equity; Mortgage Applications

Robbie ChrismanWelcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include an update on VA lending, why mortgage applications normally shoot up during election week, and my interview with Splitero’s Stephanie Damsky on expanding access to home equity through creative products and how growing institutional demand for rated HEI securitizations is lowering funding costs, allowing for more competitive borrower pricing. Here, take a listen, do a little preview. There's a lot of figures thrown out about home equity. $36 trillion of home equity exists out there, but only 11 or 12 trillion is tap. Obviously, that's still a massive number, but where do we get those numbers from and just what do they mean? As the 12 trillion mean up to a certain LTV, like we can we can't do cash outs or home equity loans beyond. Like, can you explain that where the number numbers come from? Stephanie DamskyRight. So it is thinking about overall LTV or cumulative LTV, CLTV figures. And so tappable is really going to be anything up to let's say 80 to 90 percent CLTV within the home equity investment space for us will go up to a 75 maximum. We call it OLTV or CLTV figure. So you but but HELOCs will go higher, right? So you have this tappable amount of home equity and it is that that leverage to home value today. Robbie ChrismanThat's wild to think that only one third of overall equity is actually lower than 80 LTV. I think it just talks and shows you what the borrowing situation in America is like. Stephanie DamskyI totally agree. Yeah. Robbie ChrismanThanks to this week's podcast sponsor, Truework, a verification company. The one verification solution to replace in-house waterfalls. Verify any borrower with a VOIE solution that automates the entire process to quickly deliver the most accurate and complete reports with broad GSE coverage. To learn more, visit Truework.com. The US bond markets are closed today, so beware of posted rates. Ever wonder why little moves in interest rates move mortgage rates significantly? Capital Markets Wrap is today at noon Pacific, presented by Polly. It's a Chrisman show. You can find it on YouTube, exclusively on YouTube. I'm tired of people emailing me like where's the Zoom link? It's on YouTube, Chrisman Commentary live streams. Anyways, the panel will cover what makes mortgage rates move significantly as well as why certain products move in certain ways. Along those lines, uh Movoto by Lower Study found that less than 8% of homes listed across 196 U.S. metros are affordable to median income veterans using zero-down VA loans, highlighting significant regional disparities with Macon Bibb, Georgia ranking highest in affordability, while Jacksonville, North Carolina leads in VA loan share and Virginia Beach Norfolk leads in total VA loan origination. Watch out for those vets. The introduction of automated decision support at the Department of Veteran Affairs in December 2021 has coincided with a surge in errors at the agency. In 2021, the VA accounted 66,000 errors in collecting evidence for veterans' claims, a number which climbed in each successive year and reached 329,000 in fiscal year 2026. Before the launch of automated decision support, reviewers sent back 23% of claims to collect more evidence and reconsider. Figure that in 2026 has hit 35%. Another topic on the Capital Markets Wrap Show will be credit. And capital markets people will tell you that you can't hedge credit risk. But you can try to lower costs. Recall that about a month ago, Equifax and TransUnion both rolled out new tools aimed at reducing credit-related expenses, giving lenders more flexibility over when they order scores and what they're actually paying for. A few months ago, the Urban Institute sent out a research piece on assessing credit risk with Classic FICO, FICO 10T, and VantageScore 4.0 that continues to receive airplay. Quote, FICO 10T and VantageScore 4.0 have similar score distributions and average score levels within this sample. Both average about 13 points above Classic FICO, and they're within roughly one point of each other. Both FICO 10T and VantageScore 4.0 place more borrowers in the top score band. About 31% of loans score 800 or above under FICO 10T or VantageScore 4.0 versus 14% of loans under Classic FICO. All three models rank order default risk well. FICO 10T captures the largest share of defaults and the riskiest decile, followed by VantageScore 4.0 and then classic FICO. Within each model, using the average of the borrower scores performs better than using the lower of the borrower's scores. End quote. Investors are stuck in the middle. For example, Penny Mac has confirmed accepting VantageScore without requiring accompanying FICO scores. I believe that Newrez correspondent accepts VantageScore for conventional conforming and high balance primary residences, but doesn't explicitly address a separate FICO delivery requirement. The FHA guidance that allows the 10T model does require you to use the lowest score of all, the scores that you pull. Many wish that the FHFA, which oversees Fannie Mae and Freddie Mac, would green light the 10 T model, which they believe is the superior model using trended data. But we have to wait for Bill Pulte, right? A number of listeners have shown frustration with FICO right now and say that the reason the model is being beat up is because Fair Isaac has totally changed up its pricing structure. Preferred and subscription. Subscription is basically impossible to maintain, and some of the bureaus won't support it. So the only option is preferred, which requires FICO on every product. Social media seems to be ganging up on FICO for not being transparent about the 2027 pricing, yet some will say that the bureaus have never been transparent about any other pricing for any year. The annual increases in the dollar amount the bureaus charge for credit reports far outweigh the annual increase in FICO's costs for every year of the past eight years. Switching gears slightly, U.S. Treasury yields surged higher Tuesday, pushing the 10-year yield toward 5% and MBS prices down as hawkish Fed commentary and hotter than expected October CPI reinforced expectations for additional interest rate increases, including a potential 50 basis point hike in December. A 25 basis point hike is all but a certainty at this point. Selling pressure intensified following weak demand at both three-year and 10-year treasury auctions, with yields closing at their highest levels so far in November. Markets now face continued uncertainty surrounding Fed policy and inflation, with Thursday's $25 billion 30-year treasury auction serving as the final major test of investor demand this week. For today's interview, I wanted to welcome to the show Splitero's Stephanie Damsky to talk about expanding access to home equity through creative products and how growing institutional demand for rated HEI securitizations is lowering funding costs, allowing for more competitive borrower pricing. She's director of capital markets at Splitero, which is an HEI provider and offers a smarter, better way to access your cash. Everybody knows we're in a higher rate environment, and many homeowners are holding mortgages at rates far below today's market rates. Can you talk about how that is actually intensifying this lock-in effect, which has been around for a couple of years, and just how much home equity is effectively still sitting untapped as a result of that? Stephanie DamskyYeah, absolutely. So almost 80% of homeowners are holding mortgages below 6%. And you know, in today's rate environment, it becomes challenging to want to refi those low rate mortgages. So more folks are staying in their homes, more folks are not refining. They're using, they're, they have tons of home equity, right? We've seen a huge run up in home price appreciation, even in a higher rate environment. We've seen tons of home price appreciation over the last decade plus. So homeowners are sitting in their homes not necessarily wanting to refi, not necessarily wanting to sell, but making maybe what they thought was not a forever home into potentially a forever home. They want to tap into that home equity. Right now there's about $36 trillion of home equity in the United States. Almost a third of that is what we would consider tappable. So, you know, low LTV senior mortgage with some cushion to tap into that home equity. Part of this is what brought Splitero to market, right? You you have HELOCs, you have cash out refis, you have reverse mortgages. Each of those speaks to specific parts of the market. But in this high rate environment, it becomes challenging to want a refi. It becomes challenging to want to make that monthly payment. Um, not everybody is eligible for a rever a reverse, and not everybody wants to take out, you know, another senior mortgage. So, you know, incomes HEI, income splitero, where you can tap into that home equity. You can keep your low-leverage, low-rate senior mortgage and still access a portion, like I said, a portion of your home equity. Um, no monthly payments, there's no, there's no income requirements like there are for other products. You can have a non-traditional income stream. We do service homeowners that have lower FICOs who who aren't able to access traditional financial markets. And so you see in this high rate environment, folks don't necessarily want to want to toy with that, that senior mortgage. And an HEI is a really nice solution for many of those homeowners. Robbie ChrismanHomeowners who need cash have traditionally turned to a cash out refi or a HELOC. But I'm hoping from a pricing and structure standpoint, you can talk about how HEIs are emerging as a third option. And how should homeowners think about accessing equity without refinancing or adding a monthly payment? Stephanie DamskyCash out refi, historically really attractive, especially in a lower rate environment. But again, folks don't necessarily want to refi out their senior, right? They might have cash to take out, but they don't want that increased monthly payment. Similar with to HELOC, there's DTI requirements, there's additional income requirements, there's FICO requirements where not everybody might be eligible for HELOC and not everybody wants to make a monthly payment. So you have, again, incomes, HEI, it's priced and structured differently. Like I said, there's no monthly payment at all on these. We give homeowners a lump sum of cash today in exchange for a share of the home's future value. You have potentially up to 30 years to repay that. We can talk about maturity match if you want later, but our our product is very flexible, no monthly payments. We do share in some upside when you or downside when you sell or refinance sometime in the future. But we're also working with a lot of homeowners that are lower FICO, non-traditional income streams, no income, right? Retirees. And we're really doing kind of an asset-based underwrite. So we think of this much more as an asset-based product. We're looking at the value of your home. Yes, we do look at some homeowner criteria, but we want to make sure that the value of the home is there and then we will provide that lump sum of cash today. Robbie ChrismanSo with home equity investments, underwriting puts more weight on the property and equity than on credit quality. You can talk about how that shapes your relationship with investors and how it opens the door for homeowners, including those with lower credit scores that traditional lenders might be turning away. Stephanie DamskyYeah. So on the capital market side, I think most of the most of those folks recognize that this is an asset-based underwrite. It's similar to kind of fix and flip or bridge lending where you're doing some sort of construction loan, right? Where you you recognize that the value is in the property and not necessarily in the homeowner's ability to repay. There is, since there is no monthly payment, we don't rely on FICO. We do have a 500 minimum FICO score, but that goes well below what a lot of other lenders will lend to. You know, I have a statistic here that said almost no originations are being made to homeowners with FICOs or below 620 or credit scores below 620, and very few below 660. So that gap between 500 and 660, 660 is enormous. And so we're able to provide these homeowners with cash from their home equity that they might not have been able to access before. And a lot of these folks do have, you know, 30, 40 LTV senior mortgages. And there's plenty of cushion for us to be able to originate and do an asset-based product. So from the capital market side, I think investors generally understand that this is an asset-based underwrite. There is a level of comfort there because there is no monthly payment. So the ability to repay is really just when you sell or refi is the value of the property there. And then for homeowners, it gives them an opportunity to actually access their home equity with a product with some sort of product in the market. Otherwise, you know, HELOCs are off the table, refis are off the table, and it gives them an opportunity to really even clean up their financial picture. We see over 50% of our homeowners use this to repay debt. They're using the proceeds of their home equity to repay some outstanding debt. They see a bump to their credit score, FICO score, and uh and are able to then take out a more traditional product sometime down the road. So it helps a lot of homeowners actually better their overall financial picture for those that are lower on the FICO spectrum. Robbie ChrismanWell, I'm glad you brought up the capital markets because securitization, and we'll get to Splitero’s in a second, but um, I want to your thoughts on how securitization has become a key part of how the home equity investment market is funded and growing. Stephanie DamskyYeah. So in the past few years, DBRS Morningstar has started rating the HEI product, which has been tremendous for the overall growth of the industry. There were unrated securitizations before, but with the ratings, you see greater access to capital, right? You see more insurance buyers, you see more large players in the space who are buying into securitizations. We do mostly sell these, you know, to large institutional investors who are ultimately the ones that are securitizing them. But being able to do that, being able to access attractive financing just kind of grows the space overall, right? All the HEI players are similar to mortgage folks. They typically get sold, they typically get securitized. Then it gives us the ability to kind of refresh that capital and redeploy it. So within HEI, it's a very interesting product in that there is no, like I said, no, no monthly payment. So without income, we rely on exits, but there is also the concept of having some sort of like increased intrinsic value of the contract. So this gets a little, you know, this gets a little complicated on the CAPM side. But upon securitization, you you more or less are able to get your basis out after the first deal. Um many folks refi them out later after a three-year period or so. But it becomes an attractive investment from a capital markets perspective and obviously serves a huge swath of homeowners that are unable to access their equity on the other side. Robbie ChrismanYour inaugural securitization closed about a year ago and it drew more than $2 billion in demand for the A1 tranche alone. Second deal closed in May. Can you walk us through them and what it told you about institutional appetite for the asset class in addition to demand from homeowners? Stephanie DamskyYeah, absolutely. We were we were thrilled with our securitization reception. Now, there are other players in this space who, you know, helped pave the way. There have been a number of really successful HEI securitizations. Our first deal was nearly 10 times oversubscribed, showing that there is tons of institutional demand for this product, specifically on the senior most highest-rated tranches. Our second deal priced at the tightest spreads we had seen. Rates were in a slightly different environment in May, but still elevated. So we we were really proud to be able to come to market with two deals that had such tremendous demand that we either saw, you know, massive oversubscription or tightening of spreads. And again, it makes it makes it so investors can come in and see that there is reliable financing for this product. There are warehouse facilities, but having a reliable securitization market is really meaningful to the capital market side of this business. Robbie ChrismanWhat's next? We're coming up on the six-month anniversary of your main securitization. Seems like it's time for another. Stephanie DamskyIt certainly is. And you might see something come across your desk in the in the next few months. Um, we have continued scaling originations to a point where we are coming to market with another securitization, uh, hopefully in the near future. And then we have really high hopes for 2027. So you'll keep seeing Splitero hopefully, hopefully, more deals in the headlines as we get through the end of the year and today. Robbie ChrismanFor originators out there listening to this, can you explain at a high level how better prices on securitizations, more investor appetite translates to better rates for borrowers? Stephanie DamskyYes, absolutely. So you have one side of the marketplace, the capital market side of the marketplace, who who really does want to make some sort of return on these. The better the financing costs, the more attractive their returns become. The more attractive the returns become, the easier it is to originate at slightly lower rates to homeowners. So everything ultimately comes, I I hate to say it this way, but you know, CapM appetite or capital markets appetite ultimately drives a lot of the pricing in the market beyond, you know, what the Fed does and where rates are. And so having, like I said, reliable and attractive financing helps drive down prices on the other side of the marketplace. And that's even something that we saw. We were able to reduce our max settlement cap from 19.99 to 17.99. So now homeowners are able to get a cheaper, you know, I'm in air quotes, you can't see me, but a cheaper HEI because we've seen so much success on the capital market side. Robbie ChrismanExcellent explanation. I thoroughly enjoyed this. Hopefully, this is the first of many conversations. Thank you. Stephanie DamskyAbsolutely. Thank you so much, Robbie. Robbie ChrismanMortgage credit availability remains historically constrained, increasing to 0.4% in October, with government-backed borrowers experiencing the steepest decline in access to credit over the past five years, particularly the lower income and lower credit borrowers. As affordability pressures persist and conventional lending remains restrictive, mortgage issuance has increased or increasingly shifted toward Ginnie Mae, which now accounts for a record 42% of agency issuance year-to-date and reached 47% in October, surpassing Fannie Mae and Freddie Mac individually. The greater reliance on FHA and VA financing also changes the risk and performance profile of agency mortgage-backed securities, as Ginnie Mae borrowers generally have lower credit scores and higher delinquency rates than conventional borrowers. Meanwhile, slowing home price appreciation and smaller loan balances suggest affordability challenges are continuing to reshape borrower behavior, mortgage production, and investor risk exposure. Today's economic calendar includes mortgage applications from MBA, which rose 6.2% for the week ending November 6th, driven by an 8% increase in purchase applications and a 5% increase in refinancing activity. Despite the weekly gains, purchase applications remained 18% lower, and refinance applications 57% lower than the same week last year, highlighting continued weakness and year-over-year mortgage demand. Let's wrap up with a joke and some housekeeping. A duck walks into a psychiatrist's office. He sits on the couch and the two stare at each other in silence for a moment. Eventually the duck says, Quack. Get out of here, yells the psychiatrist. I won't be ridiculed in my office. The duck travels to another psychiatrist's office. He sits on the couch. The two look at each other in silence for a time. Again the duck says, Quack! An insult! I'll have you know I was top of my class. Get out. The duck travels to a third psychiatrist. He sits on the couch and they stare at each other for a short while. The psychiatrist finally says, You hate your father, you worry about money, and you're lonely. Finally, says the duck. Those other two quacks were idiots. Thanks again to Truework, a verification company, for sponsoring this week's podcast. Truework is the one verification solution to replace in-house waterfalls. You can verify any borrower with a VOIE solution that automates the entire process to quickly deliver the most accurate and complete reports with broad GSE coverage. To learn more, visit Truework.com.