10.15.26 Demo Day; Polunsky Beitel Green’s Andy Duane and Tye McWhorter on DSCR; Wholesale Inflation

SPEAKER_02 0:02 Welcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include Storylines that have emerged from MBA annual, why higher inflation equals higher yields to keep pace, and my interview with Polansky Vital Greens, Andy Duane, and Time Accorder on DSCR lending, the growing questions around underwriting, state-by-state licensing and disclosure requirements, and regulatory and legal risk. Here, take a listen to a little preview. SPEAKER_03 0:33 Non-agency from everything I hear is going gangbusters. DSCR makes up up to about half of that. High rate environment, we're going to see rentals continue. How do we see the DSCR space evolving from here? SPEAKER_01 0:45 Probably just going to continue to grow. And what I would imagine is as time goes on, and you see a larger volume of these, is there will probably be more uniformity across the investors. Not a betting man. So I wouldn't, I would not sure if Union would take my this as a gambling advice if you're going to put it on Cal Shee. But uh I think just by virtue of the fact that there will be more and more of these, you know, and they'll be working at maybe with different investors on different types of products that, you know, as the dust kind of settles, we'll kind of look and see like this is kind of what the the standard market acceptability of these loans are as we you know take some of these further out and see, you know, what their uh viability is in you know in income payment. SPEAKER_00 1:29 And I agree. I think not only on the origination side, but on the secondary side, I think the secondary side, you see an appetite for it. You see these loans doing well. And there, once they kind of buy more and more of those, you're gonna see that kind of increase when these lenders can get them off their books. And also it's a viable product. I think also at the same time, you know, a lot of volume does lend scrutiny to it. You know, are we gonna see regulation of it? Maybe not. It is a business purpose loan, so it's kind of outside of those regulations. But at the same time, will we see somebody kind of step in if there's kind of a blow up or anything like that? But at the same time, I agree with Ty. I think once everybody starts doing them, I think you'll kind of see the same kind of qualifications, same standards kind of fall into place just from the market, not from kind of a regulatory or anything like that. SPEAKER_02 2:21 Thanks to today's podcast sponsor, Encino, the platform for agentic AI and mortgage lending. NCENO is helping mortgage lenders deliver a faster, simpler path to homeownership. If you're here at MBA Annual, come find the Encino team and see how their agentic homeownership journey puts AI to work across the mortgage life cycle, helping loan teams spend less time on manual tasks and more time serving borrowers. Visit ncino.com slash mortgage slash US to learn more and schedule a meeting while you're on site. My coworker asked me how I'm doing this morning. Yet another third party trying to steal my data. Data travels at the speed of light, and McDonald's is reportedly using artificial intelligence to dynamically price its burgers. Imagine a lender trying that. AI filled the exhibition hall at the MBA's conference this week, and I don't use AI to make this podcast. Maybe I should. But perhaps I should tack AI onto the end of it in case I want to raise money or attract more listeners. On second thought, no, we're good as is. But along those lines, AI is the focal point in today's Crispin LLC demo day, the second such free showcase of third-party providers' products for lenders of 1 p.m. Eastern. Advances in document intelligence and large language models can now address various problems, enabling AI to identify issues up front, generate explanations in real time, validate documents and flag fraud, and even match borrowers with alternative loan products without changing existing credit standards. This may create an incremental shift toward AI assisted decisioning. Featuring demos from Cotality, Wilco, Mosaic, Agentic AI, One Diligence, Indecom, Night Owl, and Optify Now, seven companies, 10 minutes each, one connected pipeline. Chrisman Marketplace members receive free demo access. You can join the marketplace to participate as a vendor. Anyways, if you're tired of political matchinations, and I'm not saying demo day is a political machination, but frankly don't see congressional action on anything until 2027. The Mortgage Bankers Association at its annual convention and expo released affordability in action, a policy roadmap to lower the cost of financing a home to own or rent, a set of near-term administrative and regulatory recommendations designed to reduce the cost of buying or renting a home. The roadmap focuses on targeted changes that can be implemented without legislative overhauls and are designed to lower upfront closing costs, reduce monthly mortgage or rent payments, and decrease the cost of building and financing new housing supply. The recommendations are intended to preserve the safety and soundness of the housing finance system while reducing unnecessary regulatory and administrative costs. For example, the MBA calls for replacing Fannie Mae and Freddie Mac's current TriMerge credit report mandate for lower risk borrowers, reducing and aligning the GSE's loan level price adjustments for home purchases, responsibly reducing Federal Housing Administration annual mortgage insurance premiums, safely expanding the use of automated valuation models and AI assisted underwriting, and lowering the cost of title insurance. For example, MBA estimates that a 20 basis point reduction in FHA annual mortgage insurance premiums would save a borrower with a $400,000 loan nearly $800 per year. An interesting topic of discussion at MBA Annual was the proposal by the Financial Accounting Standards Board, or FASBE, which is considering an update to U.S. accounting rules that would specify that an entity should include the value attributable to the potential recapture of a borrower through the extension of a new loan when measuring the value of the right to service residential mortgage loan. The FASBE proposal is reportedly pushed by Penny Mac and Rhythm, who want to see higher valuations for MSRs to help them maximize liquidity, especially in a declining loan market. But on the other side of this issue are the largest banks who vehemently oppose the FASB proposal and say that any increase in the fair value of MSRs due to the inclusion of speculative estimates of recapture will be met with lower lending thresholds. During a conference call sponsored by the MBA, one of the four largest banks went completely irate over the FASB proposal, that's what I'm hearing, and made it very clear they will not tolerate any support for the proposal by the trade group. One bank that was on the same call said it is extremely unlikely the MBA or other mortgage trades will publicly support the FASB proposal and that the change will have no impact on investor valuations. At the end of the day, the valuation of an MSR is about duration, not some speculative estimate of possible recapture, one veteran mortgage banker said. All this fuss about recapture will have no impact on whatever investors are actually willing to pay for an MSR. End quote. The same source notes that purchase mortgages are extremely difficult to retain, but customers who refinance mortgages tend to stay with their existing lender. Purchase mortgages are currently 75% of total volumes, thus, recapture rates are likely to undershoot the inflated estimates used by the auditors. For today's interview, I wanted to welcome back to the show Pelunsky Bidalgreens, Andy Duane and Time A Quarter to talk about DSCR lending, the growing questions around underwriting, state-by-state licensing and disclosure requirements, and regulatory and legal risk. You can learn more about them in PolenskyBidalgreen at mortgagelaw.com. SPEAKER_03 7:44 So we are here to talk about the DSCR space. And obviously, people in the industry probably know these are debt service coverage ratio loans. They have to do with income properties. They're a part of the non-QM space, which is growing rapidly. And people might question why I have some attorneys on to talk about DSCR. Why do I have attorneys on to talk about DSCR today, Dents? SPEAKER_00 8:11 Robbie, good to see you again. Glad you got me on on DSCR. I think last time we're talking about Basil III. So you contacted us to see kind of what we're seeing. You saw the reports, what last week, maybe in August, non-QM is maybe 10, 11% of the whole market. And they were looking to see what DSCR is of that. And that's about maybe 35 to half of all non-QM loans are now DSCR loans. It's an interesting part of the market because it does something a little different. It doesn't do the credit and income from the borrower. It looks at the property itself and it's helping a lot of people. A lot of real estate investors out there that are kind of stopped with conventional financing to get these loans. They can get it through a DSCR project. And if you just Google DSCR, you'll find all the mega lenders now have the product. This isn't just a few guys in the mid-2010s that had it. Now it's everybody can do it. SPEAKER_01 9:02 And I think to kind of piggyback on that, why would the attorneys be involved? And a lot of it is these programs are really being investment properties, are really structured a lot around entities, particularly LLCs. You know, if you're going to be an investor or you know want to lease this out as an investment property, you probably want some liability shield. And so these are really the investors are really structuring their guidelines around the idea that you know that these are in limited liability companies or something like that. And they want to, you know, structure these in a way that maybe they can get the LLC, you know, hold title in the LC, but also still, you know, hold the actual individual applicant as a uh have some kind of personal guarantee, kind of keep some skin in the game, but kind of make everybody happy in that regard. SPEAKER_03 9:52 So Pelinsky Vital Green is the nation's largest transactional residential mortgage lending law firm. What is going on with y'all and the intersection of the GSCR space? Obviously, if the non-QM space in GSCR is increasing, more of these are coming across your desk. What's your interaction with these loans and the the people originating them? SPEAKER_01 10:11 I think what we see mainly is, you know, I one of the first things they want to see when they reach out to us about this, is to make sure that the structure of the entity is copacetic legally and also meets their investor guidelines. The investor space, although there's a lot of different requirements from each one because, you know, this being a non-QM product, we're really getting individual investor specific and the way they feel about certain things vary from investor to investor. You know, they may want a borrower to have a more sizable chunk of the ownership of the LC. It may be that they're okay with it being 50%. They may want it to be the majority ownership or even uh 20%. And and that, depending on ownership, they may then require a personal guarantee based on that ownership. And that and just the different you know permutations these can take. They don't have to be in LLCs. Uh you know, they could be in a partnership, they could be in a corporation if they want, you know, the largest liability shield, or you know, and disperse these down more as a shareholder situation where there's multiple owners. But that that's where we get involved is to kind of walk them through what the structure of that entity is, and I think most importantly from the lender's perspective is who needs to sign what uh to bind the company. SPEAKER_00 11:29 Andy, anything to add? It was just great, Ty. I mean, it's not a requirement that a DSCR loan close in a business entity, but most smart real estate investors do have it. I mean, think about it. You're dealing with rental properties, you're dealing with an LLC, you want that protection from personal liability in case you have kind of a tenant dispute, you have a rental property dispute. So a lot of these people are for the first time out there forming LLCs, which isn't required to have an attorney form it, but I'd recommend it. It's always a good thing. Sorry, shameless plug over here, but you're gonna want to make sure it's done right. If you're a real estate investor listening to this, you know, talk to your CPA, talk to your attorney buddy to get it formed and formed correctly, because a lot of times what we see is a lot of mismatch, name variations, a lot of people that are just kind of doing it off Google, you know, at least use Claude, right? Uh sorry, make sure you form it correctly, make sure it's set for your real estate. Because I bet if you got one rental property, you're not gonna have one for long. You're probably gonna get a few. So figure out what works for you and what entity type works for you best. SPEAKER_03 12:36 Obviously, we're not here to give legal advice, but when it comes to best practices or things to keep top of mind, maybe things people aren't thinking about that they should be. Ty, where's your head go? SPEAKER_01 12:47 I think things to keep in mind. Uh, you know, again, a lot of these, I would just say, I think just by the nature of the market, the market has pretty much said in a way that it anticipates it's going to be an LLC. And that's not to say that they're not gonna be different structures, but just the guidelines themselves that investors are providing to the lenders on what they're expecting is kind of shaped around an LLC. So kind of that's my where my head goes. It's thinking like, okay, there's probably going to be a lot of these investors are, you know, maybe maybe they're first timers, or maybe this is, you know, their intro into the space to make a little bit of money. So a lot of these are sole member, you know, or two-member LLCs, and it's maybe their first time doing anything like this. And so there's a lot of, like to Andy's point, there can be a lot of potential mistakes where they are common pitfalls are where you say it's manager managed and they appoint one person to manage the company, but then it's actually member managed, so both of them have a say. And, you know, from the lender's perspective, and what we're there to provide for the lender is you know, talking about who has the ability to sign what and who do you need to sign what. And if if there's a conflict there on who has signing authority, that's one of the quickest ways, you know, one of these can have warts on it, is when you you've got somebody obligated on there who was unaware of the transaction, let's say, if that was the situation. SPEAKER_00 14:10 Just from an LO's perspective, an LO isn't a financial planner, but they're kind of they're dealing with somebody making their first, usually their biggest purchase. And now you have other clients coming in here that real estate investors, they're buying investment properties. They need to kind of be aware not just of the product itself, but kind of the market. If you have somebody come in thinking they're going to turn it into an Airbnb or something like that, make sure you're aware of kind of the short-term rental ordinances in the area. I mean, just in our different markets, Dallas, Houston, San Antonio, Austin, they're all different, especially in the last five years. And a lot of your clients are taking advice off TikTok, Instagram, reels. So you really just need to be that number one stop. And I know you're gonna look at LLC docs as a loan officer and be like, okay, I don't really know what I'm looking at. That's when you call us to kind of say, Hey, can we close it in this? Is this formed correctly? How does it look? I've had four or five buddies call me and say, Hey, how do I form an LLC? And I'm like, okay, great. I do this type of law, but let's talk about it. Why are you doing it? But especially for the loan officers, kind of be aware of the city ordinances. But also, this is a great product. I mean, this is really cool. You know, there was a case out of Baltimore a few weeks ago that in 2000 what, 25, there was some kind of fraud involved with it. Remember, this is a non-QM product, this isn't agency guidelines. Each investor is gonna be a little different. So make sure you understand your investor guidelines, what they require, and where you can fit that person into the product. And like I said, if you have one rental property, you're probably gonna have another few or two. So this is a lot of repeat business for loan officers, especially when rates are high, agency guidelines are a little bit tough to deal with on these. If you have somebody out there trying to do some real estate investing, DSCR is probably the way to go. SPEAKER_01 15:56 The piggyback off of that again, again, and he mentioned like this is you know a growing area and probably in the high-rate environment continuing to grow. You know, when the rates are this high, borrowers are or you know, your typical, what you think of as your prototypical borrower, they're looking to rent instead of you know make that purchase. And if that's the case, then the way the lender gets into the market is there are investors out here that are going to be taking those rental properties. And so the way I see it in the you know, the next five or 10 years, it's probably if even if rates were to come down, this is probably going to be a very set standard of what to expect. And so I expect DSCR loans to kind of be here for the long run. SPEAKER_00 16:36 And because it's not related to the borrower's income. So I remember an old client my dad had when I started processing, he was a pharmacist. He had about 10 different properties, and back in conventional financing, they had a cat on how many properties you could have, or it would mess with the ratios so much that you couldn't get qualified to buy more. So I talked to my old man a few days ago. I was like, hey, are you doing DSCR loans? It's like, yeah, guess for who? And it was that guy, the pharmacist still. So it helps investors if they're making money in it and they're good landlords, they have a good structure, good CPA, to really come in there and find houses and then rent them out at a decent price. I mean, it's getting new builds off uh builders' books. It's really kind of an amazing product. It's about what half of the non-QM market right now. SPEAKER_03 17:22 So being a business purpose loan, it falls outside of a lot of the traditional regulation. And with a DFNG CFPB, we're seeing more states take on the regulatory burden themselves. Thoughts on these loans in the evolving regulatory climate as we head toward more state-by-state regulation? SPEAKER_00 17:42 I think they're a great product. I don't think they'll be too regulated, but I think there will be some kind of guardrails will be established, especially if something happens, if there's a wave of foreclosures. But that's also kind of very market-specific. You know, I mean, we're dealing with hard rates for just kind of the primary residence borrower right now. Now we're talking real estate investors, but these aren't the big, you know, megalow corporations that are coming in. These are the small-time real estate investors that maybe have five or 10 properties that are kind of using it as a night way that have a good CPA. So I think we're in a good, I think the market's kind of set it up very nicely. We'll see if something happens, we might get some regulatory guardrails on it. But I think right now the market's kind of set itself up nicely. SPEAKER_01 18:24 I really agree with with Andy on it. Of course, anytime that something like this is such a burgeoning area, I'm sure this will become fall you know, fall more and more into the public eye. And with that, there will come, you know, anybody who is uh especially in these more uh let's say litigious or scrutinizing states, they you know, they may want to be more eager to put guardrails on this, but the way it you know it's it's structured right now and kind of the way the market seems to be regulating itself, you know, it's hard for me to anticipate anything in the you know state by state that's actually going to significantly dictate what these are gonna look like. I think the market's kind of given some uniformity to these, and I would expect more coalescence around these from investors and secondary market than I would from a regulator. SPEAKER_03 19:13 Obviously, for people wanting more information, go to mortgagelaw.com. Guys, any final thoughts, things we didn't touch on that you think are important, last words? SPEAKER_00 19:23 I just think it's a great product. I think because it is not regulated, it's a non-QM product, the risk of fraud is there. Um, if you see some of the reports from some of the big bureaus, they will say at DSCR there is uh, you know, occupancy fraud, for instance. It has to be an investment property. How these LLCs are structured. And a lot of these underwriters and a lot of these compliance people, you are the first line of defense. If you see something, say something. If something looks fishy, it might be fishy, right? So just be on the lookout for that. And for the loan officers, like my dad, like my brother up in Texas, you know, this is a great product. It's helping people like the pharmacist buying a lot of real estate properties, a lot of investments that can get them outside of conventional. It's another wheelhouse. Like I said, if you Google DSCR loans, you'll notice all the mega lenders have that product now. And everybody I've been talking to lately in the last few months, oh, we're doing DSCR, we're doing DSCR. It is a product that can work, it's very well done. And if you need help with the LLCs, the structures, you know, give your favorite attorney a call, like Ty and I. SPEAKER_01 20:23 There's really nothing more I could add to that, other than it is a great tool in the tool belt, and we're happy to assist any uh lender that has any questions about this. SPEAKER_03 20:32 Gents, I really appreciate the time, as always. Ton of valuable info. Hopefully, we'll speak again soon. Thank you very much. SPEAKER_02 20:38 Thanks for having me. Does it cost more to buy a head of lettuce or fill your car's tank? Well, if you're feeling that, you're not alone. September consumer prices accelerated to its fastest pace in five months. Headline consumer price index inflation rose to 3.7% from 3.4%, and core inflation increased to 2.6% from 2.4%. This briefly pushed three, five, and seven-year yields to new 2026 highs before the market rallied by the close. The report complicates the Federal Reserve's efforts to restore price stability and strengthens market expectations for a potential rate hike as rising energy costs threaten to spill over into broader prices. Gasoline prices surged 9.1% month over month, and medical care costs continue to rise. With inflation outpacing wage growth for a sixth consecutive month in real terms, household purchasing power is weakening and pressure is mounting ahead of the midterm elections. U.S. treasuries are showing tentative stabilization through a bull flattening of the yield curve as longer duration bonds recover while the front end reflects expectations for an October Fed pause and potential December hike. Margins are thin and pricing is volatile. Mortgage backed securities sold off after the hotter than expected inflation rating and then recovered, and the sharp reversal highlights fragile market position. And uncertainty over the Fed's response. Lenders had to distinguish a temporary market reaction from a meaningful change in execution value, which requires more than refreshing rate sheets. Capital markets teams must understand investor demand for higher coupons, validate premium pricing, explain discount points and temporary buy downs to loan officers, and review whether best efforts execution makes more sense than taking additional pipeline risk. Lenders chasing another 20 to 30 basis points in non-QM execution can find themselves exposed when a pool fails to trade and its value falls several points. Competitive advantage in this environment comes from making disciplined decisions with a clear understanding of both borrower outcomes and investor appetite. Absent clearer disinflation or economic deterioration, a durable bond rally remains unlikely. The latest page book from the Federal Reserve pointed to modest, uneven economic growth, with manufacturing providing the main support as consumer spending and real estate softened. Labor markets remain largely stable, but persistent oil, tariff, and transportation costs are fueling inflation and squeezing margins as price-sensitive consumers resist pass-throughs. With spending increasingly reliant on higher income households and businesses anticipating only slight growth, sticky inflation and geopolitical uncertainty remain headwinds for the economy and the Fed's path toward price stability. Upcoming remarks from Fed Chair Warsh in the October 28th FOMC meeting are key catalysts, as are upcoming retail sales, PPI and labor data. After CPI yesterday, today's economic calendar kicked off with September PPI, which was up 1.3% month over month and 6.3% year over year, both much higher than expected. We've also received core PPI, up 0.7% month over month and up 5% year over year. September retail sales up 0.8%, stronger than expected. Jobless claims, Empire State Manufacturing, Philadelphia Fed, August business inventories, and weekly crude oil inventories round out today's calendar. After the producer price numbers, agency MBS prices are much better than Wednesday's close because people think the Fed will have to hike. The two years yielding 4.76 and the 10-year is yielding 5.09 after closing yesterday at 5.19%. The rally is also due to some sentiment related to stock market and AI fears. Let's wrap up with a joke and some housekeeping. A zoo keeper wishes to buy some new animals from another wildlife park. So she writes, Dear sir, we recently opened zoo and are looking to purchase two mooses. No, that doesn't sound right, she thinks. We are looking to purchase two meese. No, that can't be right either. Dear sir, I wish to inquire about purchasing a moose. Kind regards. P.S. Please send another moose along with the first. Thanks again to Encino for sponsoring this week's podcasts. Encino is the platform for agentic AI and mortgage lending, helping mortgage lenders deliver a faster, simpler path to home ownership. If you're here at NBA Annual, come find the Encino team and see how their agentic homeownership journey puts AI to work across the mortgage life cycle, helping loan teams spend less time on manual tasks and more time serving borrowers. Visit Ncino.comslash mortgage slash US to learn more and schedule a meeting while you're on site.