Inflation, Interest Rates and The Mortgage Industry

Inflation, Interest Rates and The Mortgage Industry

Efforts by the Federal Reserve to curb inflation will take time. Interest rates will likely continue to increase slightly for the near future. Your Mortgage Matters host Mac Cregger talks to Managing Director in Lending Capital Markets, Shayan Salahuddin, on how that affects the mortgage industry. As well, Shayan explains how Angel Oak’s business model helps with affordability and commits to surety of execution throughout the loan process.

Anyone planning to buy a home or those working in the mortgage and real estate industry will hear valuable market information in this podcast. Listen now!

Efforts by the Federal Reserve to curb inflation will take time. Interest rates will likely continue to increase slightly for the near future. Your Mortgage Matters host Mac Cregger talks to Managing Director in Lending Capital Markets, Shayan Salahuddin, on how that affects the mortgage industry. As well, Shayan explains how Angel Oak’s business model helps with affordability and commits to surety of execution throughout the loan process.

Anyone planning to buy a home or those working in the mortgage and real estate industry will hear valuable market information in this podcast. Listen now!

Mac Cregger
Welcome to Your Mortgage Matters Podcast through Angel Oak Home Loans. My name is Mac Cregger. I’m divisional manager of sales at Angel Oak Home Loans. And I have a very special guest today Shayan Salahuddin who is the managing director of capital markets and secondary markets. So today is going to be action packed full of information. This is so relevant in today’s national and world news. I think everyone’s focused on finance, interest rates, inflation, the cost to live life, and how that affects purchasing a home or real estate. So shy on, so thankful for you to be here. I know your time is valuable. I am sure your desk is full of projects right now and analyzing information. So thank you for joining us today.

Shayan Salahuddin
Thanks for having me.

Mac Cregger
So I want to hear a little bit about you. And I know that I was there for your first day a couple years ago to Angel Oak, you have come in immediately and made changes. Tell us a little bit about how you got to Angel Oak and some of the changes you’ve implemented such a short time.

Shayan Salahuddin
Yeah, so my, my, my route to this particular seat, and frankly, two mortgages in general was fairly circuitous as, as most people that end up in mortgages can kind of relate to. I started at a college as a consultant that was an Accenture guy for a couple years. And then other than that, I’ve really literally done nothing other than mortgages for my entire career started off in mortgages at Fannie Mae where I spent 12 years in their capital markets organization where I structured and traded, frankly, probably every mortgage product known to mankind. From Fannie, I went to go run capital markets, a very large servicer and originator. I headed up a mortgage consulting and outsourcing company for several years. I’ve been a consultant to the industry for many years and actually came to Angel Oak originally, on a consulting contract that very, very quickly turned into a full time seat, I was took a look around Angel Oak, the day that I came, you know that I started on my consulting engagement. And I thought to myself, this place is way too interesting for me to not be a part of full time and permanently. And so that’s how I got here. And since I’ve gotten here, we have done quite a bit in terms of getting ourselves a bit more sophisticated and in our approach to to, to capital markets, right, really focusing on improving execution on our loans and opening up our you know, the possibilities of what we can be doing with various different loan assets that we that we originally because, you know, Angel Oak is fully diversified in terms of the origination channels, and also in terms of the products that we originate. So it provides a very interesting space to be as a capital markets person, and that you have so many different products to deal with. But at the same time, it increases our level of responsibility. Because we have so many different products, we have to think about so many different products and engineer exits to all of those products, the most profitable exits we could possibly find. So we’ve done a lot of changes around Angel Oak in terms of how we look at markets and how we approach them. But, you know, everything that we’ve done has really been focused on providing us the most efficient, most effective execution and every loan that we’ve got. So we’re pushing out the best possible pricing to the point of sale, getting our borrowers the very best deals we can possibly get them and also providing you know the the asset management portion of our business with high quality assets that you know that the world definitely wants to invest in.

Mac Cregger
Well, our referral partners, our clients and definitely our top producing loan officers. Thank you and your team for all you’ve done. It has made a big difference. I want to jump right into what makes Angel Oak unique and you’re a big part of that your team is in the balls that y’all move down the field. But before we jump in there, I want to address where we’re at as a nation, especially with where interest rates have been I feel like every day we’re seeing rate increases on the street for our clients, and they just see no end in sight inflation seems out of control. Every time I pull up my web browser, I feel like it’s negative news and watch out. So when you look at the landscape today, are we seeing any improvement on inflation? Are we right in the middle of the storm? You know, what’s your quick solution on on what to look for on how we get out of the situation we’re in? Where do you see us in today’s market as a whole?

Shayan Salahuddin
Yeah. So, you know, there’s there’s a lot, right, that’s a kind of a loaded question in the sense that, you know, he’s inflation added control, there’s no real. There’s no differing opinions on that. And inflation is, in fact, at a control, we printed an inflation number on Friday, right CPI came out on Friday, because we’re pricing index, which is a very, very intently watched metric by the Fed, it came out and printed a Tyus number since 1982. Anyone that looks at that number and says inflation isn’t added control is either delusional or in denial, right? I mean, they’re ignoring it. So it’s out of control. There’s no doubt about it. Now, the question is, what needs to be done about it? And what ramifications are those actions going to precipitate? Right? Well, you’ve got the Fed, the Fed has very limited number of things that they’re actually able to do, right, they’ve got monetary policy on one set aside, meaning how much money there, they can either add or subtract from the market. Remember that the Fed, they they own quote, unquote, interest rates. But really, the only rate that they actually own is the the Fed funds rate, right, the the rate that banks can lend to each other on an overnight basis. The Fed also has a very large investment portfolio comprised of longer data treasuries and mortgage backed securities. They aren’t really buying mortgage backed securities and treasuries in any meaningful way anymore, but they are, in fact trying to deliver that that portfolio. So it’s two different things, right. One is rates and that the the monetary policy, and that is the very front end of interest rates, right, short, dated straights. And then there’s MBs and mortgage backed securities and treasuries, which are the back end. So they can do some things to try to move those rates around in order to try to rein in inflation, right. So how does that actually happen? Well, if you increase rates, then you decrease demand for borrowing, right? If you decrease demand from borrowing, people spend less, right because they can borrow less, they spend less, and that creates a decrease in demand for products, right and services. So if you decrease permitted demand for products and services, what you should see is a lowering of prices for those same products surfaces, because demand is decreasing. So that’s kind of the game plan here on the on the part of the Fed, what people are now sort of arguing about and the reason there’s so much volatility in the market, is because everyone’s got their own opinion on exactly how that should happen. And because the numbers are so far off the charts, right, eight plus percent inflation, despite the fact that the world has priced in on a 789 rate hikes this year. And we’re still printing historically high numbers, right? Well, now we start to toe into different areas of concern, right? Is it just inflation? Are we gonna, you know, is inflation so far off the charts that the Fed is going to have to move overly aggressively, and if they move overly aggressively, could they then push us into a recession, and then you end up in a place where we have stagflation, right, a stagnating economy amid an inflationary backdrop, that’s a tough place to be anyone that’s, you know, old, like me, remembers the 1980s, where stagflation was very much front and center, and it was a tough thing to live through. We haven’t seen it in a really long time. And then you’ve got, you’ve got an entire generation, and frankly, at this point, literally an entire generation that has grown up in, you know, in, in an environment where interest rates were essentially at the zero, right, and we’ve seen, you know, both short term interest rates read zero and long term interest rates, right, like and on mortgages. Were the lowest we’ve ever seen. And we’ve gotten accustomed to that being the norm, when in reality, it isn’t right. We’re talking about trillions of dollars that have been put into the economy, to try to push interest rates down and spur spur lending and spur some growth. And, you know, the fact that in face that inflation was out of control is not really a surprise to anyone. It’s the the size and the the, the sorry, the dramatic

Shayan Salahuddin
move that we’ve seen in rates recently. It is because we’re kind of in unprecedented territory, right? We have trillions of dollars of stimulus. In the marketplace, you’ve got inflation rearing its head, after a decade and a half of the of the Fed trying to make it happen, it’s finally actually happening, but it’s happening faster than we expected. So the way out of this is not an easy sort of short term thing. Inflation isn’t on a light switch. It took us a while to get here, and it’s going to take us a little while to unwind.

Mac Cregger
Alright, so we’ve identified the problem now that you’ve scared me Shayan let’s jump into solutions. I believe Angel Oak Home Loans provides solutions to some of what you’re talking about. We’re not a lender that has some kind of magic wand that can change the environment and the climate where we’re at. But we do offer solutions. When we say we’re a fully integrated lender, Shayan, what what exactly does that mean, we know enough about mortgages of agency, whether it be a conventional or government loan, we’ll touch on what non QM non traditional means for all of our listeners. But everybody’s probably familiar with that term by now. So what do we mean when we say fully integrated mortgage company?

Shayan Salahuddin
So Angel Oak is fully integrated, actually, when we say fully integrated, we actually mean it from several different aspects, right? We are fully integrated in the sense that Angel Oak owns the entire mortgage value chain, right, our business is, we own every single point in the process from that very first call to the borrower, all the way through placing that particular mortgage with an investor, right? So we own you know, the folks that make that very first call we make, we own all of the underwriting and the processing the entire manufacturing process, we own my my group owns that that transformation process where we take assets in one end right loan assets, and we turn them into investment assets. And then we have an asset management firm that positions those assets on behalf of our investors. There’s very, very few shops out there that actually can say that they own the entire vertical, when a mortgage when the from that time that that first call all the way through, you know, positioning within investor, the loan never leaves the house, right, we are in control the process the entire way through, which gives us a lot of flexibility in what we can do. It gives us the ability to be very pragmatic as markets change. And as you know, our view of what should and shouldn’t be financeable changes, were able to implement that very, very quickly. Fully integrated also means that we we offer several different doors through which people can walk to do business with Angel Oak, right. If you’re wholesale, if you’re a retail, if you’re you know the correspondent if you’re you know, a self employed borrower, if you’re a W two borrower, it doesn’t really matter to us, right? We can take in a relationship and service that relationship. And an incredibly, incredibly high level. Doesn’t really matter what you look like, it doesn’t matter really matter where you come from. We have solutions.

Mac Cregger
Well, before I set you up for the next question, because your explanation of that is so valuable, because that means we are in control, we control the process. So for our referral sources, for our customers, we are in control. And I think after just hearing you explain what we’re not in control of, of the United States and global economy, I love the fact that we’re in control of the mortgage process, which is something we can own. You know, we have our own proprietary non QM non qualified non agency mortgage product. I think this solves many solutions for self employed buyers, for investors for people that might be lightening their tax burden, or maybe have a hiccup or roadblock that’s happened in a credit event for them to get started and get in on this opportunity of gaining wealth and what is the only market that seems to be incrementally growing in residential real estate. So we have those solutions through products. And I know we work hand in hand with our asset management company, because we have 20, some billion almost 30 billion securitize funds. I’m sure Shayan’s about to give me that exact number. But tell me a little bit about why it’s beneficial that we work hand in hand with our asset company, as it relates to realtors and borrowers. I mean, I get it from the big end, but from the actual street level, what does it do for us as a company?

Shayan Salahuddin
Yeah, that’s the I’ve mentioned this word earlier. And I think it bears mentioning again, in this context, being pragmatic Right, you know when when a loan makes sense to do, and no one else wants to do it, and they don’t want to do it, because they don’t want that additional level of risk that whoever it is they’re trying to sell that loan to whether it be Wall Street, whether it be regional bank would I mean, the ultimately everyone, you know, every originator out there selling their loans to somebody, right. And in that context, you always take whatever that investors willing to buy, and you hair, cut it a little bit to make sure that you don’t end up holding the bag. So when there’s an exception that needs to be made, when there’s, you know, something sort of strange and hairy about a particular loan, you tend to want to shy away from it in that case, in our case, right now, we don’t sell those loans to anybody, we generally are taking those loans out of our left pocket and putting them into our right pocket, if a loan makes sense to do, we are going to do that loan. And we’re able to, we have long standing relationships in our asset management company that is 20 plus billion dollars. So under under management, those investors trust us to do this work, they understand that we are experts in mortgage credit. And if we believe a loan is worth doing, they believe a loan is worth doing, they’ve entrusted us to do that work. And so, you know, from our realtor partners perspective, from our builder partners perspective, and even from our individual borrowers perspective, right. You know, there’s, there’s there’s very few Silver Linings that came out of the, you know, 2008 crash, and the global financial crisis. But one of the things that did come out of that is that we know, right, we know which loans didn’t make sense now, which loans did. And thankfully, there’s not really much of that stuff that didn’t make sense that came back. But the stuff that does make sense is still plentiful. And because non QM has been such a small and sort of ignored part of the market, generally, because rates have been so very, very low. And it’s been so easy to make agency loans. The fact that that rates are going up in the non QM execution is because the non QM product is becoming much more front and center these days, people are realizing that this isn’t subprime. This isn’t, you know, that weird? Maybe, you know, borderline financeable borrower that that needs this product. These are everyday folks, these are folks in your neighborhood, these are folks everywhere, that just don’t happen to fit the d u box, the LP box, meaning that they’re not Fannie Freddie borrowers, but there’s still fantastic credit. There’s still people who deserve credit. And those are the kind of people that we cater towards. I mean, we do everything right. We do the Fannie loans, we do the friendly loans, we do the Jimmy loans, where we do all that stuff. But this is our bread and butter. So if a loan seems like it shouldn’t be financeable, there’s no place better to come than Angel Oak, because we know for sure, because we’re putting it away forever.

Mac Cregger
You said that there’s we learned through the financial crisis, one of the positives, that there were loans that worked in loans that didn’t. And then you went into great explanation of those underserved buyers, on the non QM products, whether it be self employed people and in the tax burdens, or investors. But why do these loans work? Because I get asked that all the time. I feel like at barbecues and at family events, Mac, is the bubble coming? Is the mortgage industry going to cause it again? And I say no, these loans are good. We underwrite them different. What makes from your perspective, these loans loans that work versus what we went through about 1415 years ago in creating a crisis.

Shayan Salahuddin
So I remember back in 2007 2008, I was at a conference in Southern California, and I’m driving down the street my rental car and I’m listen to the radio and I’m an ad comes on the radio, for the ninja loans. no income, no job, no asset verification. I remember now. It’s just so now I’m as big a fan of the martial arts as there is out there. That was a moment where I probably should have seen the top of the market. Right? If we’re Nike, you know, if you’re qualifying people based on literally nothing, it’s probably not a it’s a very, very good indicator that alone is not actually going to gonna perform in any sort of adversity. You look back on the non QM book that Angel Oak has, and during you know the the single largest upheaval we’ve had, you know, since the global financial crisis Truus COVID. Our books performed nearly as well as premium Ready spoke. Wow. Right, we had incredibly low defaults, we had incredibly low losses on that, frankly, I think it’s, it’s a number that looks a lot like zero in terms of the losses that we took during COVID. And so, you know, that the, you know, we can talk about how we, you know, we qualify people based on common sense rules that we, you know, we do verify assets, we do verify, you know, cash flows, whether they come from, you know, a W two or a bank statement or whatever we we understand how to how to look at a borrower and determine whether or not that borrower is, is good to make their payment, whether that that that piece of collateral that home is is is is worth what they say it’s worth. And the proof is in the pudding, right? We can talk about it all day, but the proof is in the pudding, and that is, when things did go poorly. Our book performed rather than what happened in 2008 to 2010. Were everything that was based off of, you know, questionable underwriting guidelines, it failed quick, and it failed hard.

Mac Cregger
I’ve seen the creation of opportunities through our non QM product, having a product that serves a qualified, yet underserved marketplace, some of its just education, things like this podcast, Your Mortgage Matters, getting the word out about opportunities for people that may not fit introduced to traditional financing boxes to get financing. We’ve seen that growth, especially over the last couple years, with COVID, a lot of people choosing to move into a self employment type situation or work out of their home, or maybe file their taxes in a way to lighten their burden through these hard financial times. So a question I would have for you, Shayan is where do you see the growth of non QM over the next couple of years? And I’m sure that that’s affected by the economy now, right?

Shayan Salahuddin
For sure, I mean, I think the growth of non QM comes in a couple of different aspects, right? One is the changing landscape of what it means to be employed in the United States, right? The gig economy is something that didn’t really exist, you know, when the global financial crisis hit even, you know, 10 years ago, there wasn’t anything, the gig economy wasn’t even a term, there’s plenty of folks during the Great resignation, that have decided to rather than have a traditional, you know, office job, they’ve decided to piece together some sort of self employment through various 1099 opportunities, or, you know, content creators on social media or, you know, someone’s decided to, to, you know, make their own bake shop, you know, in their kitchen, there’s all sorts of stuff out there that people are starting to come, you know, come to realize that there are opportunities here that you can make a passion with, you know, with a profession, and you don’t have to be beholden to somebody else to come up with the idea. If you’ve got an idea…

Mac Cregger
Stop one second, that was excellent, I gotta write that down, say it again.

Shayan Salahuddin
I don’t know what I said, passion, passion was profession, you’re able to bathe in passion with the profession, and you don’t have to wait for somebody else, to stand up a shop and apply for that job, you can just create your job for yourself, which is brilliant. It’s brilliant. And it is, in my mind, one of the things that will that will prove to be the great drivers, the US economy going forward. Right. So that’s one thing, the other thing, and let’s talk about for a second what already, so that’s kind of a newfangled, you know, borrower right, that that’s a borrower with his new door to the non QM, you know, product set. But the non QM process products that we didn’t know was going to facilitate those guys and gals. Well, but it does, it does perfectly. Those folks that we were originally thinking to, you know, to cater to in non QM, like you said, it’s the self employed borrower. Right. It’s the borrower that’s got some history that, you know, arguably isn’t that even though they’ve either learned from or wasn’t really their fault, right? Recent divorcees, folks that have had credit issues through, you know, identity theft or something like that, folks that have, you know, good balance sheets, but not necessarily good income statements, that those kind of borrowers look like they can’t pay a mortgage from, you know, family friends perspective, just because of the way that Fannie and Freddie have set up the mass. But we’ve gone beyond that math, right, and understand that folks have the ability to dip into their savings in order to facilitate a mortgage payment, and in fact, that’s the way that they’ve designed their life. They’ve designed their life around that savings rather than what they’re bringing in. Those are the types of borrowers that have all existed for us nothing has been serving for years. The gig economy really is that next wave of folks that are coming in and, and the self employed borrowers they had worked for them before it’s going to work for them in the future. The other thing that’s going to drive growth in our space, really is acceptance, right? The silver lining to this Herky jerky, wild movement, we’ve seen it with the first quarter and the second quarter of 2022 is that everybody wants to learn, right? Everyone wants to learn about this non QM thing. Everyone had it in their minds. That non QM was exotic and strange and perhaps irresponsible. There’s nothing more responsible out there, our book of business, the performance of our book of business, proves it. And now that folks are coming around saying, You know what, I’m not gonna get the you know, I’m not gonna be able to see my business just only doing Fannie Freddie and Ginnie loans. I got to broaden broaden my horizons. Well, they broaden their horizons into non QM, they see that non QM serves a really, really important and necessary purpose. And they see that it is a responsible set of lending criteria. And as more and more people do that, then more and more people understand, kind of sell it more and more people understand that this is a product that shouldn’t be the product of last resort but a product really that stands alongside the Fannie the Freddie the Ginnie product, and acceptance is going to make this a much, much more mainstream product. It was already it was built to be a mainstream product. Now it’s gonna become a mainstream product. And so you’ll see a lot of folks that will use non QM as an alternative to agency lending, not a last resort.

Mac Cregger
On a good note on Your Mortgage Matters Podcast, Angel Oak Home Loans, Shayan has proven himself the last 25 minutes to be an expert in this is a subject everybody wants to know about. The bad news is like I set you up out of the gate with an impossible question, I’m about to ask you a second loaded question to close out as our final question, because I think we’ve covered the meaning of non QM how it relates to so many people that need the product, especially at a time where I feel like so many people are searching for solutions and answers. So I want to ask you the loaded question that I get get asked every day and have no idea how to answer. Interest rates, supply and demand, the competitive market inventory. When do the winds change? When do things settle down? I think it can be a little discouraging, when you don’t know that you see the solution in sight. Or when you’re trying to figure out how long you have to get through rough weather. So can you in your expert opinion, not going to hold you to this, although this is recorded. Give us a little bit about what you would expect from a timeline for markets to settle.

Shayan Salahuddin
Alright, so loaded question, but I’ll give you an answer in the best way I possibly can. Let’s start with this. I’m probably carrying around 20 extra pounds. Right? I’m a little definitely got the dad. But it took me a long time to cultivate this dad body. It was years of you know, sitting on the couch watching games and eating potato chips and, and not running everyday and not not exercising. I couldn’t make a decision tomorrow that I want to get skinny. It took me years to get here. It’s going to take me years to get to being skinny, despite the fact that today I’ve made the decision. We are there today from an economic perspective, it took us years of zero interest rates to get and trillions of dollars of excess will not excess trillions of dollars of necessary stimulus in the marketplace for us to get here. And while we may take make a decision today that we don’t want inflation to happen, it is going to take some time to wean the market off of this stimulus and get inflation under control. It took us 15 years to get here. And it wouldn’t surprise me if it takes us many years to get through this. Inflation is real and it’s happening right now. And when the Fed looks to tame inflation, they are in fact setting policy. Right and the policy is going to be around for years, potentially a generation and so it the ebbs and flows of the market every day, like oil prices and food prices. These are not the things that drive the Fed to do stuff, despite the fact that they are adding to inflation. Those ebbs and flows are really market driven, but the policy around how We aren’t going to approach monetary and fiscal items going forward, that’s what the Fed is focused on doing. So they’re going to take bites of the apple, and then they’re going to take a pause to figure out how those bites of the Apple are actually manifesting in the data. And that’s months, right? It takes months for a change today to actually ripple through and show up in the results. So to say that we’re going to get this you know, that the Fed should increase 75 basis points tomorrow, and then 75 basis points in July and then another 50 basis points of September and then we’ll be good. That’s not in fact, what will happen right, they’ll do these three moves and then the wait three months, six months and see what happens, right and then if more needs to be done, more will be done, if less needs to be done, they can unwind things, but we are looking at a you know a volatile market for at least the short term right for the next several weeks to months. And then we will look at a scenario with higher rates for years, presumably years, right. So the the what we are used to was never the norm. It was a necessity a necessary setup to to spur growth in the economy. And what we are what we need to do now is get our heads around being used to this.

Mac Cregger
Today you’ve heard from Shayan Salahuddin, who is our Managing Director of capital markets and secondary markets in just 30 minutes with a bunch of loaded questions with the most challenging topics that face our nation in our economy and the global markets. Shayan proven himself with answers that help us as an expert. I want to remind you when you chain when you choose Angel Oak Home Loans to work with, you’re not just working with a loan officer, there’s loan officers everywhere you can choose, you’re working with an expert, Angel Oak Home Loans was built around top producers, experts, people with reputations in your local market that you can reach out to and know that they are in control the entire process, we talked about what it means to be vertically, vertically and fully integrated as a lender, and your loan officer from beginning to end is the end investor. So he or she can help you from the very beginning of understanding your financial situation, taking your loan application, placing you in a product that is most beneficial for you and your family to buy a home that could be an agency product, it could be a non agency product, a non QM loan that we’ve discussed something that’s outside of the box, maybe your financial situation is much different than most people around you. That doesn’t mean you cannot get a home loan, you need to talk to one of our loan officers at Angel Oak home loans.com. We are in 39 states throughout this beautiful country. So you can find someone local to you that you know has gone through the ability to look and use all types of loan products for a solution for you. We’ve proven ourselves through the development of our non QM product not not only doing over 12 billion in Angel Oak Home Loans and non QM loans over the years. But also doing that and proving that it’s a valuable product for you. It’s a valuable product for the market with a low default rate, even in challenging times. We desire to be your preferred lender, someone that you would call upon as an expert who can help you with your home loans. I can’t thank you enough Shayan for for joining Your Mortgage Matters Podcast by Angel Oak Home Loans today. And for you offering your expertise and your advice. I am sure we will hear from you in the future as we have you on again. I appreciate your time today any closing thoughts?

Shayan Salahuddin
First of all, it’s been my pleasure Mac. Thanks so much for inviting me I would implore everybody out there to be calm, alright, and we’re gonna get through this we’re all going to be fine. And in markets will return to normal in the midst of you know, uncertainty, there’s always opportunities so Angel Oak is always focused on finding and seizing the opportunities. So you know, talk to us that there’s there’s a lot to be done even at times when you don’t think things can get done.

Mac Cregger
Thank you for your time today, Shayan, and guests listening please go to Angel OakHomeLoans.com AngelOakHomeLoans.com And find a mortgage expert in your area. Thank you have a great day.