HousingWire sat down with Acra Lending CEO Keith Lind to discuss effective ways to not only survive, but profit in the non-QM space while so many others are closing their doors. Lind also shares insights into the future of non-QM lending and the importance of emergent technologies in improving the origination process.
Zebulon Lowe: Keith, thank you for speaking with us. The non-QM space was hit hard by liquidity issues in the pandemic period. How does Acra manage liquidity so that you don’t just survive but thrive?
Keith Lind: I believe we tackled that problem effectively on two fronts. I think one is, when you’re talking about managing liquidity in a period when interest rates go up as fast as they did, we weren’t hedging our pipeline. Coming from my background as a bond trader working at Bear Stearns, Royal Bank of Scotland, and Robin Howard, I understood the straightforward approach: when rates go up, adjust accordingly.
I think a lot of people in this industry probably got caught sideways because they had never seen a rate environment where rates went up. We took our rates up simply because that’s what we had to do. I got a lot of pushback from my salesforce. They were concerned because we were 100 basis points above our competition. I said, “This is where we have to be. This is where the market is.” It’s really that simple.
Liquidity for us was a lot easier than our competition because our first rate hike was Jan. 3, 2022. In June of ’22, our pipeline was already at 7% for four and a half. So when I’m selling loans at 7%, our competitors were trying to sell loans at 5%.
Another contributing factor to our liquidity is that our buyer base is very institutional. We don’t sell to correspondent lenders. We’re selling to the largest money managers in the world. Having those different outlets during that time was very advantageous.
It wasn’t pretty, I’m not gonna lie to you, but we got through it, and we ended up being profitable in 2022 and 2023. But, you know, I’d say the leading factor boils down to being decisive.
ZL: Did you receive pushback from your AEs? How did you handle it?
KL: I relied on my experience because I’d been on the other side. As a bond trader, I know what happens when rates go up. Trader prices go down, and they go down fast. When we were seeing some of these inflation numbers, they were staggering. I knew we had to stay ahead of it.
I thought prioritizing risk was the right move. So much of our industry is sales and marketing first. That’s fine most of the time, but not all the time. I knew that thinking about risk first was the only way we were getting through this.
ZL: Mortgage rates have challenged every part of the mortgage landscape in the last 18 months. What are you doing to tackle those challenges?
KL: My basic answer is just stay the course. Stick to your game plan. You’ve got to manage three things in this business really well: Rates, liquidity and expenses. If you do that efficiently, you can get through these times. I think the hardest part was the layoffs followed by salary cuts across the organization. We are not a huge company and we had to go from 460 people to 275 really fast. Those were the moves I knew we had to make and part of staying the course.
You can see other publicly traded mortgage companies’ earnings reports that did not cut expenses and they are still fighting expenses. Unfortunately, they are going to be paying the price for that in smaller gains, or losses.
In finance there’s a saying, “don’t fight the Fed.” I say, “don’t fight the housing market.” We are a small piece of the puzzle. Volume will come. We’re actually seeing now our volume is up about 25% year over year because we did manage expenses and we were right.
ZL: What was your approach to manage and optimize operational expenses?
KL: In 2021, everyone was hiring mortgage people. Then, all of a sudden, the market starts to go down and you don’t want to let these people go that you worked so hard to recruit. And I think that was a difficult decision for many executives. They didn’t want to lower their salaries either because they thought they might jump ship and go somewhere else.
What I’ve learned is that if your people believe in the vision, no one’s going anywhere. It’s such a cyclical market. So many people in this industry have been bounced around from company to company. If you can get them to believe in you, the right people will stay. If they believe in you, and they think you’re doing these things for the right reasons, they won’t want to leave. They all want to stay together. That’s the goal.
I was very concerned that we were going to lose salespeople, but at the end of the day, they are a cohesive team that has been here for eight years. They don’t want to jump ship, especially when they’re seeing other companies go out of business. I think that seeing some of our biggest competitors go out of business actually helped our core group of people see that we were making the right decisions, even though they were difficult decisions.
ZL: How are you managing early payment defaults?
KL: Get in front of them as soon as they pop up on your balance sheet. Our most recent loan package we split up into two pools. Some of the bidders had kicks. I decided we’re not taking kicks, we have bids for every loan. I just want to clean the balance sheet every month. Same thing with EPDs (early payment defaults). The goal is: don’t lose a lot of money. And I think the best way to do that is to sell them as fast as possible.
ZL: How are you using tech to lower the cost to originate?
KL: If you want to talk about an industry that’s lacking in technology, it’s the mortgage industry. A couple of the big guys like Rocket and UWM are really investing in it, but the industry is behind the curve. We finally got to a point, after the pandemic, where we shut down for six months and focused on delivering a new portal for all of our brokers.
Instead of sending everything through email, now brokers have a portal. When brokers login, they see the status of all their loans, exactly what’s missing in each file, etc. They drag and drop all their items instead of emailing attachments. We’re closing loans 15 days faster than we were last year.
The portal also adds transparency. The goal in this industry is to make the lives of the brokers as pain-free as possible. I think our brokers see that and appreciate not only our investment in the technology, but our effort to make the process easier.
ZL: What other technological improvements are you planning to integrate into your tech stack and/or processes?
KL: AI is going to play a big part in the future. Roughly 55% to 60% of submitted files end up funding. With AI we can more easily review the non-funded files to find the reasons and then, with the help of AI, ensure we get that right information upfront as soon as possible. This will greatly increase our pull-through rate, which will make life for our brokers so much easier.
We are approaching AI from the standpoint of, “How can we improve the process and the experience for everyone involved in the transaction?”
ZL: Is there anything else you would like to share?
KL: I think a lot of these topics are taboo because not a lot of people are doing well. And it’s tough. It’s hard out there. But I think this transparency is the right approach. I want people to know that you’ve got to be decisive because rates don’t always go down. This will happen again and the more prepared people are for the next time, the better.
To learn more about non-QM and working with Acra Lending, visit www.acralending.com
