Sean Dobson on the US Real Estate Industry

Episode Transcript
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News. This is Master's in
Business with Barry rid Hoolds on Bloomberg Radio.

Speaker 2 (00:18):
This week on the podcast, I have an extra special guest.
Sean Dobson has really had a fascinating career as a
real estate investor, starring pretty much at the bottom and
working his way up to becoming a investor in a
variety of mortgage backed securities, individual homes, commercial real estate,

(00:40):
really all aspects of the finding, buying, and investing in
real estate. And on top of that, he's pretty much
a quantitative geek, so he is looking at this not
simply from the typical real estate investment perspective, but from
a deep quantitative analytical basis. If you're interested in any

(01:04):
aspect of commercial, residential, mortgage back real estate, then you
should absolutely listen to this. It's fascinating and there are
a few people in the industry who not only have
been successful as investors, but also very clearly saw and
warned about the Great financial crisis coming because it was

(01:25):
all there in the data if you were looking in
the right place. And continues to build and expand the
Amherst Group into a real estate powerhouse. I found this
conversation to be absolutely fascinating, and I think you will
also with no further ado my discussion with Amherst groups
Sean Dobson.

Speaker 1 (01:43):
Thank you very much. It's great to be here.

Speaker 2 (01:44):
So let's talk a little bit about your career in
real estate. But before we get to that, I just
got to ask on your LinkedIn under education, it says
didn't graduate none, working for a living. What does that mean?

Speaker 1 (01:58):
I think I answered questions of of when did you graduate?
And so I said I didn't graduate, and then that
was your what degrees did you achieve? And I said none?
And then I think the question was what were you
doing or what were your interested in? So I was
working for a living, but I didn't.

Speaker 2 (02:13):
Go to college, did not go to college. So that
leads to the next question, what got you interested in
real estate?

Speaker 1 (02:21):
It was it was happenstance. I took a temporary job
at a brokerage firm in Houston, Texas the summer after
high school, between high school and college. Really as the
office runner, run around picking up people's drying cleaning, grabbing lunch,
opening the mail, that sort of thing. And I took
the job really because a friend of ours a friend

(02:42):
of the families had worked there and just said, what
an interesting sort of industry it was. This is back
when mortgages were sort of a backwater of the fixed
income market, so they were traded a little bit like
UNI bonds or not really well understood, not.

Speaker 2 (02:55):
Well followed nineteen nineties or eighty.

Speaker 1 (02:58):
Seven, wow, nineteen eighty seven. So after that it was
I later was given some opportunities to join the research team,
and then took over the research team, and then took
over the eventually took over the trading platform, and then
by nineteen ninety four a group of us had started
our own business, and that's the predecessor to Amherst, which
we bought in two thousand and have been running it

(03:20):
since then.

Speaker 2 (03:22):
So when you say you were running the trading desk,
you're running primarily mortgage backed securities. That's mortgageback exactly. Anything
else swaps, derivatives and anything wrong.

Speaker 1 (03:31):
So back then it was really just mortgage back securities
and structured products that were derivatives of mortgage backed securities.
We sort of carved out a name for ourselves in
quant analytics around mortgage risk, and that's still a big
core competency of Amherst is understanding the risks of mortgages
are kind of boring, but they're also very complicated. The
borrower has so many options around when the refinance, how
to repay, if the repay. It takes quite a lot

(03:53):
of research, quite a lot of modeling, quite a lot
of data to actually keep up with the mortgage market.
It's really forty million individual contracts, forty fifty million individual
contracts and a million different securities, so it takes quale.
We've built an interesting system to allow to sort of
monitor all that and price it in real time.

Speaker 2 (04:10):
So if you're running a desk in the two thousands
and you're looking at mortgage backed then you're looking at
securitized product. One would think, especially from Texas as opposed
to being in the thick of Wall Street, you might
have seen some signs that perhaps the wheels are coming
off the bus. Tell us about your experience in the

(04:31):
two thousands, what did you see? Comment?

Speaker 1 (04:33):
Yeah, So from the late eighties until the really the
late nineties, we were focused primarily on prepayment related risk
in agency mortgs backed securities. By the time you get
to the early two thousands, Freddie mc fanny age and
may were losing market share. A lot of mortgages were
coming straight from originators and going and being packaged into
what later became the private label securities market. So as

(04:55):
part of our just growth, we attack that market. And
up until that moment in time, we didn't spend a
lot of time on credit risk in mortgages. We didn't
really have the model credit risk because that risk was
taken by the agencies. But in these private labels you had,
the market was taking the credit risk. So we took
the exact same modeling approach, which is loan level detail,
borrower behavior, stochastic processes, options based modeling, and we said,

(05:19):
let's just take a little detour here and make sure
we understand the credit risk of these things before we
sort of travel start making markets and banking and making
these a core part of our business. At that time,
this market was about a third of all mortgages, were
the ones where the credit risk was going into the
capital markets. So that little detour was in two thousand
and three and we found a couple of things we modeled.

(05:42):
We modeled defaults the same way with model prepayments, which
is an option for the consumer to not pay most.

Speaker 2 (05:48):
Of it rarely here it described that way.

Speaker 1 (05:50):
Well, it's a unique approach, right, and it was unique
at the time, and so we thought there were conditions
under which the option probably should be exercised. If you
have a two hours set out, if you have a
two hundred thousand dollars home and one hundred thousand dollars mortgage,
and the consequence for not paying is ding on your
credit report, you're probably not supposed to pay, is the
position we took. So through that lens, we said, okay,

(06:12):
let's price these securities, and we found a bunch of
interesting things. For example, we found that the follow on
rating surveillance for mortgage backed securities doesn't follow the same
ratings methodology that the initial rating does. So over time
the risk composition of the pool which would change dramatically.
So think about two thousand and three. Home price has
gone up a lot from two thousand, So mortgage position

(06:33):
in two thousand were way more valuable in two thousand
and three than they were they originated because they weigh
less credit risk. Not the same thing couldn't be true
as you went forward.

Speaker 2 (06:42):
In time, each subsequent vintage became risk, and risk became
risking risk as prices went up because rates had gone
lower and lower.

Speaker 1 (06:48):
And that's the way we thought about it. The way
we think about it when you make someone alone. This
is sort of the credit oas world. So we think
about when you make someone alone on a building, whether
it's this building or or a home, you're implicitly United States,
you're implicit giving them the option to send you the keys.
So jingle mail is exactly and so we thought it
was least Okay, we've been pricing complicated options our whole career,

(07:09):
so let's just price the option to default as if
it is a financial option. When you do that, and
then you looked at the types of loans or being originated,
and this is where Amher's story is a little different
than some of the stories you've seen are on the
financial crisis. What we figured out was that the premium
that you were being paid as this option seller was
way below the fair market price of their premium, meaning

(07:30):
that the default risk you were taking was way higher
than the market had appreciated. So they were underpricing the
fault risk dramatically. Then, as we dug in and dug
in and dug in, we realized that there were a
lot of loans that were really experiments. There were financial
experiments where the bar hadn't been through dal diligence, the
LTV was very high, the underlying risk of the home
market was very high.

Speaker 2 (07:51):
Other of these were the no dock or Ninja.

Speaker 1 (07:54):
Loans were limited DOC no dock, no.

Speaker 2 (07:57):
Income, no no assets exactly, Ninja no pulse seem seems
reasonable exactly.

Speaker 1 (08:04):
So you look back at these things, you're like, how
could it happen? But we're low level people, right, so
we don't see the mortgage backed securities market as a market.
We see it as like I said, about fifty million assets,
and we're modeling up the value of every home in
the country every every week basically, and we're modeling with
the value of every mortgage in the country, and we're
modeling with the value every derivative of that mortgage, of
the structure, products, and so forth. So through our lens,

(08:26):
it was like, Okay, we've made these financial experiments. The
underlying real estate has become very volatile, so we could
construct trades that had very very low premiums to sell
this volatility, to basically join the consumer on their side
of the trade, which is in essense buying insurance on
the bonds that were exposed of these great risks. Soult.
We did that for a lot of the market, so

(08:47):
a lot of the headline names you see, a lot
of the stories you see about the financial crisis, a
significant number of those investors we were helping in security selection,
modeling and analytics. That sort of put Amherst on a
different pack because prior to that, our core business model
was investment, banking, brokerage, market making and underwriting. By the

(09:08):
time we got to two thousand and five and figured
out that there was such a large sector that was
so mispriced, we started hedge funds, opportunity funds. We took
sub mandates from the big global macro hedge funds, and
we started to build our model around investing in our research.
Co investing our research and earning carried interest in sort
of big complicated trades that we thought we had figured

(09:28):
out the market, maybe the market had imprised something properly.

Speaker 2 (09:31):
How did that end up working out?

Speaker 1 (09:34):
It was a wild ride.

Speaker 2 (09:35):
It was a wild ride.

Speaker 1 (09:36):
Because by the time you got so in two thousand
and five, we went on a road show trying to
tell people we had learned and there wasn't a lot
of reception.

Speaker 2 (09:44):
We literally, let me, let me interrupt you and ask you.
Did people laugh at you?

Speaker 1 (09:49):
They were more polite than that, but they didn't invest.
So there were very few people that thought because at
that time the triling credit performers, for you, single thing
mortgagees great, impeccable, peckable.

Speaker 2 (10:02):
I want to say five was where we peaked in
price and six's volume or am I getting that?

Speaker 1 (10:09):
So six O five was six? It started to turn
over and our thesis on a lot of these mortgages
and the very very exposed securities within these structured products
wasn't that home prices needed to go down. It was
that the only way that the loan was going to
perform is that the consumer could refinance out of it quickly. Right,
So you really just wanted the music to stop, right
or if you mean, this whole thing was going to

(10:29):
come down if the music stopped. So by the time
the music stopped, it was pretty apparent, but we had it.
There's a there's a big industry conference called AFS that
happens twice a year, and in the two thousand, the
two thousand and five conference, it's kind of wild. So
these big brokens frooms get together and they set up
a convention like like plumbers, and they also give out
choski's and they have a and then they give presentations
in their business. And so we participated in this. Our

(10:51):
choshki that year was a hard helmet, was a was
an orange hard hat, and they said beware of falling
home prices. And our whole thesis was that was what
I'm trying to describe.

Speaker 2 (10:59):
Which is that's a great swag. Do you do you
still have?

Speaker 1 (11:01):
I have one in my office now. I have a
helmet from Beware of Falling home Prices, and I have
one for our new construction division where we build entire neighborhoods.
And that's really to sort of bring it all together
with this core competency and analytics, and we're probably the only,
maybe not the only, but but I don't know of
a competitor. We're the quant shop in real estate and

(11:23):
the quant shop in physic glasses. So with that core competency,
that's the reason we're in the single play rental business.
You followed that all the way through. There were amazing
trades to do, amazing opportunities, wild scary things to do.
I got to spend a lot of time in DC
consulting on the response to the financial crisis and trying
to sort out sort of what was really going on.
And what we figured out in two thousand and nine

(11:43):
really when we started buying homes is that we made
the bet that I mean, it wasn't a very exotic bet,
but we made the bet that the sub primorgage market
wasn't coming back at all.

Speaker 2 (11:53):
So wait, let me unpack some of that. Christ there's
a lot of really interesting things. When you mentioned DC,
I'm aware of the Act that you briefed Congress, the
Federal Reserve, the White House. Who else did you speak
to when you were there? Well, what was that experience?

Speaker 1 (12:08):
So I lived in Washington, d C. For five years,
my family and I moved to McLain, Virginia in two
thousand and eight. So we were down the street, and
we were in a pretty interesting situation because we were
we were one of the biggest, if not the only,
investment banks specializing in the core risk that the nation
was facing. And we didn't need any help, right, So

(12:28):
we weren't there looking for changing of a reg cap,
you know, of anything. We weren't looking for a bailout.
We were looking for recapitalization or anything. We were just
there as a source of information. So we met a
lot of interesting people in DC, and it was the
whole gamut. We were consulted on the recapitalization in Freddie
mckin family. We participated in that with Treasury and FHFA
and the regulators of the White House. And I would

(12:51):
say that Washington was pretty interesting because we had gone
and spoken to people in two thousand and five, two
thousand and six and to kind of let people know
that there was something these this is a trillion dollars
worth miss price risk right.

Speaker 2 (13:02):
And I very vividly recall six even o seven. People were, hey,
we're in the middle of a giant boom. Why do
you have to come, you know, rain on our purrass?
But what was your experience?

Speaker 1 (13:15):
It was lonely, I tell you. The analogy was something
like this, is that we had seen what had happened,
and by two thousand and six it was over right.
The mortgages were defaulting. People were taking out mortgages and
defaulting in the third payment, the fourth payment.

Speaker 2 (13:28):
Ninety day warranty on those non conforming non Fanny May
mortgages from those private contractors, like a toaster comes with
along a warranty, it's amazing.

Speaker 1 (13:39):
So eventually even that was gone, even that they wouldn't
provide nine day warranty. Eventually it was take it at
cash for keys or cash and carry. So like for us,
it was weird though, because the analogy I give is
it in two thousand and six it happened. It was
over first four to two thousand and six, the market
was over. The market kept issuing securities, And I think
the analogy that we think about it is that if
you're standing, if you're sitting in front of a bank,

(13:59):
and you know, a van rolls up and people with
masks run in and they empty out the bank and
they leave with all the money, and you see it,
and then people keep coming and going from the bank
for another year. You're like, yo, there's there's no money
in that bank, right, And so so we sort of
felt pretty stupid for a while because we did a
lot of losing trades in two thousand and six that
were the you know, the obviously didn't come to fruition

(14:20):
until the actual people could see the losses. So in mortgages,
the barber can stop paying maybe a year to two
years before the lenders actually book a loss. So there's
this great lag in housing that is affecting the market,
affecting today's CPI numbers that the market doesn't do a
great job of adjusting the real time for information that

(14:41):
they already have. So when the barber hasn't paid in
twelve months, probably not going to get back the loan,
probably not going to start paying again. And then you
can model up what happens, like what's the home going
to sell for, what are my expenses to sell, awa,
how long it's going to take, And all of a sudden,
you have a loan that was worth, you know, one
hundred cents on the dollar, and now it's worth thirty
cents on the dollar. And you knew that eight months
into the loan or eight or maybe a year ago

(15:02):
or two years ago, But it takes that long to
it takes that long for the losses to get through
to the securities. And so I don't know if it's
sort of just the fact that we're so myopic into
the minutia of each little detail, or if it's the
fact that the market kind of doesn't want to buy
an umbrella until it starts raining.

Speaker 2 (15:18):
Really very fascinating. So so coming out of this in nine,
home prices on average across the country down over thirty percent,
but really in the worst areas like Las Vegas and
South Florida and you know, parts of California and parts
of Arizona, Phoenix.

Speaker 1 (15:37):
Two thirds in Phoenix.

Speaker 2 (15:38):
Unbelievable. So you say, I have an idea, Let's buy
all these distressed real estate and rent them out.

Speaker 1 (15:44):
Yeah, I had. I had a very good idea. So
I have very good partners, are very patient with me,
and I said, Okay, we don't think the subprime market
to mark is coming back, which was a non consensus
view at the time. People were buying up mortgage originators
and things waiting for the machines to sort of get
turned back on. We were thinking, this is investors are
never going to buy these loans again at any price.
So what's going to happen, what's going to happen to
the homes, and what's going to happen to the people

(16:06):
that were living these homes. And what a lot of
people I think didn't follow is that there was a
concept that job loss is called mortgage caused to mortgage defaults.
But in the Amir's view, a mortgage default can be rational,
as distasteful as it may sound. And when I give
this presentation in Europe or the EU or the UK,
they look at me like you're crazy. Or in Australia
or in Canada they're like, what do you mean? Mortgage

(16:27):
is a recourse and so like, well not in the US.

Speaker 2 (16:29):
Well, actually some states are recourse.

Speaker 1 (16:31):
In some states I try to tell people, is that
one person's default you have, you can handle. But when
seven or eight million people default, we don't have debtors'
prisons right their recourse, I mean, they're not recourse. So
in this in this context of a mortgage now being
clear to everyone that this default risk is present, it's real,
and it's hard to price because following the borrowers economic profile,

(16:53):
there are defaults that are related to just life events,
but there's also defaults related to a macroeconomic event. So
the position, you know what, investors are not going to
buy these loans anymore. The homes are here, and the
job loss wasn't as big as the mortgage defaults were, right,
so the people still had jobs, they slid revenue, and
the homes were very affordable now because the prices have

(17:15):
been reset. So we asked ourselves, Okay, we've seen this
movie before. Can we at Amherst make a three hundred
thousand dollars home investible to a global financial investor? Which
we spent our whole careers turning a three hundred thousand
dollars mortgage investible in the global capital markets. So we said, okay,
this is probably not a long put for us because

(17:36):
we've been following the mortgage with all this minutia for
thirty years. Now we're just going to follow the house
the same way. So we took our same analytic and
modeling team and we said, let's press down one more
level so we can actually price the home instead of
the mortgage with precision. And then let's set up an
operating capability that allows us to acquire the homes, renovate
the homes, manage the homes, and then more importantly, scale

(17:59):
the homes in to an investible pool. So we created
pools of homes just the same way we created pools
and mortgages in nineteen eighty nine.

Speaker 2 (18:06):
So are you keeping these homes and leasing them out
or are they flips?

Speaker 1 (18:11):
So they're kept and leased out, So we're starting in
two thousand and nine. There was no flip market. There
was no one to sew them to because the mortgage
market had basically closed on a large section of the
consumer base.

Speaker 2 (18:22):
So think about and that credit market was frozen pretty.

Speaker 1 (18:25):
Much, and it's still frozen for most people. So really
still today, still today. Basically the barrier to entry to
getting a mortgage became irreversibly higher, and we spent a
lot of times. You mentioned my time in DC. I
got to go and brief the Fetal Reserve, which is
kind of cool. I got to go into the FMC
room and I got to sit with with Yelling and
Vernaki and walk them through kind of in our view,

(18:48):
how we got here and the best way out. And
I asked them not to shut down the sub prime
mortgage market because it does serve a large swath of
the American public who has a slightly higher rent in
or debt income ratio, or has defaulted on a credit
card in the past or something, but they can pay,
they've had a problem in the past, they've cured it. Well,

(19:08):
those people now are pretty much blocked out of the
mortgage market. So I was unsuccessful in talking people and
still to this day unsuccessful into talking to people to
get back into lending to lower credit quality consumers. Because
you can do it, you can risk base prizing. So
we took we took the view like, hey, that market's
not coming back. People are not going to listen to us.
They're not going to say there's some good subprime loans
and some bad sub loans. They're just gonna they're just

(19:30):
going to draw a line and say you have to
have a credit score above a certain level, you have
to have income above a certain level, you have to
have a debt load below a certain level, or the
price for you is zero. You just get the answer is.

Speaker 2 (19:41):
No, you're out of the market.

Speaker 1 (19:43):
Used to you would say you would pay one percent
more or two percent right now. He said no, that's
so that's how we So we said, okay, well, how's
it's going to work. And we had seen this movie
before aggregating mortgages, strapping services on them, getting them rated,
getting them available to the global capital markets. So we
also so saw the conflicts and the frictions of the

(20:03):
mortgage market when it went under duress, the problems with
getting service to the consumers, the problem with getting service
to investors. The litigation. A lot of people don't know it,
but were We represented a large swath of the US
investor base and their litigation for buying these bus and securities.
So we said, you know what, let's just build under
one platform everything you need to originate, managed service, aggregate

(20:28):
and the long term service. These homes on behalf of
the residents and the investors. So that's the single platform
we built.

Speaker 2 (20:35):
H absolutely fascinating. So let's talk a little bit about
who the clients are for Amherst. I'm assuming it's primarily
institutional and not retail. Tell us who your clients are
and what they want to invest in. Sure.

Speaker 1 (20:49):
Over the years, we've migrated really to what I would
say is the largest customer base in the world, the
largest single investors. So we do business with most most
of the sovereign wealth funds, most of the big US
national insurers, global insurers, the largest pension funds, and we
try to position ourselves as an extension of their capabilities.

(21:12):
And since we're smaller, more nimble, we can kind of
get in there and do some of the gritty things,
the smaller things. Imagine setting up a platform with in
thirty two markets that has to buy each individual home
and execute a CAPEX plan on a thirty forty thousand
dollars CAPEX plan on a home. So these large investors
need someone like us to kind of make things investable
in scale, and so that's where we've been. So it's

(21:34):
all institutional investors. It's the call it five hundred largest
investors in the world.

Speaker 2 (21:39):
Is that patient capital? Did they have the bandwidth to hey,
we're in this for decades.

Speaker 1 (21:44):
Yeah, it's super patient, it's super sophisticated. Their asset allocation
model driven folks. The bulk of our investors are investing
on behalf of consumers, on behalf of taxpayers. So we're
partners with the State of Texas. The actual state of
time is not one of the pension funds, but the
state itself. So we have a lot of sovereign wealth
on types that are investing on behalf of tax payers.

(22:06):
So it's very long dated capital. They're lower risk tolerance,
I would say, very high standards on quality of service
and quality of infrastructure decision making. So we're very proud
that we're a partner to that type of capital.

Speaker 2 (22:21):
So let's talk a little bit about the residential side.
Before we look at the commercial side. You mentioned you
are in thirty two markets buying single family homes. How
many homes have you, guys?

Speaker 1 (22:32):
So their platform service is about fifty thousand units now.
So we've purchased and most of the homes were purchased
one at a time, independent due diligence, independent construction management
to get the home back up to current market standards,
and we manage each home independently.

Speaker 2 (22:45):
So that implies that some of the homes you're buying
are kind of project homes. A wrecked or otherwise neglected
doesn't even have to be a willf elected destruction, just
time and tide.

Speaker 1 (22:57):
Just what we like to say is it's deferred cappex.
So you'll find that owners that have owned the home
for ten, fifteen, twenty years become pretty comfortable with a
smudge paint or a stained floor, or old countertops, or
appliances that may make noises at night or that or
that you know, that bathroom set that leaks and whatever,
and so people just get comfortable in their homes and

(23:17):
they they tend not to reinvest in real time on
keeping that home up to current market standards. So we
buy those homes that haven't really been touched in fifteen
or twenty years. They've still got the original builder interior.
We make sure that, of course that the bones of
the house are good, the foundation and the walls and
so forth, but then we pretty much trip them down
to I wouldn't say down to the studs, but down
to the sheet rock and put a brand new interier

(23:39):
in on. We oftentimes people don't buy a roof, they'll
let the roof go a longer than maybe the staple
exact or a third one, or bought a lot of
roofs and buy a lot of hvacs. We take out
a lot of compressors that are still running on those
old toxic gases. So we basically bring the home up
to a current monitor standard and there's a there's a
profit in that that the home you get paid to
go and improve PA's real estate.

Speaker 2 (24:01):
And then how do you figure out what to lease
these for? And do you ever sell any of these homes?

Speaker 1 (24:06):
We do sell we do. The platform is pretty nimble.
So if for example, we were talking before the show,
we were talking about how some markets have really benefited
from the post COVID migration and it's changed their customer
based dramatically. So think about Naples, Florida and clear Water
and those types of places. So in those places, home
prices since pre COVID are up maybe forty fifty percent

(24:28):
and rents are up twenty twenty five percent, so they
really don't really make much sense more as a as
a rental investment. So we're cleaning those homes back up
and selling them back to the consumers. So that's an
active part of portfolio trimming and optimization, and it's cool
to have the capability to sort of execute in both markets.

Speaker 2 (24:45):
So it's funny you mentioned Naples and Clearwater. A few
of the areas adjacent to those really got to lacked
by that last hurricane that came through last year. What
do you do when you have a natural disaster? Is
that does that create any interest or is it just
just too much may.

Speaker 1 (25:02):
Have It's well, we've been hit by hurricanes several times,
floods several times, tornadoes several times. Given that the homes
are in thirty markets, the good news is no one
event has a big impact on the portfolio. The bad
news is all events you get to experience.

Speaker 2 (25:15):
Right, So diversified, which means you're embracing every natural right.

Speaker 1 (25:19):
So in Houston one year, we got hit in Houston
and in Florida at the same time, two different hurricanes.
So what's interesting is that now we have a natural
disaster of team and response unit and a playbook which
is a little bit unfortunately you have to have that,
but we use it every couple of years.

Speaker 2 (25:34):
Now.

Speaker 1 (25:35):
We tend not to invest when those markets are busted.
We do see a lot of demand for our rentals
because when you know, a few percent of the housing
stock gets taken offline for a storm, it creates pressure
on demand. But now our job is just to go
in there and get the homes fixed as fast as
we can and get them back into service.

Speaker 2 (25:52):
So fifty thousand homes, I'm going to assume you're a
self insurer on all those homes.

Speaker 1 (25:56):
We do so Amerus is completely verted integrated. We own
our own insurance platform, so we're the we're you know,
we basically access our coverage through the reinsurance markets. At
our scale, it's hard to go get insurance through the
normal channels, and so we set up our own insurance
brokerage and risk attention platform and now we we insuran
through the resurance markets.

Speaker 2 (26:16):
Huh really very very intriguing. Uh So let's let's talk
a little bit about some data and technology you use. Sure,
you guys created your own platform. Tell us a little
bit about what it was like developing that and what
makes it specific and unique to Amhurst.

Speaker 1 (26:31):
It's interesting because you know, today we talk about AI
and and uh, you know, high speed computing, and what
I look at, what we do is being comically you know,
simple compared to what we talked what we're talking about
today with generative AI. But when we started this in
the late eighties, so that was the job I was
pronted into, which was, hey, let's figure out how to
differentiate pricing from one mortgage pool to the next. They've

(26:53):
got different interest rates, they've got different LTVs, they've got
different credit scores, they must have different values. So I
was part of a small or the our team was
part of a small group of people tackling this problem
in the late eighties early nineties, and what we do
today is just now growth of that original project. So
it's a quantitative analytics approach. It's highly data driven, but
we need to know the price history for us, that's

(27:13):
the correlation to to what drives price, and then we
have a big consumer behavior modeling infrastructure because we have
what's nice is that over the thirty years of our
history and then we purchase data that was probably twenty
five years old at the time, we can measure how
consumers behave to changes in their economic environment, and that
consumer behavior will affect home prices and will affect performance

(27:35):
on credit. It's that So that's the core competency, and
it's just leveraged into if it's a loan, if it's
a security back by a loan, if it's the actual
estate itself. So from a data perspective, think about it
this way. So obviously the S and P five hundred
is five hundred names and they report four times a year,
and God loved the analysts that have to figure out
how to price these things with so little information. We

(27:56):
have one hundred million items that we're following. Is one
hundred million piece of real estate in the country. We've
gathered up all the information you would need to do
an appraisal, and we keep that information current in real time,
and we've automated the appraisal process for evaluation both intrinsic value,
meaning like where would we pay it, where would we
buy it, and where is the fair market price that asset?
From that level, from price and from consumer behavior. Now,

(28:18):
so now we're watching the payments on every mortgage in
the country, so you can see who paid, Did Maryland
do better than Texas last month? And more importantly, versus
the model, who outperforms, who underperformed. Because there's a schedule,
there's an expectation for not everyone to pay every month.

Speaker 2 (28:34):
So when you're trying to put a value on a home,
you're not just sending a third party appraiser oute to
do a drive buy and go. Yeah, that's about two
seventy five. You're actually crunching a lot of numbers. And
this is proprietary you're running.

Speaker 1 (28:47):
We're running a ten year Monte Carlo. That's probably twenty thousand,
ten thousand paths of outcomes on that asset. It includes
all of its changes in its property taxes, it's depreciable
life for the improvements of the assets, and course it's
revenue stream from rental demand.

Speaker 2 (29:02):
So it's interesting that you started this after the financial crisis,
given your technological expertise and your unique way to value
these things. I'm curious how much of this is a
legacy of your experiences during the Great Financial Crisis. How
did that couple of years affect how you look at

(29:23):
risk and pricing of real estate process?

Speaker 1 (29:26):
It's infecting, I would say. So the problem, the problem
for me, I'll speak for myself personally in the financial
crisis is that once you find something like that, because
literally we were saying to people these loans aren't going
to pay off in two thousand and five, two thousand
and six, and they were like, Sean, in the worst
of fault rate, it's been geographically focused. Rather it was

(29:48):
the farm belt crisis or the California crisis. What are
you talking about? National home prices going down? And oh,
by the way, the defaults in those micro markets were
ten or fifteen percent and the losses were five percent.
So if you we had five percent losses on a
market and the market was only five percent of a pool,
the losses are going to be nearly zero, right, And
we're like, yeah, except for none of that's going to

(30:09):
happen this time. And they were like sure, Sean, pat
you on the head and send you down the road.
So so one of the problems is once you see
something like that, you kind of look for them everywhere,
So we spend our time a lot of time looking
for looking for sasquatch. And so the other thing is
is that, and I think it's our core risk management culture,
is that we think that tiller risk is way more
probable than everyone else does. So we manage the business

(30:31):
for extreme shocks to prices, for home prices moving twenty
five to thirty percent in a year, for interest rates
moving dramatically in a short period of time. And we
found you know that check check is all these tail risks. Well,
it's like the one hundred year floods every ten years
or so. I've been doing this for thirty years, and
I've had how many hundred your floods? More than more
than point three?

Speaker 2 (30:51):
You know. The fascinating thing is I have a vivid
recollection of a paper, a white paper coming out by
professors rein Hart and Rogueoff. I remembered it was five
financial crises. So it was Helsinki, it was Sweden, it
was Japan, it was Mexico, maybe US, and the Great

(31:12):
Depression was the fifth one. I don't remember exactly what.
By the way that paper eventually becomes this time is different.
Eight hundred years of financial folly. But the average of
the real estate drop in any modern financial we're not
talking about tulips. Right. The last century was over thirty
percent in real estate. And once you once I saw

(31:32):
that paper, I remember saying, hey, this is in a
theoretical possibility. This has happened once in decades.

Speaker 1 (31:38):
Right. So people think of home prices as being sort
of four to five percent price movers per annum, and
that's the case most of the time. But the problem
is we don't get to live most of the time.
We get to live all the time, and so sometimes
that five percent move can be thirty five percent and
forty percent. So think about that eighty percent l TV mortgage.
That doesn't seem like a risky loan. The bar will
put up twenty percent, the lender put up eighty percent,

(32:00):
but there's a one in something chance that the home
price goes goes to sixty five, And if the home
goes to sixty five, the loan is no longer going
to pay off. So that was the sort of the
thing that we built that people hadn't thought through, is
how to you stochastically forecast a range of outcomes for
the asset price? Then how does it affect the repayment
risk on.

Speaker 2 (32:19):
The loan, So you have to have boots on the ground.
With fifty thousand homes, how big a staff do you have?
Is it regional? How do you manage since since you're
now the landlord for these homes, how do you manage
the regular maintenance the one off you know, things break
or refrigerator stops, the toilet kits backed up. How do

(32:39):
you manage that?

Speaker 1 (32:40):
Yeah, it's complicated. So we have a both of an
on balance sheet group of repairmen. So we're an investment
management platform that also has trucks with plumbers crews around
the country and fixing air conditioners. We also have a
great vendor network and we have a lot of technology
that the team, as you mentioned, is about fifteen hundred

(33:02):
people that are just in that single venderaial platform. This's
is one of the things Amherst does. But that fifteen
hundred person team is augmented by about two thousand vendors
of companies and we're able to handle the properties because
we have a team in the field. So we literally
have a repair and maintenance team that's assigned to a
group of homes. So that person has their three hundred

(33:23):
homes or something, and then they're part of a local
team that's managing about fifteen hundred units. So it's not
that different from how you would manage a multi family
an apartment complex. It's just that the rooms are further apart,
the units are further apart, and it causes our drive
time to be higher. But one of the things that
we went into this that was one of the big
questions is could you provide good service and could you
manage them? And we don't get it right all the time.

(33:44):
But if you think about the fact that how easy
it is to get someone out to a home, and
that's part of our filtering criteria of how we buy
a home. But think about the fact that for ten bucks,
you can have Dominoes bringing a pizza and somehow of
that ten bucks they get the delivery person from their
store to your home with a hot pizza, and they
were able to pay for the Super Bowl add out

(34:04):
embedded in that ten dollar cost, like the transportation cost
to get people to and from these homes, it just
isn't a barrier. It's really timing and technology to really
to rout them.

Speaker 2 (34:12):
So let's talk a little bit about technology over the
past two decades, real time monitoring of things like fire, flood,
carbon monoxide break ins, whatever, they've become very inexpensive, very ubiquitous.
Everybody can have it on a phone. Is that anything
that you've explored in terms?

Speaker 1 (34:33):
We spent a lot of time on it. There's big
privacy concerns. So we have families, we have fifty thousand
families living in their homes and they're their homes and
we're proud to be part of that process. So, you know,
a lot of that stuff gets a little creepy to us,
and so we haven't done well.

Speaker 2 (34:46):
There's a difference between a puppy cam where you're seeing
what's going on in the bedroom and I know in
my basement I have a flood.

Speaker 1 (34:54):
Like a high water alarm, that sort of thing. So
that we're still on their network, we're still so that
technology for us to go at it stronger. We would
like for those devices to communicate back to us, uh directly,
not like.

Speaker 2 (35:07):
A like a cell phone.

Speaker 1 (35:09):
So we are looking at that. There's locks now you
can buy that have little cell phone transmitters in them, right,
So we may we may look at things like that,
but at this point we have so many people on
the field. We're touching the houses six, eight, nine times
a year. We have good relationships with our with our residents.
A lot of that stuff is a little bit of
pizaz and we see other people charging residents, you know,
fifty dollars a month for electronic door lock or something.

(35:31):
We don't think that that's sustainable cost.

Speaker 2 (35:32):
It's a fifty dollar product. How do you chrusee fifty
dollars a month.

Speaker 1 (35:35):
I no, I don't don't. I don't get it. So
we will will it's coming along. If I can get
direct cell phone connections to a high water alarm, I
would take it. But really, what we have as a
person go out there and look and touch the property
eight times a year, and that's how that's how we
do it. A lot of this is not so complicated,
but we have you know, through COVID was fascinating because
that field team and we have a big construction management team.
So these guys, those fifty thousand homes have all been renovated.

(35:57):
So that those teams during COVID man they up and
they went out and they made us so proud they
provide a service to the residents. They finished construction jobs.
They got homes back in service so people could move
out of wherever they were and get into a home.
So it's been fascinating to watch this business run through
a crazy COVID cycle, and then a crazy post COVID cycle,
and now an interest rate cycle. The team has had

(36:19):
to be pretty nimble. Huh.

Speaker 2 (36:20):
Really quite intriguing. Let's talk a little bit about about
your space. What are you doing these days in mortgage
backed securities? Does that market exist remotely like it did
in the two thousands.

Speaker 1 (36:32):
Well, it's great that you ask about it. So the
bulk of my career was spent in the mortgage backed
securities and structure products markets. The single family riendal of
business kept us very busy while the FED was monetizing
so many mortgages, so, as you know, they own about
a third of all mortgages that were ever issued. The
relative value for non government investors was so bad that

(36:53):
we wound down a lot of our capabilities in that space.
We actually sold our investment bank to Manco Santander as
part of just the frustration with how much intervention had
sort of driven down value in that space. Well, now
that's completely reversed and there's a real vacuum today, a
real vacuum. As the FED stopped buying mortgages, they bought
a third of the whole market when they stopped buying them.

(37:15):
I think the belief was that the market would get
back to its regulary scheduled programming and the traditional investors
would show up to buy them, and they didn't because
a lot of those traditional investors don't exist anymore.

Speaker 2 (37:26):
You lose a whole generation, there's no succession beyond.

Speaker 1 (37:30):
This is the largest debt cautter market in the world,
the largest, most liquid, and it's lost its sponsor. So
the sponsor went from being the big investment banks, the
government agencies, the big bank balance sheets, a lot of
the insurance can be balance sheets, and the money managers.
The FED displaced all of them. Then they changed regulations
to where the investment banks can't really step in. The

(37:52):
agencies are no longer allowed to run balance sheets, the
reats are not really well positioned to step up in
the size, as we just saw in the four quarter.
So there's a real lack of sponsorship with the assets,
and they've become incredibly attractively priced. So we've been ginning
back up those strategies. We still we've always run strategy
that space, but they've been very sort of boring strategies,
index tracking, index outperformance, that kind of thing. But now

(38:14):
there's opportunity to really go in and build proper hedge
fund strategies, proper total return strategies. The relative value is
sort of startlingly attractive now.

Speaker 2 (38:22):
So I always hated the term financial repression, but what
you're describing really is the FED engaging in financial repression
on that corner of the market.

Speaker 1 (38:33):
Well, what I would say is that they were investing
for a non monetary focus or motivation. Right, They didn't
care what their returnal the mortgages were they trice and sensitive, right,
they cared what the lower mortgage rate did to the economy.
So as a person that's just investing for an economic return,
you can't compete with that, right, So their motivations were
totally different, and they and they basically drove down the
relative value to where on a hedge adjusted basis, if

(38:56):
you looked at a mortgage and you'd sort of get
it back to where it's got the same risk a treasury,
it was yielding almost half a percent less than a treasury.
They normally yield half a percent more. Now they yield
one percent more. So in fixed income terms, that's a lot.
So so now we're really focused on mortgages that we're
way more active than we have been in the past,
and we're excited about the opportunities there, and we have

(39:17):
a commercial morgage lending strategy as well.

Speaker 2 (39:19):
Huh, that's kind of interesting. So let's talk a little
bit about what's going on in the commercial space. We
were talking earlier about sixty minutes. Did a piece recently
on the New York real estate market is never coming
back and all these big office towers are you know, empty.
I'm old enough to remember the sea through office towers right.

Speaker 1 (39:40):
Dallas back in the eighties and Dulles the whole right
the Washington Dulles Quarter was full of sea through right
see through buildings.

Speaker 2 (39:46):
So we're not there, but certainly the typical high rise
has you know, a vacancy rate of ten fifteen to
twenty percent, and the occupancy rate during the day is
probably another ten to fifteen percent less than that. What's
going on in the office space.

Speaker 1 (40:04):
So the castle data is pretty fascinating and you can
get it on your Bloomberg terminal the castle. The castle
ocup data as we talked about before.

Speaker 2 (40:12):
But by the way, that's all swipe cards of employees
literally going down.

Speaker 1 (40:16):
The real time physical occupancy data is pretty and it's
not perfect, like no data set is, but it's pretty startling.
The last time I looked at it, most markets are
peaking at fifty percent physical occupancy. Remember I said before
that in the mortgage market, in the residential mortgage market,
a borrower can stop making payments and it might be
two years before the investor actually takes a loss, sometimes

(40:37):
five years. Well, I think that same thing's been happening
commercial now for the last since twenty twenty one. Is
that physical occupancy is the leading indicator to economic occupancy.
Economic occupancy is who's paying the rent, and in corporate
leases are of incredibly high credit quality, incredible very few
leases ever default. Those leases, however, are going to come

(41:00):
do and the renewal rates are tragically tragically low. So
if you model out what's going to happen to the
commercial space from an economic perspective, you don't have to
be a wizard to figure out that monetary or physical,
fiscal or financial occupancy is going to track physical accuracy.
Companies aren't going to be able to give back one
for one as much space as they're not using because

(41:21):
they've got this peak and load problem where everyone likes
to come to work on Wednesdays. So you still need
the space, but that quantum of space that people need
has been reduced dramatically and we're seeing it in that
Castle data. So it's a scary thing to do. But
if you forecast that the lease payments track the physical usage,
meaning that what you're seeing today, it's fifteen percent vacancy

(41:42):
because some leases expired and to get renewed, well, all
those leases that are being underutilized by half, if those
don't renew or they renew it much smaller spaces, you
could create thirty forty percent physical you're actually financial vacancy
in the commercial space. Now, it's dangerous to forecast that
far in the future because behavior can change. How much

(42:03):
space do people need or do they do out the
fact they want their whole team to get together three
days a week, so they do they just eat the
space on the Mondays and Fridays. Some companies are never
coming back, some jobs are never coming back. So the
way we look at it, we have some loans in
the office space. We do feel like it's like bottom
fishing time and we're taking back real estate. Now that

(42:25):
is fifty dollars sixty dollars a square foot space for big,
beautiful buildings that need to be repopulated. But so the
way we think about is this is that occupancy is
probably going to drop by a third, but it won't
be a third for everyone. Right, some places going to
go to zero, and some guys they won't, They won't
feel it. So asset selection becomes incredibly important.

Speaker 2 (42:43):
So there's a huge difference between the A class buildings
and the B and C class. And I've heard people
say even within A there's a big ring.

Speaker 1 (42:51):
There's the super A stuff, you know, the one Vanderbilt
thing at two hundred bucks half foot that you can't
get enough of it. But a block away some traditional
commodity office space that's just a little draft or whatever,
you know, that people just don't want it at any price.
So now that super A space is a very very
small fracture of the market. So it's not what happens
there probably isn't going to be sort of impactful, but

(43:14):
we think that, you know, they're people have to adjust
to a new normal of demand, like demand function for
commercial real estate has come down. Now this is, by
the way, just another domino in a long series of
what the Inrice Norwitz guys call software eating the world.
This is technology eating real estate. And so if you
look at this over longer the time, the way we
think about it is that technology eight retail and we

(43:37):
all kind of saw it, right. It was Amazon killed
the shopping mall. Airbnb has eaten up a lot of
hotel demand. So technology matching a home to a to
a rent or a leaser has eaten up a bunch
of the hotel demand. Now work from home is eating
is eating office. So we can we kind of have
a playbook for how this goes. And it's not great.

Speaker 2 (43:58):
And all of these are technology enabled. Without tech, you
wouldn't be able to do this. The ironic thing is
the I love people discovered like screen sharing in twenty
twenty one, right, that tech has been around for a
dozen plus fifteen years.

Speaker 1 (44:13):
I know, I think about the people that created Skype.
They must be sort of jumping off a bridge somewhere
because you know, you couldn't give away Skype pre covid,
and now now I don't even have calls on my phone,
my office phone ever anymore. Everything happens over teams are
over over zoom. So the behavior has changed so quickly.
But I think that, you know, the CEO from Cisco
made a good point that the home has become the enterprise,

(44:33):
and what it was saying is that Cisco is seeing
people buying really sophisticated communications equipment for their homes because
now they're they're they're pushing their use case. I so
for us, it's also kind of fascinating. And this is
a little bit about how the single trintal trade has
becomes interesting. Is as people stop going out to the
mall and they shop at home, as high speed communications

(44:56):
allows them to stream at home, as delivery allows them
to and eat at home. Right, these real estate sectors
are all seeing their demand dry up, the demand for usage.
All that demand is showing up in the home. It's
showing up in that eighteen hundred square foot three bedroom
home because and everyone's use case and demand for real

(45:17):
estate's changing because they're spending so much more time there.

Speaker 2 (45:20):
So I kind of feel like a lot of those
big technological shifts we'll post the peak of that like,
I'm a big online shopper and I've kind of come
to recognize there's certain things that you just can't buy them.

Speaker 1 (45:35):
Yeah, I have all the time with clothes and things.

Speaker 2 (45:37):
Close is a perfect example. A lot of times you
order certain things like it's hilarious. You think you're getting
a four foot tall you know, lamp and this miniature
and I guess the photo is what the photo is,
there's just no tape mail tape measure next to it.

Speaker 1 (45:53):
But let me ask you about this, because pre COVID,
you couldn't have convinced me I could buy groceries on
an app.

Speaker 2 (45:58):
Oh I was doing that, That's easy. Now.

Speaker 1 (46:01):
I don't think I would ever go back to grocery.

Speaker 2 (46:02):
In fact, Amazon began that when they bought Whole Food.

Speaker 1 (46:05):
So think about what that means that grocery store, that
grocery store anchored retail. Ordinarily, the grocery store space was
undwritten at a loss by the real estate developer, right
because that was your magnet.

Speaker 2 (46:16):
Now it's your distribution hub and there's no people.

Speaker 1 (46:18):
So what happens to the dry clear, what happens to
the ice cream shop? What happens to the T shirt shop?
What happens to the travel agent.

Speaker 2 (46:24):
They have to adapt the same technology and do pick
up and delver.

Speaker 1 (46:28):
So e commerce is changing, like the footprint for a business,
it's addressable market. And so I don't think this is over.
I think that that the pricing of it kind of
like we talked about the loan starts, the loan defaults,
and then two years later someone takes a loss. Today
we're CPI prints higher than people expected because owner equivalent
rents is higher that OER number was calculable four months ago.

(46:51):
So the market isn't doing a good job of forecasting
what it already pricing in what it what already knows
in any cases. And I think that we're still in
the repricing phase of real estate for a new a
new type of demand.

Speaker 2 (47:04):
So some of the solutions to these are wholesale changes
to the way we built out suburbia, which is so
car dependent. If we were creating these more walkable communities
like back in the Andy Griffith days, it's fascinating, suddenly
fascinating you have retailed that's survivable because everything isn't. Getting
your car and drive to Target that's right, or have

(47:27):
Target make a delivery exactly.

Speaker 1 (47:29):
So we spend it. You think about how European cities work.
That's that's what that's how they're that's how they're designed.

Speaker 2 (47:34):
So so the question is is that something we can
build here? Is there an appetite for that? Is there?

Speaker 1 (47:41):
I'm spending a fair amount of time on just that is.
Can you respond to this? Should you respond to it?
Because as you said, like you know, maybe this is
a flash in the pan. If all the companies decide
that employees have to come to work every day, then
then these trends and occupancy will change and quantum of
demand will change. But I recently was given a book
and I read it. It's a companion of essays called

(48:01):
The City Is Not a Tree. It was written in
nineteen sixty five, and it was about this. It was
about how a city should work to optimize the experience
for its residents and think of a city as a product.
And so we give the speech to mayors when we're
asked about sort of how we think about their city
from a migration investment perspective, and we try to tell
people that a city is a product. So New York
City is a product and the customers can choose a

(48:24):
different product, and it's a great product. It's one of
the greatest products in the world. But like all customers,
like all businesses, in all product delivery systems, you have
to freshen your product to keep your customers happy. And
we see some cities doing that and some cities not
doing that. So you have to modify. You can't just
completely tear down and change.

Speaker 2 (48:42):
So one of my favorite YouTube channels is this kind
of wacky Canadian expat who moved to Amsterdam, and it's
called Not Just Bikes, and he talks about walkable cities
and how different countries in Europe do a better job
of it, and how there are pockets of it in
the US right and North America, but they're few and

(49:04):
far between. It.

Speaker 1 (49:05):
Yeah, I think it's something we're spending time on because
we're with our vertical integration of manufacturing homes, building homes,
real estate development. The ability to monetize a home either
as a cell to a consumer or a rent and
have into an investor. It gives us the ability to
think big about development and I haven't seen anyone pull
off yet. So the master plan community the United States,

(49:26):
other than maybe the woodlands in Houston very few of
them are actually master planned for multiple product types where
you have office, medical, civil, residential, entertainment, all kind of
thought about together the way you would the way European
cities were developed. But remember Europe, like you said, you
said a very key thing. European cities were developed before
the cars became years a lot of our cities stopped

(49:49):
growing as core cities and started growing as these suburban
driven cities because of the car. And so this will
be simple, this will be think if will you reverse?
And this is something that global real estate investor are
thinking about a full time basis. There was a paper
written about five years ago, I think it was put
out by the research team Prudential, and it was all
about urbanization and all of the investment themes across our

(50:09):
investor base, the biggest invests in the world. We're very
focused on urbanization as a global theme, and you could
see it in Southeast Asia, you could see it all
over China, you could see it. Of course, has happened
in the United States where people left the small town
to go to the big city. COVID may have reversed
one of the largest global trends in investing in the
last one hundred years. It may have turned. It may
have turned us from urbanization to de urbanization and the

(50:33):
impact of that. Now we're not calling that just yet,
but it is probably one of the most important things
that people can focus on, or are we going to
shrink the size of these megacities that all benefited from
urbanization for the last you know, sort of fifty years
in the US, maybe the last fifteen years in Southeast Asia.
So it's an interesting time where the I wish I
could say I was going to turn out, but there

(50:54):
is a the ball is bouncing around and we need
to understand which way it's going to land.

Speaker 2 (50:58):
Tell us about Main Street Renewal.

Speaker 1 (51:00):
Is that so that's the operating platform for the single
fundamental business. That's our construction management, our real estate brokers platform,
our leasing platform, the customer service platform. So that's the
brand name that the consumers see, that our their operating
partners see for the whole vertically integrated single family rental strategy.
That's basically analogous to the entire ecosystem of the mortgage market,

(51:22):
wrapped up under one one corporate label.

Speaker 2 (51:25):
And we've been talking a lot about single family homes
to be purchased and rented a couple of years ago
sixty Minutes to a piece talking about, hey, is private
equity pushing out local buyers? I know you have an
opinion on this. Tell us a little bit about your
experience with sixty minutes.

Speaker 1 (51:42):
Sure, sure, So, first of all, I love sixty Minutes.
I don't know it's just because I'm finally old enough
to age into their demographic. But I think it's one
of the best news shows on television because in that
twelve or fifteen minute segment, they really can simplify a
topic and make it and make it understandable to everyone.
The topic of where do we fit in the system
of the single family housing market is what we're doing

(52:02):
a good thing or a bad thing? Obviously, you know,
I've got a couple of thousand people that wake up
every day and go to work. They don't think they're
doing a bad thing. So I can tell you our
perspective of it. I can kind of give you both
sides of the argument, and people can decide for themselves.
I mean, part of the argument is that if Sean
buys the home, or if amorist buys the home, some
family couldn't buy the home. And it's true that if

(52:23):
we buy the home, no one else could buy the home.
I'll give you that part. Now, in the US, we
track the home ownership rate over time. The home ownership
rate has grown to sort of mid sixties and babble around.
It got really really high when we were giving away
mortgages in two thousand and seven, and then it came
back down. But that number has been a six handle
for the last fifty years, right, So sixty something percent

(52:43):
of people own their homes. The inverse of that number
is the people that don't own their homes. So that
number has been between thirty and call it thirty and
twenty five percent for a very long time. So that
third of how of families in the US that rent
their home rent for a mere reasons. One of the
reasons that they rent is because they can't get amorage.

(53:04):
And part of our bet in two thousand and nine
was that the group of people who are going to
be locked out of the mortgage market is going to
grow substantially, partially because the standards became higher, and partially
because student loans became kind of a predatory financial product.
So having a student loan makes it way more difficult
to get a mortage. So in this argument of are

(53:25):
we buying a home that a family is not moving into,
I put the paradigm in a slightly different way. When
that home comes up for sale, a lot of families
show up that want to live in that home. A
group of those families show up and they can get
a mortgage and they can buy the home. A group
of those famili show up and they can't get a
mortage for that second group of families to get to
live with that home, and investors got to buy the home.

(53:45):
And that investor can be and historically has been very
small investors, people that own one or two homes. Maybe
they owned a home, lived there, moved away, kept it,
rented it. And now through the through technology and through
significant investment platforms like ours, allow larger investors to go
and invest in that home. So when I sit down
with policy makers and they're sort of of this mindset

(54:07):
that I should have stayed away and let the family
buy the home, what I like to do is say,
can you guys just put together the pictures of these
two families and who's going to get to live in
that home? If the only people who can get a
mortgage can live there? And who can live there if
Sean buys the home, because demographically they look more like
the people that get served by the home when I

(54:27):
buy it, look a lot more like the people the
government should be trying to help. And that usually takes
people and they step back and they go, wait a minute,
what do you mean. I'm like, well, so Shawn doesn't
live in fifty thousand homes. Someone's living in there. And
the people that live in those homes, for the most part,
are not candidates to get a mortgage in the twenty
twenty four mortgage standards.

Speaker 2 (54:45):
And it's not because they don't have a jobs and
they aren't.

Speaker 1 (54:48):
Currently they're paying two thousand dollars a month in rent.
Our average customer only pays twenty five percent of their
income in rent. For two thousand dollars. They cover everything,
They cover the chance that the ac breaks. They don't
have to pay for that, property taxes, insurance, the whole
nine yards. So right now, the cost to rent is
probably thirty percent cheaper than the cost to own. But
more importantly, if you're not given a chance to get

(55:10):
a mortgage, it doesn't matter what the cost to own is.
The cost for you is infinite because you're not allowed
to get a mortgage. So when they when Dodd Frank
passed and the standards for mortage credit became unfairly high,
we said, Okay, this is what's gonna this is what
the nation to decided it wants to do now against
my advice when I sat, when I sat at full reserve,
I said, this doesn't have to happen. This way, we
can sort out for you what the good subprime was

(55:31):
from the bad subprime. People are like, we agree, you can,
but that's not how policy works. That mortgage market has
been shut down and it's going to stay shut down.

Speaker 2 (55:40):
So what should we do to reopen that mortgage market
for people who are currently employed have a half decent credit.

Speaker 1 (55:47):
Now, you're baby, we're gonna give in the two hours
for the podcast. I got a whole list of things
need to do, but the give us a short PNT.
The primary, the primary thing you have to do is
you have to put risk. You have to make risk
based pricing legal in the US mortgage system. Dodd Frank
made risk based pricing illegal. So if someone comes in
with a lower credit score, a higher likelihood of default,

(56:08):
and remember the likelihood of default could mean that they
go from being five percent likely to ten percent likely,
not ninety percent likely. But if someone comes in that
that has a likelihood default above a certain level, the
answer is you can't make them the mortgage.

Speaker 2 (56:21):
At any price as opposed to where it's I'll make
up a round number. If we're at five percent, they
could buy get a mortgage at six and.

Speaker 1 (56:28):
Three we used the rate used to be three points
hire two points are so Dodd Frank basically carved out
the maximum premium you can charge to anyone, and then
they created recourse for the borrower. So I give this
presentation in the UK, and I gave this presentation to
France once and I said, okay, the US passed. They
were like, why is the demand for rental so high?
And I said, people can't get mortgages. He said why,

(56:50):
I said, well, Dodd Frank created a precedent that said
that if I lend you money to buy your home
and then you can't pay me back, you can sue me.
And even in France, the guy would say no, no, no,
you mean the other way around. I lend you the
money you don't pay, I can sue you and I'm like, no, no.
So there's there's this concept that that that was part

(57:11):
of the the ether in the financial crisis, that the
banks were the proximate cause for the default, and so
the bank should not be allowed to make these loans.
There were some bad back that's a.

Speaker 2 (57:23):
Wild statement because as someone literally wrote a book on this,
banks did a bunch of stuff that wasn't very smart.
But it's hard to say the banks making loans were approximate,
cause now there's a handful of banks doing the ninja stuff,
and but that was.

Speaker 1 (57:39):
There really enough bad acts to go around. The banks
had culpability, the securitization industry had culpability, Serving industries culpability,
The ratings agency agencies had culpability. And this is why
I spend time washing trying to explain to people. But
the consumers had culpability as well. So a lot of
people with fraudulent loans six eight loans. So we bought
a bunch of these loans. Something people don't know is

(58:00):
that we audited eighty thousand loan contracts that we bought,
and we there's a return to cinder clause in mortgage
contracts that most people don't know about.

Speaker 2 (58:07):
Right.

Speaker 1 (58:07):
And if the bar were defaulted and the contracts were
in a certain way, the person that sold your loan
has to buy it back. So in these eighty thousand
loans you kind of had sort of two big populations
of predatory borrowers. One with a little mini we call
the little Minnie Donald Trump's. They would have like twenty
five or thirty or forty homes, no equity down. They're
all rented, no management, kind of like yolo of like

(58:29):
if they go up, we're going to refinance them. If
they don't, we're going to send the keys back in.
And these were loans that were made with no equity
from the barrower eighty percent first, twenty percent second investor loans.
And then then there were a group of people who
really just wanted a house and they were willing to
fib about their financial standards to get there, right, and
so and the banks and the mortga originators. In many

(58:49):
cases there's eighty thousand files. You would open up the
file and it would say the person was a dental
hygienist and made one hundred thousand dollars a year, no document,
and that loom was loans approved. Now in this you
file would be the application that got denied that said
that they were a dental assistant and they made fifty
thousand dollars a year, so they would give us the
file that so they was.

Speaker 2 (59:09):
So those were the I heard stories at the time
of the mortgage brokers who were able to guide an
applicant through coaching. Coach, don't write this, don't write here
what you got to say? And basically, you know, we're
co conspirators to fraud.

Speaker 1 (59:26):
And you know the Mortriges broker was making five or
six percent of the loan amount, right, it's a lot
of incentives.

Speaker 2 (59:31):
So I blame them much more than the person who
just did what they were told they were wrong. At
this point, really the professional is the one got a
whole scount.

Speaker 1 (59:38):
I think that we're hung up on who to blame,
not you and me. But if the market is who
to blame, and the market isn't paying attention of who
got harmed, because in the first degree, the person that
got harmed was the person who got four clothes up
on and got addicted from their home, that's a very
clear harm to see. The harder harm to see is
that maybe eight million families that haven't been able to
buy a home since this law went and it's fifteen

(59:59):
years and there's no progress, So the rental market has
to grow. Institutional capital is going to play a part
in every home transaction. Its social capital has to be
there to make the loan if they're not going to
buy the home. Providing service to the third of American
families who rent for various reasons. Now, about a third
of our customers, or twenty percent of our customers move

(01:00:19):
out every year, so they were never like long term
committed to that location to begin with. The credit scores
of our customers suggest and the financial condition of our
customers suggests it would be very difficult. It's not it
possible for them to get a mortgage on average. So
this is the solution for people to move out of
the Other thing people think about it is that it's

(01:00:39):
okay to rent apartments. So that's socially acceptable to invest
in apartments and rent them. But apartments are primarily one
and two bedroom products, so we're a three bedroom product.
So as you age out of an apartment or you
need more space because you work from home, or you
have a family or whatever, and you age into the
single family product, which is location driven, local amenities driven
blah blah blah. So you would go and get a

(01:01:00):
mortgage and buy. But that cross section of the customer
base that the mortgage market serves has shrunk so much
that we set up this platform because we knew they
were coming. We knew that they're going to want to
live in that product and they're going to need to
get there with a different financial solution than a mortgage.
So we developed an institutional scale, securitized financing vehicle for
the pool of homes. We developed the services that wrap
around the pool of home to lower its cost to capital,

(01:01:23):
So the cost of capital for single time really today
is in the five to five and a half percent range.
Prior to us getting involved, the cost of capital for
rental was probably eight hundred over and nine hundred over
because it was provided by small investors taking very specific
location risk. Now we can have a thousand homes, all
the adiosyncratic risk is pretty much gone. So we feel

(01:01:43):
very proud of what we're doing. And I wish that
the conversation about this crowd out would focused more on
the specifics of who didn't get to buy, but who
got to live there, and when people see that and
they see that, Oh wait a minute, these are three
hundred thousand OAR homes. These are not you know, these
are homes that that bar, that resident would have a
very difficult time getting into without us, and we were

(01:02:05):
able to provide a really good service at a very
effective price for that customer base.

Speaker 2 (01:02:10):
That's a really interesting answer to a complicated question, and
it still leaves open the problem that there are eight
million people that might otherwise be on be homeowners. But
the rule change has been and the.

Speaker 1 (01:02:25):
Way I think about it, the way you get me
a slopbox. But in the worst of the worst mortgage
pools that we were short and the dirtiest of the pools,
where everybody was lying the bar, where the banker, the securitizer,
everything age, everybody was lying the worst of the worst.
About thirty five percent of the loans defaulted, which means
that two thirds of even those dodgy things paid. So
those are two thirds of those families got to get

(01:02:47):
on the economic ladder and own the piece of America.
Because the third worked out so poorly, we shut out
the two thirds. And that's kind of the frustration I
had with Washington. It is like guys like I know
there's to throw the baby out with the bath or
what other. But you're thrown out. You're throwing out an
opportunity for people to own a piece of the country
and act as owners in their community because you don't

(01:03:10):
have a good way to manage the ones that don't
work out. So we should be focused on what to
do when they don't work out. We shouldn't prohibit the
activity because some of it doesn't.

Speaker 2 (01:03:18):
Work out well. Congress seems to have its act together.

Speaker 1 (01:03:21):
I'm sure, I'm sure it's next to the docket, right.

Speaker 2 (01:03:24):
This will be worked out, all right, So I only
have you for a limited amount of time. Let's jump
to our favorite questions. We ask all of our guests
starting with what have you been entertained with these days?
Tell us what you're either watching or listening to.

Speaker 1 (01:03:38):
Oh wow, So I'm a very boring person. I spent
a lot of my time buried in data and analytics.
I think that I really love the whole Yellowstone series.
I'm upset that Costner backed out because I thought the
production quality was so good. So I've seen all of
the pre the you know, the prequels and so forth.
So on the entertainment side, I think that streaming has
set a whole new bar for quality of broke.

Speaker 2 (01:04:00):
Yeah, no, that's absolutely on my list. Tell us about
your early mentors who might have helped shape your career.

Speaker 1 (01:04:08):
Wow. Well, so I've got a big family. I'm one
of five kids. My parents were serial entrepreneurs. I've got
four big sisters, and so they're all successful in various ways,
and so the family has always been the primary motivator
and leaders. You have to this in our business. You know,
in finance, who you marry really matters. So I've been

(01:04:29):
married for twenty eight years. My wife was in finance.
She ran an investment management business, built it up and
sold it. So having support at home and having a
real partner in the business is super super important our jobs.
When you're the founder of a business, you know, the
hours are long and the mental exercise is significant. So
having the right teammate at home is absolutely paramount.

Speaker 2 (01:04:50):
I was.

Speaker 1 (01:04:51):
I had a high school economics teacher who later went
to work for the Federal Home Loan Bank of Dallas
named Sandy Hawkins, who was just fantastic for a high
school economics teacher. She covered everything from Milton Friedman to
free lunches in a way that made it fun for
high school kids, and I absorbed every second of that
I could. And then I had this really unusual situation

(01:05:12):
because I was at this brokerage firm when I was
very young, and mortgages were just getting some science around them,
and I was always good at math and I had
been writing code since I was in the sixth grade.
So I had real support around Wall Street because at
the time there was a small club of firms that
were helping solve this problem together. And so I had

(01:05:33):
a guy named Frank Gordon who ran mortgage research at
First Boston. That was just a great support to kind
of bring me up up the learning curve.

Speaker 2 (01:05:41):
Huh interesting. Tell us about some of your favorite books
and what have you been reading recently.

Speaker 1 (01:05:46):
Well, I mentioned I read A City Is Not a Tree.
It's a little bit boring, but it's fascinating because I
do think that there's an opportunity for us to rebuild
microcities instead of instead of going to the exerbs and
trying to adjoin a city. I do think that is
something that we're working on, to just PLoP in the
middle of nowhere and build a full stand up city,
which would be fascinating. My my daughter and I listened

(01:06:08):
to crime Junkies and on the entertainment side, I think
it's one of the most popular, other than Years of course,
one of the most popular podcasts in the country. It's fascinating.
It's it's a couple of young women that that tell
the story of some sort of unsolved mystery or solved
mystery of real time what they call it there, it's
a it's the real crime dramas. I think it's been
pretty fascinating. And I've got we have two kids, and

(01:06:30):
my wife and I have a freshman at Columbia and
a sophomore at Stanford, so we're spending a lot of
time learning about the college.

Speaker 2 (01:06:38):
Experience freshmen at Columbia. Oh, so you're you're back and.

Speaker 1 (01:06:40):
Forth, but my poor wife is on like the coast
to coast tour.

Speaker 2 (01:06:44):
Are you are you guys in Austin?

Speaker 1 (01:06:47):
A lot home is in Austin, so you're halfway or exactly,
we're equally it's equal travel to either place.

Speaker 2 (01:06:54):
And uh So, our final two questions, what sort of
advice would you give a recent college grad interested in
a career in mortgages real estate cra anything along those lines.

Speaker 1 (01:07:06):
Yeah, So whenever we have interns come in or we
have young executives start, I buy them a couple things.
So I buy them the Frank Fobose Handbook on mortgagsback securities,
the Mortgage back Nerds Bible, and I buy them a
book Bernstein's book called Against the Gods. And I really
think that maybe it's just because I'm such a quant nerd,
but I think that Against the Gods it's a very

(01:07:28):
small book, a very quick read, but it does a
really good job of teaching people that you can apply
quantitative analytics and probably a theory to almost anything and
to everything, to your life decisions, to everything. And I
think it provides a nice paradigm in a world where
today it feels like, because of the political environment, people
are sort of it's black or it's white, it's zero

(01:07:49):
or it's one, and it's never zero one, right, There's
always some difference in between. So that's a book that
I think is sort of required reading at Amherst to
really understand the history of risk management, the history of
ability theory, how it first turned into what are the
big missed pricings have been? So it's not a super
complicated read, but I think it does a really good
job of taking people from thinking about the world as

(01:08:10):
trying to predict a thing, instead of saying, wait a minute,
there's a range of things. Can I be okay with
a broadery of outcomes versus just betting on that one thing?

Speaker 2 (01:08:19):
And pretty much everything Peter Bernstein writes is great, awesome.

Speaker 1 (01:08:22):
The gold One's even good too.

Speaker 2 (01:08:24):
And our final question, what do you know about the
world of real estate investing today? You wish you knew
thirty so years ago when you were first getting started.

Speaker 1 (01:08:33):
Wow, that's fascinating. The ecosystem of real estate has been
hard for me to follow, coming at it from the
fixed income markets, so just understanding the various players of
what they do and how they're motivated has been something
I wish I would have just sat down and mapped
out early on, because understanding how people are sort of
economically rewarded really helps you predict their behavior. And I

(01:08:54):
was kind of confused by that for a long time,
trying to pick the thing that was the right answer
instead of the thing that would benefited to most people.
It's like in the financial crisis, we were we were
short countrywide in scale hundreds of millions of dollars, and
Bank of America.

Speaker 2 (01:09:11):
Bought them but for like next to nothing though right, well,
but but.

Speaker 1 (01:09:16):
Yeah, but it was worth less than nothing, and so
zero was a good was a good outcome for that thing.
So at that point we realized that the consequence of
countrywide failing was so great that the system was going
to find an alternate outcome. So we switched to our
thesis to that point to understand that the value an
asset might have more to do with the consequences of
that asset failing than the assets actually probably a failing.

(01:09:39):
And that's something I wish I would have figured out before,
because it.

Speaker 2 (01:09:42):
Was so you and I could go down this rabbit
hole because we were short c T, we were short Leahman,
and we were short AIG and AIG similarly too systemically important.
It couldn't be allowed to crash and burn. But what
was so fascinating was, Okay, how come Leman Brothers was

(01:10:03):
left out to fall on its face, uniquely amongst the
giant financial players. And I have a pet theory which
I've never been able to validate anywhere. People forget, you know,
Warren Buffett very famously made alone to Goldman. Sachs sure
that at very advantageous price has got a nice piece

(01:10:25):
of Goldman. Great bit of business for Berkshire Hathaway. What
people forget is a few months earlier he had offered
that deal to Dick Folds, and Dick Fold said, what
is this so man trying to do? Steal the company?
Tell him to go jump? And once you turned down
Warren Buffett, how can the Treasury Department or the Fed?

(01:10:45):
Yeah right, you know, all right, we're gonna bail you
out of a couple hundred billion dollars. Chuse you had
a chance to save yourself, but you waited for us.

Speaker 1 (01:10:54):
It's super complicated. We were a little bit on the
outside looking in on that deal. We did price Leman,
We priced more than Stanley for a lot of different investors.
We priced bear Stearns. The magnitude of the losses was
hard to get your head around, but it felt like
the capital markets had it about right. So when bear
Stearns was sold, their CDs was trading thirty five points
up front for the senior unsecured piece. So it's meant

(01:11:16):
that the bond portion of the capital structure had about
a sixty five dollars recovery if you marked the market
bear Stearns, that was about right. But the consequence of
wiping out the equity, it had effects that we couldn't
even years later I figured out what the effects were.
But like the you know, it's kind of like the
old anti hall, Like there's what they're saying, and then
there's what's in the subtitles, like the macro of who

(01:11:38):
owned the equity, who was going to get crammed down,
who owned the fixed income? Who was going to end
up with control? Like there was a much bigger That's
what I'm trying to say about what to learn is
that the first instance of what you see if something
probably is a fraction of the story.

Speaker 2 (01:11:52):
Sure, and if you remember, oh, you have a weekend
to figure this out. We expect a deal before markets open.

Speaker 1 (01:12:00):
These trillion dollar ballance sheet's a full of complex liquid
assets and you have a weekend. So it was I
think that's the thing is, it's probably never as obvious
as it looks would be one advice, and to understand
the whole ecosystem, not just one asset's you know sort
of risk profile.

Speaker 2 (01:12:15):
Huh. Well, Sean, thank you for being so generous with
your time. This has been absolutely fascinating. We have been
speaking with Sean Dobson. He is the chairman, chief executive
officer and chief investment officer at Amherst Group, managing about
sixteen point eight billion dollars. If you enjoy this conversation, well,

(01:12:36):
be sure and check out any of our previous five
hundred or so. You can find those at iTunes, Spotify, YouTube,
wherever you find your favorite podcasts. Check out my new
podcast at the Money ten minutes of conversation about earning, spending,
and investing your money with an expert. You can find

(01:12:56):
that in the Master's and Business feed, or wherever you
get your favorite Sign up for my daily reading list
at rehelts dot com. Follow me on What's left of
Twitter at rahelts dot com. Follow all of the Bloomberg
Family of podcasts at Podcasts. I would be remiss if
I did not thank the correct team that helps us
put these conversations together each week. Kaylie Lapara is my

(01:13:18):
audio engineer. A Tick of Albron is my project manager.
Pariswold is my producer. Short Rousso is my head of research.
I'm Barryhots. You've been listening to Masters of business on
Bloomberg Radio

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