About 55% of outstanding US home mortgages have interest rates below 4% and a byproduct is that those homeowners are deeply reluctant to move because it would usually mean taking out a new mortgage at 6% or more.
Enter Takara which says it has a way to resolve what it calls the mortgage lock in effect.
On the show is Takara CEO Jonathan Arad who says the solution is to use a Danish-style mortgage payoff model to the U.S. market.This gives credit unions a way to offer principal discounts that unlock member mobility while creating new revenue opportunities and balance sheet flexibility.
This is not hocus pocus.
But I’ll let Arad explain it in the show.
It’s for you if you want to light a fire under your mortgage originations.
It also may be for you if you currently have a 30 year fixed rate mortgage with a very low interest rate and that’s stopping you from moving.
Understand this: the 30 year fixed rate mortgage is a US product. It just isn’t common around the globe. But yet mortgages and home purchases flourish globally.
Just maybe it’s time for a change.
Listen up.
Like what you are hearing? Find out how you can help sponsor this podcast here. Very affordable sponsorship packages are available. Email rjmcgarvey@gmail.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_02 (00:00):
Welcome to the CU2.0 podcast.
SPEAKER_01 (00:05):
Hi, and welcome to the CU2.0 podcast with big new
ideas about credit unions andconversations about innovative
technology with credit union andfintech leaders.
This podcast is brought to youby Quillo, the real-time loan
syndication network for creditunions, and by your host,
longtime credit union andfinancial technology journalist,
(00:27):
Robert McGarvey.
And now...
The CU 2.0 Podcast with RobertMcGarvey.
SPEAKER_02 (00:35):
About 55% of outstanding U.S.
home mortgages have interestrates below 4%.
A byproduct of that is thatthose homeowners are deeply
reluctant to move because itwould usually mean taking out a
new mortgage at 6% or more.
Enter Takara, which says it hasa way to resolve what it calls
the mortgage lock-in effect.
(00:55):
On the show is Takara's CEO,Jonathan Arad, who says the
solution is to use aDanish-style mortgage payoff
model.
This gives credit unions a wayto offer principal discounts and
unlock member mobility whilecreating new revenue
opportunities and balance sheetflexibility.
This is not hocus-pocus.
(01:16):
But I'll let Arad explain thetechnique in the show.
It's a product that just maywork for you if you want to
light a fire under yourmortgage-reward donations.
Also may be for you if youcurrently have a 30-year
fixed-rate mortgage personallyand your mortgage rate is very,
very low.
And that's stopping you frommoving.
Understand this, the 30-yearfixed rate mortgage is a U.S.
(01:38):
product.
It just isn't common around theglobe.
But yet, mortgages and homepurchases flourish globally.
Just maybe it is time for achange.
Listen up.
Why are you interested in theU.S.
mortgage market?
SPEAKER_00 (01:53):
To answer that, I have to tell you a little bit
about myself.
So in the past 20 years, I'vebeen in finance and, in fact, in
the intersection of finance andinnovation and technology.
But my formal education is waterdistribution system engineering.
I spent many years identifyingdisturbances and clogs in water
(02:16):
distribution networks anddesigning solutions to restore
flow.
And in many aspects, that's whatI'm doing today, just in a
different system.
So I believe I was originallydrawn to the U.S.
mortgage market because I'veidentified a few problems that I
(02:37):
believe are solvable.
A lot of the tools that we usefrom an engineering perspective,
ironically can be used also inthe mortgage industry.
But basically just a glorifiedplumber, if you'd like.
SPEAKER_02 (02:53):
Now tell me about the two credit unions that have
signed up to be pilot partnersof yours.
SPEAKER_00 (03:00):
Absolutely.
So I can't disclose their names,but I can tell you that they're
both multi-billion dollarscredit unions.
I've been working with them forthe better part of the past few
months already, four or fivemonths with the go-live date in
early Q3.
And each of them has differentmotivations.
(03:25):
Basically, the benefit to themember is what drives the
conversation.
but from a lender's point ofview, one of them is extremely
interested and motivated by theability to induce new
origination.
And the other one is in factvery much interested in the
(03:47):
balance sheet flexibility thatour programs generates once
transaction are completed.
The common denominator, I think,between both those credit unions
is the ability to go live andtest the program without
(04:07):
investing significant resourcesbefore the value is proven.
So that's one of usually hurdlesof implementing innovation and
especially in banking andespecially in consumer lending.
So we have created animplementation plan which allows
those credit union to test thewaters before they have to put a
(04:30):
lot of skin in the game, infact.
SPEAKER_02 (04:33):
As I'm sure you know, you talk to pretty much
every credit union in the UnitedStates.
They all say that their mortgagebusiness is down.
Oh, you hear differentpercentages, but as much as 50
to 75 percent from what it hadbeen just a few years ago.
So all of them certainly wouldbe interested in more
origination.
(04:53):
Well, we'll discuss how you helpon the origination side in a
minute.
But on the other hand, A, thiscredit union piece of the
mortgage market isn't that biganymore.
It had been, but it's way down.
It's mainly fintechs that aredriving the mortgage market in
the United States.
Now, two, most credit unions ofany size securitize a lot of
(05:19):
their mortgages.
I mean, they bundle them andpush them out the door.
So that ceases to be theirproblem in a way.
They're kicking a can down theroad.
And in the United States,something like two-thirds of
mortgages are securitized,one-third are held.
Are you addressing in any waythat securitization issue?
SPEAKER_00 (05:41):
Yes, absolutely.
So to your first point,obviously mortgage, whether
origination or operations is...
It's a significant portion ofany bank and credit union.
SPEAKER_02 (05:59):
Credit unions would love to have a lot more.
SPEAKER_00 (06:02):
Yeah, absolutely.
But it's not just the ability tooriginate.
It is, in fact, the retentiontool.
And we can talk about why a bitlater.
But exactly because creditunions are finding it very hard
to compete with banks andfintechs, like you mentioned,
Our program allows them orprovides them with a tool which
(06:23):
others don't have in order to bemuch more sticky and to retain
customers and, in fact, attractmore.
To your second question, so,yeah, absolutely, about 70% of
mortgages in the U.S.
are securitized and then FreddieFannie and capital markets.
Our target audience are banksand credit unions, and we
(06:45):
currently deal with theirportfolio loans.
So the$4 trillion of mortgagesthat sit on their balance sheet
with an average rate of, whichis sub below 4%.
Granted it is the smaller partof the market, but very
significant from our point ofview in terms of addressable
(07:07):
market.
And of course that drives thekey problem for those portfolio
lenders in terms of loworigination volume, compressed
margin, and overall, freeze inthe market, if you like.
SPEAKER_02 (07:18):
Now, why does it take you so many months to get
up and running at a creditunion?
SPEAKER_00 (07:31):
So we have been going into market for the past
six months, so not that much.
I believe having the tractionthat we have and the engagement
is very positive.
SPEAKER_02 (07:43):
The engagement is very positive.
I'm just wondering about thetime between, okay, let's do
this and implementation, even ina pilot.
SPEAKER_00 (07:54):
Yes, well, there are some things that we can't solve
and we have to operate in theframework that is provided to
us.
And building something that isinnovative and transformative in
many aspects takes time.
in financial institutions,especially when it relates to
(08:16):
consumer lending and mortgages.
I probably don't have to tellyou how many people are
involved.
It's the core business of thebank and the credit.
It's the core business of thecredit union, right?
So a lot of people have alwayssomething to say about what's
going on and if this is good orbad, what needs to happen.
So that takes time to...
(08:37):
describe and to make sure thatall the stakeholders are aware
of exactly what it is that we'redoing, and you comply with the
internal policies of thatorganization, which differ from
one to another.
And of course, there aredifferences between states for a
state-regulated credit unionversus a national credit union.
(08:58):
And the second aspect, I believethe From our perspective, the
turmoil in the market and themortgage lock-in effect that
occurred because of the interestrate cycle creates a lot of
turmoil.
And that merged with otherchallenges from a regulatory
(09:23):
point of view, with theadministration making a lot of
changes in the agencies.
That, in many aspects, deterinstitutions to make decisions
that are avant-garde, even ifthey're, of course, positive.
They sometimes prefer to waitand see and see that the waters
(09:44):
are a bit calmer.
I have to say that those who aremoving forward will reap the
benefits because there's so muchto do, and those who will will
take a bigger share of thegrowth and market that our
program offers them.
SPEAKER_02 (10:03):
Right now, and you just touched on it, we're in a
period of something bordering onparalysis since nobody, unless
you have a really good workingcrystal ball, has any idea
what's happening in the nextday, no less than next month.
It's almost become theater ofthe absurd.
(10:25):
But When you go into a creditunion, what itch are you
scratching?
What says to them, okay, we wantto talk to you?
SPEAKER_00 (10:38):
I believe it's two things.
First, the fact that we'retelling them something that they
don't know about their ownbusiness, not in the US, but
that the problem that iscurrently compressing their
business is actually solvedelsewhere.
And they are very muchinterested and curious to hear
(10:59):
more about that.
So they're interested aboutglobal solutions and why the
mortgage lock-in effect is infact an American problem.
SPEAKER_02 (11:08):
And- I agree with you there.
At one point, I was looking atpossibly buying property in
Ireland.
And if you went to the Irishbanks and said, geez, I want a
30-year fixed rate mortgage.
A, they wouldn't know what youwere talking about.
B, when they began to understandit, they would just laugh at you
and kick you out the door.
Yeah, the product doesn't exist.
SPEAKER_00 (11:28):
Yeah, yeah.
Different mortgage marketsbehave very differently, and you
have different retail mortgageproducts in different mortgage
markets.
But even markets with 30-yearfixed-rate mortgages do not have
the mortgage lock-in effect thatthe U.S.
has because the system worksdifferently, and we can talk
about that.
SPEAKER_02 (11:47):
Yeah, yeah.
Tell me how that system worksdifferently.
SPEAKER_00 (11:50):
So for example, in Denmark, the 30-year fixed rate
mortgage is also the mostpopular retail product, but they
don't have a mortgage lockingproblem.
So one of the key differences iswhen a Danish mortgage is
originated, it is covered by asingle bond, unlike the US.
So one mortgage connected to asingle bond, which is then sold
(12:13):
and traded in the open market.
And the
SPEAKER_02 (12:16):
Danish- So it's kind of securitized instantly.
So
SPEAKER_00 (12:19):
it is not even securitized, if you think about
it.
But it's just a bond.
Right.
You don't know.
It's
SPEAKER_02 (12:27):
right.
It's standing there on its own.
Exactly.
That's a big difference.
Yes.
SPEAKER_00 (12:31):
Exactly.
And a Danish borrower can payoff their loan in one of two
ways.
The first is to prepay theoutstanding principal.
So just like in the US.
And the second is to buy thebond.
So a Danish borrower always hasthe option to buy their bond in
(12:54):
the open market.
Does the bond price
SPEAKER_02 (12:57):
float in
SPEAKER_00 (12:57):
the open market?
Exactly.
Oh, that's interesting.
SPEAKER_02 (13:01):
So you can look, if your bond dips, you can pounce
on it.
SPEAKER_00 (13:05):
That's exactly what happened.
So in 2022, when rates spiked inDenmark, prepayment rates
tripled 30%.
That's exactly what happened.
They paid 80 cents on the dollarwhen they bought their own
bonds.
And that's the reason why theydon't have the lock-in, because
the lenders remained active andliquid, and people moved and
(13:27):
relocated and refinanced, andthe market continued to work.
So the 30-year fixed ratemortgage creates the stability,
but in the U.S., there is noflexibility.
And in Denmark, you can have thebest of both worlds, in fact.
And in many aspects, that's whatTakara is doing.
So we are...
(13:48):
We took that feature, we createda product, and we adapted it to
the US market, and we areproviding that solution to
credit unions so they can offertheir members to pay off their
loan with a significant discountwithout the credit union
requiring to write any kind ofloss.
In fact, they're making revenue.
SPEAKER_02 (14:08):
Now, if I'm a credit union executive, I'm interested,
but I have a concern.
My concern would be, how thehell do I explain this to my
members?
Yeah, how do I get them tounderstand this?
You know, you come out of thecradle and you understand
(14:28):
30-year fixed rate mortgages.
I mean, that's pretty simple tounderstand.
Now I got to explain this thingand there's a bond involved and
geez, okay.
How do I do this?
SPEAKER_00 (14:40):
So if you are talking about explaining this to
a member.
SPEAKER_02 (14:44):
Yeah, that's, yeah, yeah.
SPEAKER_00 (14:47):
A lot
SPEAKER_02 (14:49):
of credit union initiatives die because they do
a terrible job of explaining thebenefits for the member to the
member.
They'll understand.
I've talked to a lot of FinTechguys, great ideas, great ideas,
but they're marketed horribly.
SPEAKER_00 (15:06):
There's a saying in the startup world that the
cemeteries are filled with greatideas.
SPEAKER_02 (15:12):
Yeah, and they honestly are great ideas.
They've just been marketedhorribly in many cases.
SPEAKER_00 (15:19):
Yeah, I couldn't agree more.
A lot of the time, a great ideais good, but if you don't have a
solid go-to-market strategy, itwould be hard to make it a
success.
There's two
SPEAKER_02 (15:32):
pieces that go to market for the fintech industry.
There's the immediate piecewhere you have to figure out how
you take this to market tobuyers of your products, i.e.
credit units.
But then there's the secondpiece is how do credit unions
sell this to their members,which is a whole different
problem.
I
SPEAKER_00 (15:52):
completely agree.
And I think it's true with everynew consumer-facing product,
especially so in consumerfinance.
From a formality point of view,what the member is offered is a
payoff discount.
So you owe a certain amount andnow your lender offers you to be
(16:16):
released from that mortgage bypaying 85 or 80 cents on the
dollar.
That's it.
And there are no fine print orsmall letters.
That is it.
It is in fact legally releasedfrom the liability and the lien
is released from the property.
Now, that's from a formalitypoint of view.
Now, granted, when you start offwith an offer that was never
(16:40):
been made before, people want toknow more and sometimes it
sounds a little bit too good tobe true.
And what we provide to thecredit union and to the loan
officers, other than scripts andbrochures and a landing page
with consumer facinginformation, what we're saying
is that there will be a learningcurve.
(17:02):
There are a lot of things thatTakara is not a consumer-facing
company, that we don't know whatwould be the optimal way to
explain this.
Because perhaps differentmembers and different segments
and different target audienceswould need to hear this a little
bit differently.
And whether you're a real estateinvestor or a family who is
(17:23):
moving, perhaps the explanationis a little bit different.
So being a startup and afinting, and that's part of the
challenge and part of theadventure, is finding that out,
as part of the journey.
But what's nice about what it isthat we're doing is in both of
our clients and in everyconversation that we have with a
credit union, the people whohear about this program, there
(17:50):
is always employees who want totake part of this.
So in fact, the firsttransactions are employees,
friends, and family.
So we are learning a lot fromthat conversation.
from that audience as well.
And of course, the credit unionthemselves learn a lot about
what's the best way tocommunicate this externally.
SPEAKER_02 (18:06):
You talked to companies, fintechs involved in
the mortgage business and tocredit unions.
Why aren't mortgages beingoriginated today?
People come in, if they come inat all, and they say, geez, I
don't want to pay 6%.
That's too high.
I'm going to wait for it to comedown.
(18:28):
And they've been waiting now fora year or two, three.
And if they ask me, I say, thatcould be a really long wait.
I don't know.
SPEAKER_00 (18:42):
I completely agree.
I completely agree.
I think you have homebuyerswho...
who 6% and 7% is just too muchfor them?
SPEAKER_02 (18:56):
Hey, I had a mortgage.
I thought it was a greatmortgage like 20-some odd years,
25 years ago.
It was 6.75%.
I thought that was great.
I didn't complain for a minute.
By the way...
That was 30-year fixed rates.
Yeah.
SPEAKER_00 (19:10):
There were people who took 16% rate and thought it
was a great deal at the time inthe 70s and 80s.
So it's...
I mean...
the memory is very, in manyaspects, is short-term.
And people remember theultra-low rates of COVID.
And that's why a jump from 2.5to 7 is much more painful than
(19:33):
the jump from 10 to 15, forexample.
SPEAKER_02 (19:36):
It's
SPEAKER_00 (19:36):
much more
SPEAKER_02 (19:36):
painful.
Now, something that took hold inthe United States, I've never
done it, but I certainly havehad friends who did it
compulsively, is refinance.
So the interest rate would tickdown like half a point.
And a lot of places wereoffering like$100 refinancing or
free refinancing.
(19:57):
I mean, there are essentially nofees.
And so they would refinanceliterally every year, sometimes
twice in a year.
To me, this was just crazybehavior.
But why not do that instead ofdoing what you're talking about?
SPEAKER_00 (20:13):
Well, if you want to refinance today, it depends on
the current rate that you have.
If you took a 7% loan and youcan refinance to a 6% loan,
perhaps you should.
You should run the numbers.
But if you took a 3% loan...
SPEAKER_02 (20:24):
Well, that would be stupid.
SPEAKER_00 (20:27):
But that's the point.
So refinance in its core is away for borrowers to benefit
from declining rates.
But...
But the other way around doesn'twork.
If you have a low rate and ratesare rising, there is no
(20:48):
mechanism for borrowers to tapinto the trapped gain in their
low fixed rate mortgage, right?
Freddie Mac just released acouple of months ago a research
that showed that on average, ontheir loans, there's over$50,000
of trapped gain.
And there is no pressure valvesin the US mortgage market.
(21:08):
That's one of the reasons Onlythe US has this extremity of the
mortgage lock-in program.
And the majority of people whorefinance traditionally are
people who are going from highrates to low rates.
And those are just the minorityof mortgage holders today
because you have close to 60% ofmortgage borrowers with rates
(21:32):
below four.
So they will never refinance andthey will never move unless they
really have to.
And like you said,
SPEAKER_02 (21:40):
that is a huge problem in the real estate
market now where people are inhouses they don't really want to
be in anymore.
But it's a mortgage and theysay, I ain't moving.
I ain't moving.
Can't do it.
I'm not going to take a 6% loan.
SPEAKER_00 (21:56):
They are stuck in their forever home, whether they
like it or not.
It's like living in rentcontrol.
SPEAKER_02 (22:01):
Yes, it is.
That's a good analogy.
I know people in New York whohate their apartments, but you'd
have to shoot them.
to move them out of it.
SPEAKER_00 (22:08):
Precisely, precisely.
And the point, and I think thisis sometimes is missed, the
ripple effect of this decisionwhen it is repeated millions of
times by millions of families isextensive for, that's why we
have supply problems in realestate.
(22:30):
That's why home buyers can't,can't find homes.
That's why rent is gettinghigher and higher because people
are not going to move.
And I'm not even talking aboutthe moving industry or the
renovation industry.
The ripple effect is justextensive.
(22:52):
And of course, if you look at itfrom credit union's point of
view, it's no wonder we seeconsolidation in the market
because what else can they do?
There's no growth when yourmarket is shrinking 200,000
mortgages per quarter, that'swhat's happening in the last two
years, right?
The mortgage lock-in effect hasprevented 60% of home sales in
(23:14):
the US.
So that's 200,000 transactionsper quarter.
No wonder they have toconsolidate.
There's no other way to creategrowth and to generate business.
SPEAKER_02 (23:28):
So in your testing, when you...
seek to explain this to aconsumer?
How does that go?
SPEAKER_00 (23:36):
Well, the starting point is easy.
You want to pay off with adiscount?
Here's 15% discount.
So you owe$500,000 outstandingprincipal.
If you want to get out of thatmortgage, you need to come up
with$425,000.
And that's it.
You're completely released.
Where do they get that money?
Usually they sell the propertyand they are$75,000 better off.
(24:00):
But then, a lot of the membersare asking, okay, this sounds a
bit too good to be true.
Where does that come from?
Who is taking the hit?
Who is taking the loss?
And that's where, and that'sexactly directly relates to your
question.
Then you start to explain that,okay, there's no loss in fact,
(24:23):
and there's no fine print andyou're not reliable to anything.
And there's a legal release fromthe obligation.
And if they want to learn moreabout the process, we actually
provide them with anyinformation that they want.
We try to be as proactive andtransparent with the information
that we provide.
But the feedback in terms ofadoption is off the roof.
(24:46):
Like we talked about Denmark,when rates went up in 2022, when
repayment rates tripled from 10%to 30%, in the U.S., At scale,
this will be even higher becauseyou have demand that wasn't
(25:08):
executed.
So you have people who wanted tomove and didn't.
So you have accumulated demandthat people that are sitting at
the gate, if you'd like, whowould jump on this.
But
SPEAKER_02 (25:21):
it goes back to the COVID era.
I mean, that's when people stopshopping for homes.
Do you really want to go intothat open house with strangers
and look at this house?
You could die, literally.
That was the thought.
So, I mean, we've seen aslowdown in this market for some
years.
It's not just the interest ratestoday.
SPEAKER_00 (25:41):
No, absolutely.
So it's not just one thing.
You're absolutely right.
There's the asset prices aswell.
And, of course, other factors,too.
COVID being one of them, likeyou mentioned, and the ripple
effect of that.
So the remote work has asignificant portion of that as
well.
(26:02):
But in fact, the FHFA did acomprehensive research about
the...
They quantified the rateincrease and its effects on real
estate.
And as I mentioned, 60% of homesales were prevented,
isolated...
reason is the mortgage lock-inderived by the changing rates.
(26:25):
And granted that people areworking from remote, but that's
also changing over time now.
Many of the places that were100% remote a few years ago are
now back to 100% in office.
And yeah, and people who inCOVID got their 2.5% 30-year
(26:49):
fixed-rate mortgage, had kids,and those kids now need
bedrooms.
And that's a challenge.
That's a challenge for many,many families.
You have older couples thattheir kids left for college.
They can't downsize and savecapital.
The numbers are just staggeringwhen you look at the implication
(27:13):
of this issue.
SPEAKER_02 (27:14):
Yeah, another issue here is...
We did a kitchen renovation ayear or so ago.
And it was delayed for a year ortwo because of COVID.
But the price also went up byabout 25%.
Yeah, everything.
It wasn't the labor.
It was everything else.
(27:34):
The refrigerator, the stove, youknow, all that.
Everything was more expensive.
SPEAKER_00 (27:39):
Yeah, inflation is...
It's really painful, absolutely.
SPEAKER_02 (27:46):
And it's going to go more expensive, assuming these
tariffs stick for any length oftime.
Because so much of that stuffcomes from abroad.
Yeah,
SPEAKER_00 (27:57):
I think it remains to be seen what will be the
effects of the decisions made bythe administration.
Because it's not just aunilateral decision.
Well, it is a unilateraldecision, but then you have the
counterpart or counterparts whoneed to react to that and their
reaction will affect what theresult would look like here in
(28:19):
the US.
So I think the jury is still outand it's not really clear.
And that's part of the problem.
Like you mentioned yourself, Ithink it's, and I completely
agree, the uncertainty in themarkets is probably the worst
thing and markets likestability.
And that is what is currentlydeprived from them.
(28:40):
And that's true with thetariffs.
It's true with actions done onthe regulatory front, the
taxation front in the creditunion space.
And we see that.
And I think that what drives alot of the sit and wait
approach, the consolidation, theconsolidation that we see in the
(29:00):
market.
Absolutely.
SPEAKER_02 (29:02):
Well, you know this better than I do, but private
equity, guys.
sitting there on piles ofmillions of dollars.
As long as they think they knowwhat's going to happen in the
next year or two, they're verycomfortable.
They don't much care what'sgoing to happen as long as they
know what's going to happen.
If you say, hey, dude, you don'tknow anything.
(29:24):
Well, I'm not putting any moneyin anything.
No way, no how, can't do it.
Too much risk.
SPEAKER_00 (29:31):
Absolutely.
And you see capital markets,equity markets, and bond markets
behave differently in ways thatwe haven't seen for many, many
years and sometimes for thefirst time.
So,
SPEAKER_02 (29:43):
okay, I'm a mortgage guy at a credit union.
I have your product.
I'm talking to a consumer.
Consumer says, geez, I just, I'mnot comfortable with this 6%
mortgage.
I say, okay, I've got this otherproduct here.
How do I explain it to theperson?
SPEAKER_00 (30:03):
So your member has a 3%.
$500,000 outstanding principalloan.
And they want to move, but theycan't afford the 6% that is
waiting for them on the otherside.
What our program enables you asa credit union to do is to offer
your members a 15% discount onthat outstanding principal.
(30:25):
So instead of paying off500,000, that member is offered
to pay$425,000.
And you got my attention there.
Exactly.
And the members usually.
SPEAKER_02 (30:38):
Yeah.
That's what I mean.
I'm pretending to be the member.
SPEAKER_00 (30:42):
Yeah.
So as a member, you sell yourproperty.
And instead of repaying$500, yourepay$425.
So your gain net is$75,000,which goes to the home equity
and goes to...
You can use it however you seefit.
You can take a smaller new loan.
You can buy a bigger home.
(31:03):
You can do whatever you want.
It's yours.
So the offer to them, this is infact why our program solves the
mortgage lock-in effect becausewe are in many aspects
liquidating or extracting thetrapped gain in those ultra low
fixed rate mortgages.
And we split them between themember and part of it also to
(31:26):
Takara as our business model, aswell as the lender.
Now, importantly, and that's thesecret sauce, which we won't go
too much into detail, we'redoing that in a way that does
not cause the credit union towrite any loss.
Again, going back, this is aportfolio loan, so it sits on
your balance sheet.
So we allow you to offer yourmember a significant discount
(31:50):
without writing a loss.
It sounds like black magic, butthat's what we're doing.
SPEAKER_02 (31:55):
You got to explain that.
That does sound like a carnivaltrick.
SPEAKER_00 (32:01):
Well, I can say just in high level, but the basic
concept is in many, it relatesto what I described about what
happens in Denmark.
So that mortgage, there's noquestion that it is not worth
$500,000.
So if the bank, if the creditunion had to sell that loan in
the open market, they would get80 cents on the dollar and write
(32:24):
a loss.
So we are taking advantage ofthis spread, which we didn't
create.
The market created it.
And we are making sure that theborrower gets the majority of
that spread while keeping thecredit union whole on the loan.
(32:45):
And we are, in fact, utilizing aprocess which is well-defined
and heavily executed in realestate called Deficience.
I'm not sure if it's not very,it's relatively niche in real
estate, but it is$10 billionmarket here in the US, which
allows the replacement ofcollateral without the
(33:07):
impairment or modification ofthe loan on the balance sheet
side.
And the adaptation part of theDanish concept to the American
market is in fact based on theexisting rails, the operational
rails, as well as accounting,taxation, legal of this process
(33:28):
that I just mentioned.
SPEAKER_02 (33:31):
The credit unions that are going to be your
pilots, where are they located?
SPEAKER_00 (33:36):
So we are in fact talking to local credit unions,
so operating in one state, butalso national.
One
SPEAKER_02 (33:46):
has a national charter.
Okay.
SPEAKER_00 (33:49):
Yeah.
So our sweet spot are creditunions who have at least 10% of
their total assets as portfoliolong-term residential mortgages.
The reason why that's our sweetspot is because they feel the
pain.
And in order for them to havethe motivation to pursue this at
(34:14):
a timely manner, we prefer totalk to those institutions
because we solve a biggerproblem for them relatively.
And again, our target audience,our institution with a billion
or plus total assets with atleast 10% of long-term one to
(34:37):
four residential mortgages,traditionally, they have
somewhere around 3% average rateon those loans.
So the average discount that isoffered to their members is
around 15%.
SPEAKER_02 (34:50):
What size mortgages are you particularly interested
in?
Now, there's parts of thecountry where a typical home
price is$200,000, and there'sparts like Manhattan or San
Francisco where a million willbuy you a studio apartment.
So...
And if you want somethingbigger, you need more millions.
(35:12):
What kind of size are youinterested in?
SPEAKER_00 (35:16):
So we actually don't mind.
We don't like the millions andmillions of dollars of
mortgages, but that's justbecause we're relatively early
in our journey.
We won't have any problems to dothat at scale.
But as you mentioned earlier,the majority of mortgages are
(35:38):
securitized.
Those that are not and remain onthe balance sheet are, in many
cases, jumbo loans.
So they are larger than thenational average.
So what we find is that if theaverage U.S.
mortgage is around$450,000,portfolio loans are
traditionally a bit larger.
(35:58):
But as you mentioned, when we goto certain credit unions,
sometimes the average is 250,and that's fine.
SPEAKER_02 (36:08):
No, I mean, look, the reason I'm talking to you is
because clearly this marketright now is suffering from
severe inertia.
No one's doing anything.
Credit unions are seriouslyunhappy.
Their members are seriouslyunhappy.
You can't sell your home becauseno one wants to get the mortgage
(36:31):
to pay for the home.
So the whole system is stalledright now.
And it takes some innovativethinking to do this.
And as I discovered in Europe,the idea of a 30-year fixed rate
mortgage is not common.
It's like, huh?
(36:51):
It's an absurd idea, really, ifyou think about it.
Because we've had so muchturmoil just over the most
recent 30 years.
SPEAKER_00 (37:02):
Well, I think it's important to look at the time
axis.
Originally, the 30-year fixedrate mortgage was conceived to
solve a problem, to generatestability after the Great
Depression and to solve thefive-year bullet bankruptcies in
the 20s and early 30s.
(37:24):
And it did just that, in fact.
It was never intended to becomethe mammoth that it is today.
But from an evolutionary pointof view, it created stability,
but in an extreme manner, butalso surrounded by a rigid
system.
So the system is not flexibleand it doesn't have any pressure
(37:45):
valves in unique marketconditions.
And I say unique because thecurrent market conditions that
we see did not happen before.
So we never had here in the US asharp increase in interest rate
from very low to what the long,it's not far from the long-term
average, but it's 500 basispoint increase.
(38:07):
So that never happened before.
And so, because the system wasnot built with pressure valves,
it is completely frozen.
And like you said, it's stalled.
And the real estate problem isin fact a finance problem.
Like you said, people don't wantto move because they don't want
to take the mortgage thatfinances that move.
(38:29):
So in our perspective, the wayto solve many of the real estate
problems that we see today inthe US is in fact from a finance
point of view.
And again, going back to yourvery first question, that is
where the institutions need tolook at innovation and on new
(38:50):
ways and new perspectives tosolve those design problems in a
manner that was never discussed.
And we think that we bringproven solutions from abroad,
which help people imagine whatthe bottom line of the result
will be.
(39:10):
So just imagine if your memberscould pay off their loan at
mark-to-market at 15% discount.
Imagine that.
And you can imagine that becauseit is done elsewhere.
Is
SPEAKER_02 (39:23):
there any potential downsides for the member?
Yeah, I remember when adjustablerate mortgages came out, the
original packages did not capthe amount that it could go up
by.
So people were freaking out.
It was like, I'm going to makeup numbers.
(39:44):
They had like a 4% arm.
And then the next year it wentto 6.5%.
And the monthly outlay was wayup.
So the institution said, fine,we're going to put a cap on the
maximum amount of increase overa year.
So that kind of solved thatproblem.
Are there any potential problemswith your product?
SPEAKER_00 (40:05):
So the power is once they pay with the discount, they
are completely released.
They get a legal notificationfrom the lender.
From the credit union, you arereleased from the liability and
the lien on your property isreleased.
That's it.
Period.
No small print, no long termsand conditions.
That's it.
And what's important is for themember to understand the
(40:27):
transaction.
And when a member has a 3% loanand they're getting a discount
to pay it off and they'removing, their new loan will be
at a higher rate.
It might be in a smaller amountrelative to the alternative
because they use the discount totake a smaller loan, but the
rate will still be market rate.
(40:49):
So there's no magic here.
There's no rabbit in a hat.
It's economics.
And members will only transactif it makes sense to them from
an economical point of view.
Now, The point is that many,many members and many homeowners
(41:11):
and families in the UnitedStates would have moved if they
could afford it.
And that's what we allow them todo.
There are no strings attachedand there's no residual risk for
the member whatsoever in no way,shape or form.
This is extremely important andit's black and white.
SPEAKER_02 (41:32):
Interesting.
If I were going to, yes, I'd saythe 30-year fixed rate mortgage
actually took really took rootin the United States shortly
after World War II ended, when alot of veterans were returning.
They were in their mid-20s,late-20s.
And the government said, hey,great, we have this GI mortgage.
Zero down, zero down.
(41:53):
And you got 30 years to pay itoff.
I think that thing just wentskyrocketing.
It's everybody wanted, every GIreturning wanted to start a
family, blah, blah, blah.
So they were all buying thesenew...
And it was great for theeconomy.
Home building just went ondrugs.
It was on cocaine for like five,10 years, building houses to
(42:15):
accommodate these people.
It was quite something.
But did we still need thatstimulus 20 years later?
I don't think so.
It really served a purpose backin 1946, 1948.
But it's...
Yeah, I
SPEAKER_00 (42:34):
can...
I completely relate.
And I think what is sometimesmissed in the discussion about
the US mortgage industry is thatit's the biggest in the world by
far, but it is an anomaly from aproduct point of view.
So in the US, the capital marketside is extremely sophisticated
(42:57):
and liquid and dynamic, but theretail product is in fact quite
benign and hasn't changedsignificantly for many decades.
And if you look at othermortgage markets, that's rarely
the case.
Usually it's more balanced.
So the capital market side isless sophisticated and liquid,
(43:18):
but you have more flexibilityand variety on the retail side.
And that variety on the retailside is what provides, in many
cases, the cushion and thepressure valves that are
required in extreme marketconditions.
And that is what is lacking inthe US.
By the way, I myself come fromIsrael, and the Israeli mortgage
(43:40):
product is considered one of themost sophisticated retail
product in the world.
And on the other hand, thecapital market side in Israel is
benign.
It is, in fact, it was not untilrecently illegal to securitize
mortgages in Israel.
So all the loans are portfolioloans, in fact, in Israel.
So in many aspects, Israel isthe complete opposite.
(44:03):
of the U.S.
with a sophisticated,consumer-friendly retail
product, but a benign capitalmarket structure.
And in the U.S., it's thecomplete opposite.
So I find it very intuitive thatmortgage retail product
innovation comes from Israel orgenerally from outside the U.S.
(44:24):
into the U.S.
SPEAKER_02 (44:27):
Yeah.
No, I'm glad we're doing thisbecause I think what we need is
some innovative, fresh thinkingabout mortgages rather than
sitting here complaining thatrates are too high, people
aren't buying, people aren'tselling.
Boy, this is cruddy.
Well, it is cruddy, but whatyou're supposed to do is think
of a solution to
SPEAKER_00 (44:48):
that.
Well, you know what they say, tosit and wait is not a strategy.
SPEAKER_02 (44:52):
Yeah, and unfortunately, I think that's
what a lot of financialinstitutions are doing with
mortgage money right now.
And as they're doing that, theFinTechs continue to move
aggressively.
So they're actually doing somethinking.
And the market share of creditunions in the home mortgage
market continues to shrink,which is not a good thing for
(45:14):
credit unions.
But anyway, this has been a goodcall.
This will go up in probablyabout a month and a half.
I thank you.
I thank you for persisting andgetting in touch.
It's because, yeah, wedefinitely need some fresh
thinking about mortgages.
And so I thank you very much foryour time.
It's been fun.
(45:34):
Take care.
SPEAKER_00 (45:34):
Thank you so much, Robert, for your time, for
digging in and for bringing thisinto the light.
SPEAKER_02 (45:43):
As I say, we need some fresh thinking.
Absolutely.
And that's what you're doinghere.
So thank you.
Take care and good luck to youtoo.
SPEAKER_00 (45:51):
Thank you so much, Robert.
Cheers.
SPEAKER_02 (45:53):
Bye.
Before we go, think hard abouthow you can help support this
podcast so we can do moreinterviews with more thoughtful
leaders in the credit unionworld.
What we're trying to figure outhere in these podcasts is what's
next for credit unions.
What can they do to really,really, really make a difference
(46:14):
in the financial scene?
Can't all be megabanks, can it?
It's my hope it won't all bemegabanks.
It'll always be a place forcredit unions.
That's what we're discussinghere.
So figure out how you can help.
Get in touch with me.
This is rjmcgarvey at gmail.com.
Robert McGarvey again.
That's rjmcgarvey at gmail.com.
(46:35):
Get in touch.
We'll figure out a way that youcan help.
We need your support.
We want your support.
We thank you for your support.
The CU2.0 Podcast.
Welcome to the CU2.0 podcast.
SPEAKER_01 (00:05):
Hi, and welcome to the CU2.0 podcast with big new
ideas about credit unions andconversations about innovative
technology with credit union andfintech leaders.
This podcast is brought to youby Quillo, the real-time loan
syndication network for creditunions, and by your host,
longtime credit union andfinancial technology journalist,
(00:27):
Robert McGarvey.
And now...
The CU 2.0 Podcast with RobertMcGarvey.
SPEAKER_02 (00:35):
About 55% of outstanding U.S.
home mortgages have interestrates below 4%.
A byproduct of that is thatthose homeowners are deeply
reluctant to move because itwould usually mean taking out a
new mortgage at 6% or more.
Enter Takara, which says it hasa way to resolve what it calls
the mortgage lock-in effect.
(00:55):
On the show is Takara's CEO,Jonathan Arad, who says the
solution is to use aDanish-style mortgage payoff
model.
This gives credit unions a wayto offer principal discounts and
unlock member mobility whilecreating new revenue
opportunities and balance sheetflexibility.
This is not hocus-pocus.
(01:16):
But I'll let Arad explain thetechnique in the show.
It's a product that just maywork for you if you want to
light a fire under yourmortgage-reward donations.
Also may be for you if youcurrently have a 30-year
fixed-rate mortgage personallyand your mortgage rate is very,
very low.
And that's stopping you frommoving.
Understand this, the 30-yearfixed rate mortgage is a U.S.
(01:38):
product.
It just isn't common around theglobe.
But yet, mortgages and homepurchases flourish globally.
Just maybe it is time for achange.
Listen up.
Why are you interested in theU.S.
mortgage market?
SPEAKER_00 (01:53):
To answer that, I have to tell you a little bit
about myself.
So in the past 20 years, I'vebeen in finance and, in fact, in
the intersection of finance andinnovation and technology.
But my formal education is waterdistribution system engineering.
I spent many years identifyingdisturbances and clogs in water
(02:16):
distribution networks anddesigning solutions to restore
flow.
And in many aspects, that's whatI'm doing today, just in a
different system.
So I believe I was originallydrawn to the U.S.
mortgage market because I'veidentified a few problems that I
(02:37):
believe are solvable.
A lot of the tools that we usefrom an engineering perspective,
ironically can be used also inthe mortgage industry.
But basically just a glorifiedplumber, if you'd like.
SPEAKER_02 (02:53):
Now tell me about the two credit unions that have
signed up to be pilot partnersof yours.
SPEAKER_00 (03:00):
Absolutely.
So I can't disclose their names,but I can tell you that they're
both multi-billion dollarscredit unions.
I've been working with them forthe better part of the past few
months already, four or fivemonths with the go-live date in
early Q3.
And each of them has differentmotivations.
(03:25):
Basically, the benefit to themember is what drives the
conversation.
but from a lender's point ofview, one of them is extremely
interested and motivated by theability to induce new
origination.
And the other one is in factvery much interested in the
(03:47):
balance sheet flexibility thatour programs generates once
transaction are completed.
The common denominator, I think,between both those credit unions
is the ability to go live andtest the program without
(04:07):
investing significant resourcesbefore the value is proven.
So that's one of usually hurdlesof implementing innovation and
especially in banking andespecially in consumer lending.
So we have created animplementation plan which allows
those credit union to test thewaters before they have to put a
(04:30):
lot of skin in the game, infact.
SPEAKER_02 (04:33):
As I'm sure you know, you talk to pretty much
every credit union in the UnitedStates.
They all say that their mortgagebusiness is down.
Oh, you hear differentpercentages, but as much as 50
to 75 percent from what it hadbeen just a few years ago.
So all of them certainly wouldbe interested in more
origination.
(04:53):
Well, we'll discuss how you helpon the origination side in a
minute.
But on the other hand, A, thiscredit union piece of the
mortgage market isn't that biganymore.
It had been, but it's way down.
It's mainly fintechs that aredriving the mortgage market in
the United States.
Now, two, most credit unions ofany size securitize a lot of
(05:19):
their mortgages.
I mean, they bundle them andpush them out the door.
So that ceases to be theirproblem in a way.
They're kicking a can down theroad.
And in the United States,something like two-thirds of
mortgages are securitized,one-third are held.
Are you addressing in any waythat securitization issue?
SPEAKER_00 (05:41):
Yes, absolutely.
So to your first point,obviously mortgage, whether
origination or operations is...
It's a significant portion ofany bank and credit union.
SPEAKER_02 (05:59):
Credit unions would love to have a lot more.
SPEAKER_00 (06:02):
Yeah, absolutely.
But it's not just the ability tooriginate.
It is, in fact, the retentiontool.
And we can talk about why a bitlater.
But exactly because creditunions are finding it very hard
to compete with banks andfintechs, like you mentioned,
Our program allows them orprovides them with a tool which
(06:23):
others don't have in order to bemuch more sticky and to retain
customers and, in fact, attractmore.
To your second question, so,yeah, absolutely, about 70% of
mortgages in the U.S.
are securitized and then FreddieFannie and capital markets.
Our target audience are banksand credit unions, and we
(06:45):
currently deal with theirportfolio loans.
So the$4 trillion of mortgagesthat sit on their balance sheet
with an average rate of, whichis sub below 4%.
Granted it is the smaller partof the market, but very
significant from our point ofview in terms of addressable
(07:07):
market.
And of course that drives thekey problem for those portfolio
lenders in terms of loworigination volume, compressed
margin, and overall, freeze inthe market, if you like.
SPEAKER_02 (07:18):
Now, why does it take you so many months to get
up and running at a creditunion?
SPEAKER_00 (07:31):
So we have been going into market for the past
six months, so not that much.
I believe having the tractionthat we have and the engagement
is very positive.
SPEAKER_02 (07:43):
The engagement is very positive.
I'm just wondering about thetime between, okay, let's do
this and implementation, even ina pilot.
SPEAKER_00 (07:54):
Yes, well, there are some things that we can't solve
and we have to operate in theframework that is provided to
us.
And building something that isinnovative and transformative in
many aspects takes time.
in financial institutions,especially when it relates to
(08:16):
consumer lending and mortgages.
I probably don't have to tellyou how many people are
involved.
It's the core business of thebank and the credit.
It's the core business of thecredit union, right?
So a lot of people have alwayssomething to say about what's
going on and if this is good orbad, what needs to happen.
So that takes time to...
(08:37):
describe and to make sure thatall the stakeholders are aware
of exactly what it is that we'redoing, and you comply with the
internal policies of thatorganization, which differ from
one to another.
And of course, there aredifferences between states for a
state-regulated credit unionversus a national credit union.
(08:58):
And the second aspect, I believethe From our perspective, the
turmoil in the market and themortgage lock-in effect that
occurred because of the interestrate cycle creates a lot of
turmoil.
And that merged with otherchallenges from a regulatory
(09:23):
point of view, with theadministration making a lot of
changes in the agencies.
That, in many aspects, deterinstitutions to make decisions
that are avant-garde, even ifthey're, of course, positive.
They sometimes prefer to waitand see and see that the waters
(09:44):
are a bit calmer.
I have to say that those who aremoving forward will reap the
benefits because there's so muchto do, and those who will will
take a bigger share of thegrowth and market that our
program offers them.
SPEAKER_02 (10:03):
Right now, and you just touched on it, we're in a
period of something bordering onparalysis since nobody, unless
you have a really good workingcrystal ball, has any idea
what's happening in the nextday, no less than next month.
It's almost become theater ofthe absurd.
(10:25):
But When you go into a creditunion, what itch are you
scratching?
What says to them, okay, we wantto talk to you?
SPEAKER_00 (10:38):
I believe it's two things.
First, the fact that we'retelling them something that they
don't know about their ownbusiness, not in the US, but
that the problem that iscurrently compressing their
business is actually solvedelsewhere.
And they are very muchinterested and curious to hear
(10:59):
more about that.
So they're interested aboutglobal solutions and why the
mortgage lock-in effect is infact an American problem.
SPEAKER_02 (11:08):
And- I agree with you there.
At one point, I was looking atpossibly buying property in
Ireland.
And if you went to the Irishbanks and said, geez, I want a
30-year fixed rate mortgage.
A, they wouldn't know what youwere talking about.
B, when they began to understandit, they would just laugh at you
and kick you out the door.
Yeah, the product doesn't exist.
SPEAKER_00 (11:28):
Yeah, yeah.
Different mortgage marketsbehave very differently, and you
have different retail mortgageproducts in different mortgage
markets.
But even markets with 30-yearfixed-rate mortgages do not have
the mortgage lock-in effect thatthe U.S.
has because the system worksdifferently, and we can talk
about that.
SPEAKER_02 (11:47):
Yeah, yeah.
Tell me how that system worksdifferently.
SPEAKER_00 (11:50):
So for example, in Denmark, the 30-year fixed rate
mortgage is also the mostpopular retail product, but they
don't have a mortgage lockingproblem.
So one of the key differences iswhen a Danish mortgage is
originated, it is covered by asingle bond, unlike the US.
So one mortgage connected to asingle bond, which is then sold
(12:13):
and traded in the open market.
And the
SPEAKER_02 (12:16):
Danish- So it's kind of securitized instantly.
So
SPEAKER_00 (12:19):
it is not even securitized, if you think about
it.
But it's just a bond.
Right.
You don't know.
It's
SPEAKER_02 (12:27):
right.
It's standing there on its own.
Exactly.
That's a big difference.
Yes.
SPEAKER_00 (12:31):
Exactly.
And a Danish borrower can payoff their loan in one of two
ways.
The first is to prepay theoutstanding principal.
So just like in the US.
And the second is to buy thebond.
So a Danish borrower always hasthe option to buy their bond in
(12:54):
the open market.
Does the bond price
SPEAKER_02 (12:57):
float in
SPEAKER_00 (12:57):
the open market?
Exactly.
Oh, that's interesting.
SPEAKER_02 (13:01):
So you can look, if your bond dips, you can pounce
on it.
SPEAKER_00 (13:05):
That's exactly what happened.
So in 2022, when rates spiked inDenmark, prepayment rates
tripled 30%.
That's exactly what happened.
They paid 80 cents on the dollarwhen they bought their own
bonds.
And that's the reason why theydon't have the lock-in, because
the lenders remained active andliquid, and people moved and
(13:27):
relocated and refinanced, andthe market continued to work.
So the 30-year fixed ratemortgage creates the stability,
but in the U.S., there is noflexibility.
And in Denmark, you can have thebest of both worlds, in fact.
And in many aspects, that's whatTakara is doing.
So we are...
(13:48):
We took that feature, we createda product, and we adapted it to
the US market, and we areproviding that solution to
credit unions so they can offertheir members to pay off their
loan with a significant discountwithout the credit union
requiring to write any kind ofloss.
In fact, they're making revenue.
SPEAKER_02 (14:08):
Now, if I'm a credit union executive, I'm interested,
but I have a concern.
My concern would be, how thehell do I explain this to my
members?
Yeah, how do I get them tounderstand this?
You know, you come out of thecradle and you understand
(14:28):
30-year fixed rate mortgages.
I mean, that's pretty simple tounderstand.
Now I got to explain this thingand there's a bond involved and
geez, okay.
How do I do this?
SPEAKER_00 (14:40):
So if you are talking about explaining this to
a member.
SPEAKER_02 (14:44):
Yeah, that's, yeah, yeah.
SPEAKER_00 (14:47):
A lot
SPEAKER_02 (14:49):
of credit union initiatives die because they do
a terrible job of explaining thebenefits for the member to the
member.
They'll understand.
I've talked to a lot of FinTechguys, great ideas, great ideas,
but they're marketed horribly.
SPEAKER_00 (15:06):
There's a saying in the startup world that the
cemeteries are filled with greatideas.
SPEAKER_02 (15:12):
Yeah, and they honestly are great ideas.
They've just been marketedhorribly in many cases.
SPEAKER_00 (15:19):
Yeah, I couldn't agree more.
A lot of the time, a great ideais good, but if you don't have a
solid go-to-market strategy, itwould be hard to make it a
success.
There's two
SPEAKER_02 (15:32):
pieces that go to market for the fintech industry.
There's the immediate piecewhere you have to figure out how
you take this to market tobuyers of your products, i.e.
credit units.
But then there's the secondpiece is how do credit unions
sell this to their members,which is a whole different
problem.
I
SPEAKER_00 (15:52):
completely agree.
And I think it's true with everynew consumer-facing product,
especially so in consumerfinance.
From a formality point of view,what the member is offered is a
payoff discount.
So you owe a certain amount andnow your lender offers you to be
(16:16):
released from that mortgage bypaying 85 or 80 cents on the
dollar.
That's it.
And there are no fine print orsmall letters.
That is it.
It is in fact legally releasedfrom the liability and the lien
is released from the property.
Now, that's from a formalitypoint of view.
Now, granted, when you start offwith an offer that was never
(16:40):
been made before, people want toknow more and sometimes it
sounds a little bit too good tobe true.
And what we provide to thecredit union and to the loan
officers, other than scripts andbrochures and a landing page
with consumer facinginformation, what we're saying
is that there will be a learningcurve.
(17:02):
There are a lot of things thatTakara is not a consumer-facing
company, that we don't know whatwould be the optimal way to
explain this.
Because perhaps differentmembers and different segments
and different target audienceswould need to hear this a little
bit differently.
And whether you're a real estateinvestor or a family who is
(17:23):
moving, perhaps the explanationis a little bit different.
So being a startup and afinting, and that's part of the
challenge and part of theadventure, is finding that out,
as part of the journey.
But what's nice about what it isthat we're doing is in both of
our clients and in everyconversation that we have with a
credit union, the people whohear about this program, there
(17:50):
is always employees who want totake part of this.
So in fact, the firsttransactions are employees,
friends, and family.
So we are learning a lot fromthat conversation.
from that audience as well.
And of course, the credit unionthemselves learn a lot about
what's the best way tocommunicate this externally.
SPEAKER_02 (18:06):
You talked to companies, fintechs involved in
the mortgage business and tocredit unions.
Why aren't mortgages beingoriginated today?
People come in, if they come inat all, and they say, geez, I
don't want to pay 6%.
That's too high.
I'm going to wait for it to comedown.
(18:28):
And they've been waiting now fora year or two, three.
And if they ask me, I say, thatcould be a really long wait.
I don't know.
SPEAKER_00 (18:42):
I completely agree.
I completely agree.
I think you have homebuyerswho...
who 6% and 7% is just too muchfor them?
SPEAKER_02 (18:56):
Hey, I had a mortgage.
I thought it was a greatmortgage like 20-some odd years,
25 years ago.
It was 6.75%.
I thought that was great.
I didn't complain for a minute.
By the way...
That was 30-year fixed rates.
Yeah.
SPEAKER_00 (19:10):
There were people who took 16% rate and thought it
was a great deal at the time inthe 70s and 80s.
So it's...
I mean...
the memory is very, in manyaspects, is short-term.
And people remember theultra-low rates of COVID.
And that's why a jump from 2.5to 7 is much more painful than
(19:33):
the jump from 10 to 15, forexample.
SPEAKER_02 (19:36):
It's
SPEAKER_00 (19:36):
much more
SPEAKER_02 (19:36):
painful.
Now, something that took hold inthe United States, I've never
done it, but I certainly havehad friends who did it
compulsively, is refinance.
So the interest rate would tickdown like half a point.
And a lot of places wereoffering like$100 refinancing or
free refinancing.
(19:57):
I mean, there are essentially nofees.
And so they would refinanceliterally every year, sometimes
twice in a year.
To me, this was just crazybehavior.
But why not do that instead ofdoing what you're talking about?
SPEAKER_00 (20:13):
Well, if you want to refinance today, it depends on
the current rate that you have.
If you took a 7% loan and youcan refinance to a 6% loan,
perhaps you should.
You should run the numbers.
But if you took a 3% loan...
SPEAKER_02 (20:24):
Well, that would be stupid.
SPEAKER_00 (20:27):
But that's the point.
So refinance in its core is away for borrowers to benefit
from declining rates.
But...
But the other way around doesn'twork.
If you have a low rate and ratesare rising, there is no
(20:48):
mechanism for borrowers to tapinto the trapped gain in their
low fixed rate mortgage, right?
Freddie Mac just released acouple of months ago a research
that showed that on average, ontheir loans, there's over$50,000
of trapped gain.
And there is no pressure valvesin the US mortgage market.
(21:08):
That's one of the reasons Onlythe US has this extremity of the
mortgage lock-in program.
And the majority of people whorefinance traditionally are
people who are going from highrates to low rates.
And those are just the minorityof mortgage holders today
because you have close to 60% ofmortgage borrowers with rates
(21:32):
below four.
So they will never refinance andthey will never move unless they
really have to.
And like you said,
SPEAKER_02 (21:40):
that is a huge problem in the real estate
market now where people are inhouses they don't really want to
be in anymore.
But it's a mortgage and theysay, I ain't moving.
I ain't moving.
Can't do it.
I'm not going to take a 6% loan.
SPEAKER_00 (21:56):
They are stuck in their forever home, whether they
like it or not.
It's like living in rentcontrol.
SPEAKER_02 (22:01):
Yes, it is.
That's a good analogy.
I know people in New York whohate their apartments, but you'd
have to shoot them.
to move them out of it.
SPEAKER_00 (22:08):
Precisely, precisely.
And the point, and I think thisis sometimes is missed, the
ripple effect of this decisionwhen it is repeated millions of
times by millions of families isextensive for, that's why we
have supply problems in realestate.
(22:30):
That's why home buyers can't,can't find homes.
That's why rent is gettinghigher and higher because people
are not going to move.
And I'm not even talking aboutthe moving industry or the
renovation industry.
The ripple effect is justextensive.
(22:52):
And of course, if you look at itfrom credit union's point of
view, it's no wonder we seeconsolidation in the market
because what else can they do?
There's no growth when yourmarket is shrinking 200,000
mortgages per quarter, that'swhat's happening in the last two
years, right?
The mortgage lock-in effect hasprevented 60% of home sales in
(23:14):
the US.
So that's 200,000 transactionsper quarter.
No wonder they have toconsolidate.
There's no other way to creategrowth and to generate business.
SPEAKER_02 (23:28):
So in your testing, when you...
seek to explain this to aconsumer?
How does that go?
SPEAKER_00 (23:36):
Well, the starting point is easy.
You want to pay off with adiscount?
Here's 15% discount.
So you owe$500,000 outstandingprincipal.
If you want to get out of thatmortgage, you need to come up
with$425,000.
And that's it.
You're completely released.
Where do they get that money?
Usually they sell the propertyand they are$75,000 better off.
(24:00):
But then, a lot of the membersare asking, okay, this sounds a
bit too good to be true.
Where does that come from?
Who is taking the hit?
Who is taking the loss?
And that's where, and that'sexactly directly relates to your
question.
Then you start to explain that,okay, there's no loss in fact,
(24:23):
and there's no fine print andyou're not reliable to anything.
And there's a legal release fromthe obligation.
And if they want to learn moreabout the process, we actually
provide them with anyinformation that they want.
We try to be as proactive andtransparent with the information
that we provide.
But the feedback in terms ofadoption is off the roof.
(24:46):
Like we talked about Denmark,when rates went up in 2022, when
repayment rates tripled from 10%to 30%, in the U.S., At scale,
this will be even higher becauseyou have demand that wasn't
(25:08):
executed.
So you have people who wanted tomove and didn't.
So you have accumulated demandthat people that are sitting at
the gate, if you'd like, whowould jump on this.
But
SPEAKER_02 (25:21):
it goes back to the COVID era.
I mean, that's when people stopshopping for homes.
Do you really want to go intothat open house with strangers
and look at this house?
You could die, literally.
That was the thought.
So, I mean, we've seen aslowdown in this market for some
years.
It's not just the interest ratestoday.
SPEAKER_00 (25:41):
No, absolutely.
So it's not just one thing.
You're absolutely right.
There's the asset prices aswell.
And, of course, other factors,too.
COVID being one of them, likeyou mentioned, and the ripple
effect of that.
So the remote work has asignificant portion of that as
well.
(26:02):
But in fact, the FHFA did acomprehensive research about
the...
They quantified the rateincrease and its effects on real
estate.
And as I mentioned, 60% of homesales were prevented,
isolated...
reason is the mortgage lock-inderived by the changing rates.
(26:25):
And granted that people areworking from remote, but that's
also changing over time now.
Many of the places that were100% remote a few years ago are
now back to 100% in office.
And yeah, and people who inCOVID got their 2.5% 30-year
(26:49):
fixed-rate mortgage, had kids,and those kids now need
bedrooms.
And that's a challenge.
That's a challenge for many,many families.
You have older couples thattheir kids left for college.
They can't downsize and savecapital.
The numbers are just staggeringwhen you look at the implication
(27:13):
of this issue.
SPEAKER_02 (27:14):
Yeah, another issue here is...
We did a kitchen renovation ayear or so ago.
And it was delayed for a year ortwo because of COVID.
But the price also went up byabout 25%.
Yeah, everything.
It wasn't the labor.
It was everything else.
(27:34):
The refrigerator, the stove, youknow, all that.
Everything was more expensive.
SPEAKER_00 (27:39):
Yeah, inflation is...
It's really painful, absolutely.
SPEAKER_02 (27:46):
And it's going to go more expensive, assuming these
tariffs stick for any length oftime.
Because so much of that stuffcomes from abroad.
Yeah,
SPEAKER_00 (27:57):
I think it remains to be seen what will be the
effects of the decisions made bythe administration.
Because it's not just aunilateral decision.
Well, it is a unilateraldecision, but then you have the
counterpart or counterparts whoneed to react to that and their
reaction will affect what theresult would look like here in
(28:19):
the US.
So I think the jury is still outand it's not really clear.
And that's part of the problem.
Like you mentioned yourself, Ithink it's, and I completely
agree, the uncertainty in themarkets is probably the worst
thing and markets likestability.
And that is what is currentlydeprived from them.
(28:40):
And that's true with thetariffs.
It's true with actions done onthe regulatory front, the
taxation front in the creditunion space.
And we see that.
And I think that what drives alot of the sit and wait
approach, the consolidation, theconsolidation that we see in the
(29:00):
market.
Absolutely.
SPEAKER_02 (29:02):
Well, you know this better than I do, but private
equity, guys.
sitting there on piles ofmillions of dollars.
As long as they think they knowwhat's going to happen in the
next year or two, they're verycomfortable.
They don't much care what'sgoing to happen as long as they
know what's going to happen.
If you say, hey, dude, you don'tknow anything.
(29:24):
Well, I'm not putting any moneyin anything.
No way, no how, can't do it.
Too much risk.
SPEAKER_00 (29:31):
Absolutely.
And you see capital markets,equity markets, and bond markets
behave differently in ways thatwe haven't seen for many, many
years and sometimes for thefirst time.
So,
SPEAKER_02 (29:43):
okay, I'm a mortgage guy at a credit union.
I have your product.
I'm talking to a consumer.
Consumer says, geez, I just, I'mnot comfortable with this 6%
mortgage.
I say, okay, I've got this otherproduct here.
How do I explain it to theperson?
SPEAKER_00 (30:03):
So your member has a 3%.
$500,000 outstanding principalloan.
And they want to move, but theycan't afford the 6% that is
waiting for them on the otherside.
What our program enables you asa credit union to do is to offer
your members a 15% discount onthat outstanding principal.
(30:25):
So instead of paying off500,000, that member is offered
to pay$425,000.
And you got my attention there.
Exactly.
And the members usually.
SPEAKER_02 (30:38):
Yeah.
That's what I mean.
I'm pretending to be the member.
SPEAKER_00 (30:42):
Yeah.
So as a member, you sell yourproperty.
And instead of repaying$500, yourepay$425.
So your gain net is$75,000,which goes to the home equity
and goes to...
You can use it however you seefit.
You can take a smaller new loan.
You can buy a bigger home.
(31:03):
You can do whatever you want.
It's yours.
So the offer to them, this is infact why our program solves the
mortgage lock-in effect becausewe are in many aspects
liquidating or extracting thetrapped gain in those ultra low
fixed rate mortgages.
And we split them between themember and part of it also to
(31:26):
Takara as our business model, aswell as the lender.
Now, importantly, and that's thesecret sauce, which we won't go
too much into detail, we'redoing that in a way that does
not cause the credit union towrite any loss.
Again, going back, this is aportfolio loan, so it sits on
your balance sheet.
So we allow you to offer yourmember a significant discount
(31:50):
without writing a loss.
It sounds like black magic, butthat's what we're doing.
SPEAKER_02 (31:55):
You got to explain that.
That does sound like a carnivaltrick.
SPEAKER_00 (32:01):
Well, I can say just in high level, but the basic
concept is in many, it relatesto what I described about what
happens in Denmark.
So that mortgage, there's noquestion that it is not worth
$500,000.
So if the bank, if the creditunion had to sell that loan in
the open market, they would get80 cents on the dollar and write
(32:24):
a loss.
So we are taking advantage ofthis spread, which we didn't
create.
The market created it.
And we are making sure that theborrower gets the majority of
that spread while keeping thecredit union whole on the loan.
(32:45):
And we are, in fact, utilizing aprocess which is well-defined
and heavily executed in realestate called Deficience.
I'm not sure if it's not very,it's relatively niche in real
estate, but it is$10 billionmarket here in the US, which
allows the replacement ofcollateral without the
(33:07):
impairment or modification ofthe loan on the balance sheet
side.
And the adaptation part of theDanish concept to the American
market is in fact based on theexisting rails, the operational
rails, as well as accounting,taxation, legal of this process
(33:28):
that I just mentioned.
SPEAKER_02 (33:31):
The credit unions that are going to be your
pilots, where are they located?
SPEAKER_00 (33:36):
So we are in fact talking to local credit unions,
so operating in one state, butalso national.
One
SPEAKER_02 (33:46):
has a national charter.
Okay.
SPEAKER_00 (33:49):
Yeah.
So our sweet spot are creditunions who have at least 10% of
their total assets as portfoliolong-term residential mortgages.
The reason why that's our sweetspot is because they feel the
pain.
And in order for them to havethe motivation to pursue this at
(34:14):
a timely manner, we prefer totalk to those institutions
because we solve a biggerproblem for them relatively.
And again, our target audience,our institution with a billion
or plus total assets with atleast 10% of long-term one to
(34:37):
four residential mortgages,traditionally, they have
somewhere around 3% average rateon those loans.
So the average discount that isoffered to their members is
around 15%.
SPEAKER_02 (34:50):
What size mortgages are you particularly interested
in?
Now, there's parts of thecountry where a typical home
price is$200,000, and there'sparts like Manhattan or San
Francisco where a million willbuy you a studio apartment.
So...
And if you want somethingbigger, you need more millions.
(35:12):
What kind of size are youinterested in?
SPEAKER_00 (35:16):
So we actually don't mind.
We don't like the millions andmillions of dollars of
mortgages, but that's justbecause we're relatively early
in our journey.
We won't have any problems to dothat at scale.
But as you mentioned earlier,the majority of mortgages are
(35:38):
securitized.
Those that are not and remain onthe balance sheet are, in many
cases, jumbo loans.
So they are larger than thenational average.
So what we find is that if theaverage U.S.
mortgage is around$450,000,portfolio loans are
traditionally a bit larger.
(35:58):
But as you mentioned, when we goto certain credit unions,
sometimes the average is 250,and that's fine.
SPEAKER_02 (36:08):
No, I mean, look, the reason I'm talking to you is
because clearly this marketright now is suffering from
severe inertia.
No one's doing anything.
Credit unions are seriouslyunhappy.
Their members are seriouslyunhappy.
You can't sell your home becauseno one wants to get the mortgage
(36:31):
to pay for the home.
So the whole system is stalledright now.
And it takes some innovativethinking to do this.
And as I discovered in Europe,the idea of a 30-year fixed rate
mortgage is not common.
It's like, huh?
(36:51):
It's an absurd idea, really, ifyou think about it.
Because we've had so muchturmoil just over the most
recent 30 years.
SPEAKER_00 (37:02):
Well, I think it's important to look at the time
axis.
Originally, the 30-year fixedrate mortgage was conceived to
solve a problem, to generatestability after the Great
Depression and to solve thefive-year bullet bankruptcies in
the 20s and early 30s.
(37:24):
And it did just that, in fact.
It was never intended to becomethe mammoth that it is today.
But from an evolutionary pointof view, it created stability,
but in an extreme manner, butalso surrounded by a rigid
system.
So the system is not flexibleand it doesn't have any pressure
(37:45):
valves in unique marketconditions.
And I say unique because thecurrent market conditions that
we see did not happen before.
So we never had here in the US asharp increase in interest rate
from very low to what the long,it's not far from the long-term
average, but it's 500 basispoint increase.
(38:07):
So that never happened before.
And so, because the system wasnot built with pressure valves,
it is completely frozen.
And like you said, it's stalled.
And the real estate problem isin fact a finance problem.
Like you said, people don't wantto move because they don't want
to take the mortgage thatfinances that move.
(38:29):
So in our perspective, the wayto solve many of the real estate
problems that we see today inthe US is in fact from a finance
point of view.
And again, going back to yourvery first question, that is
where the institutions need tolook at innovation and on new
(38:50):
ways and new perspectives tosolve those design problems in a
manner that was never discussed.
And we think that we bringproven solutions from abroad,
which help people imagine whatthe bottom line of the result
will be.
(39:10):
So just imagine if your memberscould pay off their loan at
mark-to-market at 15% discount.
Imagine that.
And you can imagine that becauseit is done elsewhere.
Is
SPEAKER_02 (39:23):
there any potential downsides for the member?
Yeah, I remember when adjustablerate mortgages came out, the
original packages did not capthe amount that it could go up
by.
So people were freaking out.
It was like, I'm going to makeup numbers.
(39:44):
They had like a 4% arm.
And then the next year it wentto 6.5%.
And the monthly outlay was wayup.
So the institution said, fine,we're going to put a cap on the
maximum amount of increase overa year.
So that kind of solved thatproblem.
Are there any potential problemswith your product?
SPEAKER_00 (40:05):
So the power is once they pay with the discount, they
are completely released.
They get a legal notificationfrom the lender.
From the credit union, you arereleased from the liability and
the lien on your property isreleased.
That's it.
Period.
No small print, no long termsand conditions.
That's it.
And what's important is for themember to understand the
(40:27):
transaction.
And when a member has a 3% loanand they're getting a discount
to pay it off and they'removing, their new loan will be
at a higher rate.
It might be in a smaller amountrelative to the alternative
because they use the discount totake a smaller loan, but the
rate will still be market rate.
(40:49):
So there's no magic here.
There's no rabbit in a hat.
It's economics.
And members will only transactif it makes sense to them from
an economical point of view.
Now, The point is that many,many members and many homeowners
(41:11):
and families in the UnitedStates would have moved if they
could afford it.
And that's what we allow them todo.
There are no strings attachedand there's no residual risk for
the member whatsoever in no way,shape or form.
This is extremely important andit's black and white.
SPEAKER_02 (41:32):
Interesting.
If I were going to, yes, I'd saythe 30-year fixed rate mortgage
actually took really took rootin the United States shortly
after World War II ended, when alot of veterans were returning.
They were in their mid-20s,late-20s.
And the government said, hey,great, we have this GI mortgage.
Zero down, zero down.
(41:53):
And you got 30 years to pay itoff.
I think that thing just wentskyrocketing.
It's everybody wanted, every GIreturning wanted to start a
family, blah, blah, blah.
So they were all buying thesenew...
And it was great for theeconomy.
Home building just went ondrugs.
It was on cocaine for like five,10 years, building houses to
(42:15):
accommodate these people.
It was quite something.
But did we still need thatstimulus 20 years later?
I don't think so.
It really served a purpose backin 1946, 1948.
But it's...
Yeah, I
SPEAKER_00 (42:34):
can...
I completely relate.
And I think what is sometimesmissed in the discussion about
the US mortgage industry is thatit's the biggest in the world by
far, but it is an anomaly from aproduct point of view.
So in the US, the capital marketside is extremely sophisticated
(42:57):
and liquid and dynamic, but theretail product is in fact quite
benign and hasn't changedsignificantly for many decades.
And if you look at othermortgage markets, that's rarely
the case.
Usually it's more balanced.
So the capital market side isless sophisticated and liquid,
(43:18):
but you have more flexibilityand variety on the retail side.
And that variety on the retailside is what provides, in many
cases, the cushion and thepressure valves that are
required in extreme marketconditions.
And that is what is lacking inthe US.
By the way, I myself come fromIsrael, and the Israeli mortgage
(43:40):
product is considered one of themost sophisticated retail
product in the world.
And on the other hand, thecapital market side in Israel is
benign.
It is, in fact, it was not untilrecently illegal to securitize
mortgages in Israel.
So all the loans are portfolioloans, in fact, in Israel.
So in many aspects, Israel isthe complete opposite.
(44:03):
of the U.S.
with a sophisticated,consumer-friendly retail
product, but a benign capitalmarket structure.
And in the U.S., it's thecomplete opposite.
So I find it very intuitive thatmortgage retail product
innovation comes from Israel orgenerally from outside the U.S.
(44:24):
into the U.S.
SPEAKER_02 (44:27):
Yeah.
No, I'm glad we're doing thisbecause I think what we need is
some innovative, fresh thinkingabout mortgages rather than
sitting here complaining thatrates are too high, people
aren't buying, people aren'tselling.
Boy, this is cruddy.
Well, it is cruddy, but whatyou're supposed to do is think
of a solution to
SPEAKER_00 (44:48):
that.
Well, you know what they say, tosit and wait is not a strategy.
SPEAKER_02 (44:52):
Yeah, and unfortunately, I think that's
what a lot of financialinstitutions are doing with
mortgage money right now.
And as they're doing that, theFinTechs continue to move
aggressively.
So they're actually doing somethinking.
And the market share of creditunions in the home mortgage
market continues to shrink,which is not a good thing for
(45:14):
credit unions.
But anyway, this has been a goodcall.
This will go up in probablyabout a month and a half.
I thank you.
I thank you for persisting andgetting in touch.
It's because, yeah, wedefinitely need some fresh
thinking about mortgages.
And so I thank you very much foryour time.
It's been fun.
(45:34):
Take care.
SPEAKER_00 (45:34):
Thank you so much, Robert, for your time, for
digging in and for bringing thisinto the light.
SPEAKER_02 (45:43):
As I say, we need some fresh thinking.
Absolutely.
And that's what you're doinghere.
So thank you.
Take care and good luck to youtoo.
SPEAKER_00 (45:51):
Thank you so much, Robert.
Cheers.
SPEAKER_02 (45:53):
Bye.
Before we go, think hard abouthow you can help support this
podcast so we can do moreinterviews with more thoughtful
leaders in the credit unionworld.
What we're trying to figure outhere in these podcasts is what's
next for credit unions.
What can they do to really,really, really make a difference
(46:14):
in the financial scene?
Can't all be megabanks, can it?
It's my hope it won't all bemegabanks.
It'll always be a place forcredit unions.
That's what we're discussinghere.
So figure out how you can help.
Get in touch with me.
This is rjmcgarvey at gmail.com.
Robert McGarvey again.
That's rjmcgarvey at gmail.com.
(46:35):
Get in touch.
We'll figure out a way that youcan help.
We need your support.
We want your support.
We thank you for your support.
The CU2.0 Podcast.
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Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
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If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.