As CEO of one of the newest Mortgage Investment Corporations (MICs) on the block, Nick Kyprianou is looking to carve a niche in what’s becoming a crowded market for MICs.
The former CEO of Equity Financial Trust and President of Home Trust has an edge, however. He’s got experience that few upstart MIC managers have. Nick plans to leverage that and build RiverRock MIC into a go-to alternative lender in the mortgage broker channel.
We spoke with Nick to hear directly from the source how RiverRock is different. He shared his in-depth take on the MIC industry, underwriting best practices and more.
CMT: So, Nick, have you done a deal yet?
Nick: Yes, we’ve had deals come in and we’ve got a few on the go. What’s been interesting, and I kind of never thought about this, is that other MICs have contacted us, …other MICs that are owned by mortgage brokers… and said, “Look, you could help us when we’re short of cash…We can place our clients with you and we don’t have to worry about losing them.”
CMT: So you’re like a MIC for MICs?
Nick: That’s one part of the business. It just seemed to develop.
CMT: Interesting. So if I have a MIC and I’m in that position where I have a client but I don’t have the capital, and I want to send them to you, how do I make money in that case?
Nick: We pay a 100-basis-points fee. I pay you a finder’s fee for sending me the deal as a broker. Then I keep you in the loop the entire time that client is on our books.
CMT: Why did you end up starting a MIC as opposed to joining a traditional lender or just starting a new lender?
Nick: To start up a new regulated trust company in this regulatory environment is going to take a few years. It’s just something I wasn’t interested in doing again. I did it once with Equity (Financial Trust) where I got the CDIC approval and the deposit-taking licence. I did it once and I don’t think I want to do it again. I did it in 11 months. I don’t think anybody’s ever done it that fast. But, I’m telling you, we were working hard.
CMT: What does a MIC let you do that a traditional trust company or lender could not do?
Nick: I don’t have the regulatory constraint. Whatever I put out in my offering memorandum, I can do. For example, if I want to be very light on documentation and I want to do bad credit and I want to take self-declared letters with no supporting documentation, those types of things. If it’s spelled out in my offering memorandum, I can do it. In a regulated environment, it doesn’t matter whether it’s spelled out in your policies or not. The regulators are not going to let you do it…especially now with B20 and B21 fully entrenched into the system. They’re tightening. They’re going the other way. That’s what I saw. The last 24 months I really saw the regulatory environment getting tighter. A lot of magnifying glasses [focused] on the residential business and a really big magnifying glass was on alternative lending business.
CMT: Speaking of RiverRock specifically, do you guys have any product niches?
Nick: For our niches, we go up to 80%, we look at poor credit, we look at self-declared people, we don’t have a minimum GDS/TDS, we don’t have a minimum Beacon score. As long as we like the real estate, we’ll make the deal work. We step into the deal when a Home Trust or an Equitable Bank says no. If they said no because of the real estate, we’re more than likely going to say no too. However, if they’ve said no because of a covenant issue, we’ll do the deal.
CMT: Does your operation serve someone that has outstanding credit, a solid job, but just doesn’t want to prove income?
Nick: Yeah. It could be that guy. It could be a guy who can’t prove his income and has bad credit. It could be all of those things. It could be a pure equity deal, but…the house must be marketable. That’s the key.
CMT: Have you ever looked at LTVs over 80% to see that, if you charge X-fee and X-rate, you can make them profitable?
Nick: When you do that type of lending, it’s all based on the curve of the market. If you’re at the bottom end of a rising value environment, that works. If you’re at a flat or downward trending real estate environment, the model doesn’t work.
CMT: You go up to 80%. Suppose the market plunged 20% in a year or two, what effect would that have on a MIC like RiverRock?
Nick: I don’t think it’s going to have a lot. We’re basically lending on highly marketable properties, number one. Number two, most of them, not all of them, but most of them are going to be owner occupied.
People become very resourceful when it’s their house. They have to live somewhere. They change their lifestyle, they get a second job, they take on a boarder, they get family members helping them, there’s all sorts of things they can do, get rid of a car.
The thing is, these 20% drops don’t happen overnight. It’s not like on Monday morning prices have dropped 20%. It’s really a gradual decline of the market. So as you’re seeing those shifts in the market, you’re changing your lending guidelines to accommodate for it. You start cutting back your loan-to-values and doing things of that nature. The key is paying attention to what’s going on in the marketplace and adjusting your lending to what’s going on.
CMT: Based on your capital availability and model and whatnot, how much could you originate under this MIC model?
Nick: We don’t want to talk about our numbers but we think we could accommodate the demand that’s put upon us.
CMT: So the fees that the borrowers pay, is there a standard fee?
Nick: We start at 2 points. It’s based on the risk profile of the borrowers.
CMT: What’s a typical spread for a MIC like yours…i.e., the average rate that the customer is paying minus what you have to pay the investor?
Nick: Generally, investors are getting anywhere from 5.5% to 9%. Rates that MICs are charging, that I’ve seen, are anywhere, on first mortgages, from 7% to 10%, 11%, not including fees.
CMT: It sounds like about a 1.5-point spread, roughly. Somewhere around there anyway.
Nick: Yes, a 1.5- to 2-point spread, not including fees.
CMT: So this rush for yield…where (investment) yields have gone down versus historical averages. I have to think that as more people get sick of those 3% dividend stock yields, that they’ll start looking at other alternatives, and MICs, as a good diversified (option).
Nick: The key, I think, is finding a diversified, well-managed MIC…There are tricks of the trade of how to manage a delinquent client. The way you manage that client makes all the difference between losing money or actually making money. This comes with a lot of experience…There are (many) MICs out there, but there are different levels of experience.
CMT: You have a proprietary underwriting model. For all the brokers out there who are curious about his kind of thing, what are one or two examples of what makes your underwriting unique?
Nick: I think it’s really understanding where you can push the edges on the real estate, where you can push a little on the loan-to-value and where you need to back off on the loan-to-value. That’s really the trick of this business.
CMT: You said push the edge on real estate and loan-to-value. Those are two different things, right?
Nick: Yes, it’s knowing when to do it and how to do it. Then the second part of that is on the collection side, knowing how to manage your collections. I always think that’s part and parcel. Whenever you’re underwriting a loan, one of the things that’s going through your mind is, “What’s my exit strategy?” because bad things happen to good people all the time. When that happens, how am I going to get out? What’s my plan? That’s part of the underwriting. People forget that when you’re underwriting the loan, part of the underwriting process is your exit strategy. You don’t just underwrite and put it on your books and it’s over. That’s just the beginning. That’s the easy part.
CMT: When you’re evaluating exit strategy, what types of questions are you asking?
Nick: I’m looking at it like, can this person get a second mortgage? Do they have enough equity to list this thing and sell it themselves? Is there enough equity for me to go in there and list it and sell it? Is there another lender that he can go to to pay me out? Do I know another lender that would pay me out? Because I’ve got lots of partnerships across the industry, I can phone people up and say, ‘I’ve got this loan on the books that’s non-performing, are you interested?’ and then phone up the client and say, ‘Look, I’ve got somebody that can help you out. Do you want to go talk to them? I’ve got a deep-…
Nick: It’s not a Rolodex anymore. I got a deep iPhone. When you’re dealing with some of the younger brokers they may not know what a Rolodex is.
I also think what’s interesting about the alternative space, because I’ve been doing it my whole career, is that when things do get tougher out there, all the institutions tighten up. So it actually creates more opportunities for the alternative players. When things start to get bad, everybody raises their bar.
CMT: Hopefully when they’re raising their bars, you’re keeping your bar in the same place?
Nick: I hope so. We’re all doing this to make money, help brokers make money, help us make money and help clients get houses.
CMT: The everyone-wins scenario.
Nick: I always say it’s a win, win, win situation. The broker’s happy, the client’s happy and we’re happy. If you’ve got three wins it’s a good deal.