Let's Talk Loans - Vol. 111

A special, SFVegas (the old ABS West) edition of Let's Talk Loans. This will be a very different chapter of LTL talking about what took place and some of the boots on the ground discussions as seen through the eyes of the RJ whole loan desk. I hope you enjoy the quick, off the cuff, write up.

This is more of a stream of consciousness, as the conference has evolved over the course of the week. A few high-level items. Every year thousands of investment professionals flock to Vegas. SFIG formal communications reported that there were over 10,000 registered attendees this year. I believe that is a record for attendance and an increase from last year’s roughly 8,800 attendees. It's important to note that those are just the reported numbers. There are so many non-registered guests resulting in a conference outside the conference. Meeting rooms, suites, dinners, parties, roof tops, chandelier bars - the parade of clients, investors, broker dealers, bankers, rating agencies is non-stop from Sunday - Wednesday. Admittedly, the hard work is often done on Sunday night and throughout that first full day of meetings on Monday. As Tuesday, rolls around, the dreaded 8am meeting is often canceled after a hard night of "client entertainment". Heaven forbid a meeting on Wednesday. I would also say to my regular readers; this is a securitization conference. Certainly there are some regional banks, a handful of credit unions and our more typical client in attendance. However, this is predominately "private credit" (man that word got tossed around a lot this week), hedge funds, money managers, insurance companies, specialty finance companies, tier 1 trading desks, fintechs, aggregators, REITs, etc. This is a different audience.

I've attended this conference for at least 11 years now. My notes date back to 2015, but I feel I was here prior to that as we made our way out of the great financial crisis. Each year I always search for a theme. Over the course of 32 meetings, two dinners, a speaking panel - you start to feel a common talk track among buyers and sellers. Two words come to mind for 2025 and that is "Thirst" and "Forward Flow". There is an absolute avalanche of private credit here that has money to spend and few assets to buy. Spreads have compressed mightily in the last several months and that is all due to a constriction of supply. Higher rates are taking a bite out of origination volumes across all assets, there are fewer willing sellers in the market and buyers are out of luck fighting over fewer loans. Buyer after buyer started conversations with the hope of seeing deals with size, that they could lock up for the remainder of 2025, in either a bulk trade or a forward flow transaction. Forward flow meaning the loans are not yet originated but the buyer and seller agree to a spread / price / yield and a credit box - over a defined period of time. The challenge here is twofold. First, as a seller, when we have this kind of imbalance in the market, it's often in a seller’s best interest to put a pool out for bid, receive multiple bids, use those multiple bids to drive up price and get favorable terms. This is what we call a strong "seller’s market". Second, as a buyer, you want to do whatever you can to drive out that competition. A forward flow deal allows you to do that. Lock up the seller for 6 months, or the next 100mm in loans, so that you can control the flow of originations. The challenge in a seller’s market is that those spreads compress, you've got to work hard to be the prettiest girl at the bar and keep the seller focused on your discussions. Perhaps you offer a longer commitment than you would typically consider, more favorable funding terms but you have the ability to lock in a margin. Your hope here is that credit or spreads don't gap out on you.

Speaking to specific product types. Mortgage in particular was very favorably received, if not slightly concerned that 6.50%+ rates will cripple volumes. I didn’t sense a lot of optimism for falling rates or future cuts. Prime jumbo, non QM, seasoned or new production were all hot topics - if you could find the product. There is continued encouraging discussions on HELOCs, and unsecured home improvement loans that are also orbiting the mortgage market. They story of trapped equity in many homes remains the prime theme in housing. 3% 30 year fixed rate "forever loans" are attractive to say an insurance company if you can coax them out of a seller but are also the problem in loan locked borrowers. We are seeing increased supply and demand for HELOCs, closed seconds and home improvement and this is an expanding, bullish market. One corner that orbits the housing market is solar lending. That might be the one product that is still struggling. Credit has been clean, but prepayments are non-existent and higher coupons are taking away the value proposition to the consumer. It's not a bad asset; it just hasn't found its footing in higher for longer. Auto, RV, Marine and consumer lending was also regularly discussed. Many investors liked the short, reliable cash flows associated with the loans and at these higher coupons found the yields more attractive. Interestingly, several private credit buyers admitted to working to unlock new pools of capital with lower yield thresholds to reach down into the depository space with lower coupons and higher FICO scores. Historically we haven't seen these players look for this short and clean of an asset and they have left the market to the depository originators. It will be interesting to revisit that discussion next year and see if it took hold. CRE remained a tale of two worlds. For the right property, the right sponsor and a new origination deal we have found an incredibly vibrant and competitive market. Recently having marketed a Texas property we received over 50 inbound inquires and roughly 10 serious term sheets. As they say in real estate, "location, location, location". We certainly see plenty of private credit trying to pick up sub performing office product that dominates the headlines and deep discounts, but I would argue the new origination space is where the action is truly taking place. Unsecured and fintech lending was the subject of many a conversation. The 2022 underperformance of that product has left a bad taste in many buyer’s mouth and those originators are fighting to win back that buyer’s business. They've tightened in underwriting guidelines and new production appears to be performing better than those robust COVID vintages but that doesn't mean buyers are ready to forgive. Those who stayed up in FICO typically did better than those that went to the bottom end of the spectrum. Last year there was a flurry of discussions on selling those underperforming 2022 loans at fairly deep discounts but the bid / ask was too wide to see meaningful transactions. Now that most of that paper has seasoned another year, typically having just a 2-3 year average life, there's just not enough PAR balance left to liquidate the loan. Sellers are choosing to ride it out mostly unless they are just done dealing with it and want to clean the deck.

One topic I found of interest was an absolute disregard to credit. We heard increasing concern last year that credit might break but not even a whisper of that discussion in 2025. I do find that somewhat concerning as there are a few flashing yellow warnings in the market. It was all about finding product.

There were side discussions as to what deregulation might look like. Most were excited about the idea but were still curious to see how it materialized. Further, and to a lesser degree, some concerns as to tariffs and how that might impact the economy.

A shoutout to my fellow panelists during our presentation on Tuesday. Thank you to Concord Servicing , Fitch Ratings , Carmel Solutions , ATLAS SP Partners - Eric Johnson , Patrick Duggan , Dhruv Vakharia and Ian Rasmussen for a great discussion. Always great to get in front of a crowd and share breadth of knowledge on a topic.

I hope you enjoyed this different take on Let’s Talk Loans. M25-733257