In Your Best Interest: An ALM First Podcast

4. Trends in Depository Lending with Travis Goodman and Kevin Shaner

August 25, 2020 ALM First Season 1 Episode 4
In Your Best Interest: An ALM First Podcast
4. Trends in Depository Lending with Travis Goodman and Kevin Shaner
Show Notes Transcript

Travis Goodman is a Principal at ALM First Financial Advisors, joining the firm in 2003. Travis oversees the Advisory Services department, which is responsible for implementing actionable and effective ALM and investment strategies for client financial institutions. In addition to overseeing Advisory Services, he assists large, complex financial institutions in achieving optimal performance within policy and risk tolerances.

Kevin Shaner joined ALM First in 2018 and currently holds the position of Managing Director, Loan Transaction Network and is also responsible for the national banking channel. Kevin has over 20 years of commercial and corporate banking experience and has originated, underwritten, and managed billions of dollars in the primary and secondary loan markets, across a wide variety of loan types including: government contracting, C&I, CRE, SBA, construction, project finance, auto, and residential mortgages.


Travis Goodman:

Everybody wants to have that extra cover, the extra protection to know that when I do make a purchase, you know, I'm going to be covered.

Kevin Shaner:

I think the other trend that we're seeing is, you know, if you are one of those origination engines that has good production and you have the potential to sell, your motivation and your supply demand perspective on the market has probably changed somewhat.

Mike Ensweiler:

Welcome everyone to the fourth episode of In Your Best Interest: An ALM First Podcast. A show that will explore common depository challenges, give you an insider's view of the latest market trends and share stories and insights from industry leaders. I'm your host, Mike Ensweiler. This week's episode will focus on trends in depository lending and loan participations. 2020 has been an interesting year and depositories are seeing high levels of excess liquidity, record residential mortgage originations, and historically low and volatile rates. The hunt for yield, credit concerns, and diversification of the balance sheet is front and center on people's radar. Today, we are joined by Travis Goodman and Kevin Shaner. Travis is a principal at ALM First joining the firm in 2003. He oversees the Advisory Services department, as well as our Loan Transaction Network. Day-to-day he is responsible for implementing actionable and effective ALM and investment strategies for client financial institutions. In addition to overseeing Advisory Services, he assists in large complex financial institutions in achieving optimal performance within policy and risk tolerances. Kevin Shaner joined ALM First in 2018 and currently holds a position of Managing Director, Loan Transaction Network. Kevin has over 20 years of commercial and corporate banking experience and has originated underwritten and managed billions of dollars in the primary and secondary loan markets across a wide variety of loan types, including government contracting, CNI, CRE SBA construction, project finance, auto, and residential mortgages. And without further ado, welcome Travis and Kevin. Welcome to the podcast, Kevin and Travis. Very excited to have you here today. Before we get started, maybe you can share a little bit about your background. Kevin, I know you have a pretty extensive background in the credit side and in lending and Travis, you come more from a finance and an economic value perspective, but I think it'd be really interesting for the audience to understand your guys' background and a little bit more of who you are. So maybe Travis, tell us a little bit about yourself.

Travis Goodman:

Yeah, thanks Mike. I've been with ALM First for almost my entire career now. It's been really kind of a crazy time for me. It's been about 17 years, which seems really strange and unique to now kind of talk to my peers that in many cases I've worked here longer than a lot of them have. So it's kind of a strange scenario to be in, to work at one place for 17 years, but that's kind of how I grew up in the finance community. Kind of started as an analyst and worked my way through the company. And now I oversee a couple of groups here at ALM First, but I really enjoy working with clients. I really like the idea of helping solve problems that, you know, it's kind of what we do every day here is kind of, and it kind of leads into kind of why we're even having this conversation today, but, uh, it's a fun challenge every day to talk to clients and work through the individual things that they need to understand and solve so that they can become kind of a bigger, better organization going forward.

Mike Ensweiler:

You know, it's, it's kind of funny. The irony is you've been at ALM First almost as long as some of our entry level analysts now have been alive.

Travis Goodman:

I know, I know, I remember the times when I was the young up and comer and now I'm clearly the old veteran, which is not a, not a position I really enjoy anymore.

Mike Ensweiler:

So tell us, give us a fun fact about yourself, Travis. What's something that most people don't know.

Travis Goodman:

Yeah. I guess maybe the most obvious one is that in my younger years I used to kind of do a lot of, a lot of motorcycle racing, a lot of, uh, kind of fun, you know, kind of external activities. Unfortunately life has gotten in the way a little bit there. I've got three little kids. I've got a four and a half year old and I've got twin two and a half year old now, girls who, really, uh, well, they don't even know about the motorcycle, but they won't let me have the motorcycle.

Mike Ensweiler:

So thrill seeking these days is trying to keep them from breaking their arms and legs instead of yourself.

Travis Goodman:

Yeah. It's pretty much running after them making sure that they don't like knock over something in the house or fall over or something like that. That's the extent of my adrenaline. Yeah.

Mike Ensweiler:

That's funny, Kevin, uh, share a little bit about yourself.

Kevin Shaner:

I joined ALM First about two and a half years ago. So I'm not a seasoned guy that Travis is here. Prior to that, I don't know that I could have, you know, sort of envisioned where we kind of have been going. But prior to that, I went through commercial credit training at Wells Fargo back in the early to mid-nineties and then corporate banking training at bank of America and so kind of come to the team with a deep credit and risk management background which was what really drew me to ALM First and kind of combining that background with the analytics and infrastructure here to help clients see, you know, into what what they're looking at, which is something I wish I'd had when I was in the seat of many of our clients.

Mike Ensweiler:

So I definitely want to have a fun fact for you, Kevin, before we dig in into any more meat here.

Kevin Shaner:

I am not a former a motorcycle racer, but I do as much as possible try and spend time. Uh, I've got a buddy and I have a couple of fishing boats in San Diego and any chance I get to get out that way. And if the boats aren't being charted out for fishing, I just love to spend time out in the water. And it's a great escape from day to day, uh, critical analytical thinking.

Mike Ensweiler:

And Texas heat.

Kevin Shaner:

And Texas heat. Exactly.

Mike Ensweiler:

So, you know, one of the great things about having you on staff, Kevin, like you mentioned, is that deep kind of credit background. We've been advising depositories for years and years and a lot of it has been centered on the finance side of the house, that economic value of different assets and pricing and that kind of thing. So bringing that different perspective, I think really enhances our team and Travis, and Kevin, tell us a little bit about, you know, how what we call the Loan Transaction Network came to be? That's pretty new for ALM First, but I think it, you know, it starts to get us much beyond the bond portfolio and really taking a much deeper dive into, to asset classes that we, you know, maybe weren't as deep in several years ago.

Travis Goodman:

Yeah. You know, I think like a lot of things at ALM First the beginning of our new services and new products are mostly born from client needs and client requests. And that's true certainly here in this, in this case as well, because a couple of years ago we had a few scenarios where clients were in some pretty dire straits and needed to sell liquidity, and sell assets for liquidity and for concentration reasons. And from that process, they reached out and asked for our help to kind of solve that problem. We worked through some of the issues there and were able to successfully transfer assets to another party in a fairly large volume to begin with. And it kind of opened us up to the idea that there was some opportunity here to really add a new lens to what our clients are already seeing a lot. You know, you see loan transactions are occurring all the time between credit unions or between banks. But in many cases, it's coming from various sources that like to highlight certain aspects of a transaction, like the yield or something like that and we have the ability to target into that a much more granular view in terms of the analytics that we provide and how valuable those transactions are. So we sit in a unique seat here in our ability to kind of help both sides of that transaction. So as we kind of completed that first transaction started moving forward, we started recognizing that we have an important role to play in helping our clients find that right partner in a transaction and to kind of facilitate that process through. And then once we had Kevin come on, you know, Kevin has an extension background and I'll let him go back through this in terms of some loan transactions and loan trading. He was really able to kind of springboard us up to a much more kind of a professional and kickstarter us in a lot further along in our process of building out this platform.

Kevin Shaner:

Yeah. You know, just to maybe touch on that, you know, what's been really exciting for me is working with Travis and the team here and I think in many cases we're talking to CFOs and I can bring sort of maybe the Chief Lending Officer perspective. And in many cases, you know, Travis might be talking to the CFO and I'm talking to the Chief Lending Officer and we're kind of bringing those two teams together and helping them understand what their respective interests are in a particular transaction. And kind of putting an analysis together that both of those groups can kind of see the value in doing a particular transaction or perhaps not doing a particular transaction. So it's something, again, as I said earlier, that I really wish I'd had when I was inside institutions, either on the buyer or the sell side is, is to kind of have that thermometer in an opportunity that we were looking at a granular level, as Travis said, to make better decisions with that ultimately get us in the direction that we're trying to help clients go.

Mike Ensweiler:

You know, I was reading a piece recently, it was put out by TransUnion and it was consumer credit origination kind of balance and delinquency trends. We don't have Q2 data, but, you know, just looking back at their, you know, analysis from Q1, they said, while demand for personal loans remains high, late in the quarter, lenders began instituting stricter underwriting guidelines and reducing pre-screen campaigns to limit their exposure during a downturn. The COVID-19 crisis will likely trigger decline in originations and an uptick in delinquencies over the next few quarters. However, forbearance programs will temper the severity of the impact at least in the near term. And I think, you know, everyone, who's sitting in a depository, you know, they're, they're flushed with liquidity. Um, I think we've seen high residential mortgage demand, but I'm just curious to get your perspective. What are the kind of the current trends you're seeing maybe by asset class on the credit side for consumer auto, residential mortgages, CRE, CNI, and so forth?

Travis Goodman:

Yeah. I'll jump in there quickly on this. You know, I think if you asked me prior to this, COVID-19 kind of, where would, I think there's going to be the kind of the initial kind of losses, you know, I think certainly some of the consumer credit areas would have been kind of top of the list. You know, certainly something like autos, where there was good returns prior to COVID that, you know, you would think potentially that the next recession people would go use Uber's more, they would go use shared rides because they could save costs that way. It's something we didn't see in the financial crisis. Um, but because of this particular nature of being so much driven by, uh, you know, a pandemic and the concern with being, you know, within close proximity to other people, we've really seen at some of those asset classes that we thought, you know, might be the first places to have problems really haven't had as much problems as we thought. Um, you know, auto delinquency and forbearance, uh, has remained steady right around eight or 10% for most of our clients at least. Um, and so, you know, you might expect that to be a little bit higher given, uh, kind of what I just mentioned, but really most of those areas have, have held up better than we anticipated I think for some of the reasons I just mentioned. You know, some of the other areas that we see, uh, you know, forbearance kicking in a little further is, you know, certainly in the area of mortgages, uh, that's one area where, uh, you know, we saw because the high payment structure of a mortgage, uh, certainly kind of incentivize someone to kind of save that cost early on because it is such a big number. Uh, but we have seen that lenders have gotten smarter about that. And we saw that consumers in many cases were taking advantage of banks and credit unions, um, inability to really check if they actually needed that forbearance and have gone back to, uh, to checking with those, those borrowers and see whether or not they could actually make those payments. And in many cases they can. The borrower was just in a lot of cases, um, wanting to save money and they knew that there really couldn't be any repercussions because of forbearance programs.

Kevin Shaner:

Yeah. You know, the only thing I'd also add to that, and I agree with everything Travis said is, is that, you know, one of the impacts early on in COVID is, is with the capital market's going so wide, uh, that, you know, many of our, you know, uh, buyers and sellers, we're looking at spread to swaps and other metrics, uh, early in the days with a lot of uncertainty around where credit was going to go that variable around loss assumptions, as you look at sort of modeling risk adjusted returns is something that was very difficult for people to kind of put a good handle around. Uh, and in addition to that, with the spreads widening so much in the fixed income markets, that if you put your CFO's hat on, you know, I can get very, uh, tangible results and know exactly what I'm going to get here in the fixed income market and there's a lot of uncertainty in the, uh, in the credit markets, even with as much liquidity it was coming in through the PvP program and everything else that we sort of had a divergence, uh, early on, uh, between our buyers and sellers in terms of trying to find good valuations that everybody felt good about, particularly given the uncertainty.

Mike Ensweiler:

So just sticking on the theme of, of trends right now, you know, one of the things I mentioned a few minutes ago was due to just depositories being flushed with cash. What impact has this excess liquidity have on pricing, if any, do you see institutions going down the credit spectrum at all?

Kevin Shaner:

You know, not necessarily down the credit spectrum, but I think as, as spreads have tightened in the fixed income markets and we get into six thirty and we haven't, you know, some of our clients are, as you said, flush with cash whose loan origination engines organically are not producing the levels that they once were. Uh, they're looking for opportunities to supplement that, that lack of growth organically. And for those clients that, that we have that have excess, uh, loan volume to share, you know, their willingness to, to part with that has, has reduced as well. And so, you know, while I would say a pre COVID, uh, things like auto, uh, and those kinds of asset classes, uh, we're, we're one thing, you know, now we're, we're certainly seeing buyers come and look at more of the secondary sources of repayment, a la the collateral. And so if I'm going to have to be a patient lender with a borrower, I typically would prefer to have an asset class that's going to appreciate over time, like a piece of real estate, uh, as opposed to depreciate over time, like an auto, uh, but you know, I'd say the credit has continued to tighten, but as spreads have tightened, that willingness to take a lower yield relative to what they could get in the fixed income market, as long as they feel good about the credit quality and with some level maybe not certainty, but a little bit more familiarity with the environment that we're in. Uh, but that being said, as, as Travis alluded to previously, you know, we had a lot of stimulus or at least a lot of liquidity come in through the Fed and other mechanisms. And I think the question now is to whatever extent that starts to slow, whether it's unemployment, uh, you know, supplements and things like that, uh, you know, are we bridging, did we bridge ourselves for 90 days to something, or are we going to need another bridge ultimately to get closer to whatever the COVID solution is?

Travis Goodman:

Yeah, I think also, I mean, if you, if you think about flush with cash three months ago, it feels very different than flush with cash today. Uh, you know, there was a lot of alternative options to lending, uh, that had lower credit profiles, you know, higher spreads, more relative value, things like that, that was driving dollars into those areas. Um, that made a lot of sense. Recently, those alternative options have gotten much more expensive in the flush with cash element is still there and the need to invest cash is still there. So those dollars are now chasing other asset classes again. So, whereas in second quarter, I think, uh, you know, you had a, a big slow down in demand as we were trying to figure out credit, um, that demand for investment in putting those dollars back out is now searching for a new home again, uh, and to Kevin's point, you know, lending generally is down. I mean, there's a couple people that are been able to generate the same volumes as before, certainly in mortgage, for sure, but in certainly other consumer areas, uh, you know, those guys are the minority in certainly in most cases and everybody else is struggling with loan demands. So that, that demand for cash and cash investment is now going to be chasing a smaller pool again, which I think is probably gonna bring returns back down, um, as those dollars are chasing those assets again and pushing prices back up. We saw that happen kind of in other areas that don't have the credit risk exposure, um, that that lending does. Uh, and now we're starting to probably going to see it a little bit in the, in the participation in whole loan sale markets.

Mike Ensweiler:

Yeah. And as institutions are searching for those earning assets, or they're looking to find some kind of yield, um, you know, historically loan sales or loan participations offered an attractive opportunity to boost loan volume, to diversify risk, to enhance earnings. What are you guys seeing in terms of the environment now for buyers of participations as well as sellers?

Travis Goodman:

Well, you know, you're absolutely right that one of the benefits of participations in whole loan transactions is this is a real scale benefit for people who can kind of lend out their operations or origination channels to people who need it. Um, and as a buyer of a participation, I, you know, I get, I get servicing capabilities, I get access to, uh, maybe a sector that I don't have great, um, you know, access to my own local markets. Um, I maybe get some expertise in that lending facility. Um, I get geographic diversification, I may get balance sheet diversification. All of those things are benefits, uh, to, uh, you know, a program. We've seen actually, uh, you know, buyers of mortgage and buyers of autos, um, kind of swap their production as one sells mortgage to one buyer and one sells auto to the other, so they can actively together reposition their balance sheets. So I think that's something that's, that's really a clear benefit of this type of transaction. Um, but as you kind of move into the current environment, uh, you know, buyers, I think, um, are, are reasonably concerned about how to value credit, the other things that are related to, you know, modeling of it, of a transaction, the interest rate risk component, uh, to some degree, the liquidity risk component, the options risk, you know, those big macro risks are fairly easy to identify, evaluate and determine kind of the cost associated with those, but the big boom that's what kind of unknown right now is credit. So just about everybody's building a, a bigger credit buffer into their assumptions. Um, and trying not to just use some historical static pool assumption, because we know that, um, you know, that that process is very effective when things are the same, the same, but now that things are changing a little bit, um, you know, everybody wants to have that extra cover, the extra protection to know that, uh, when I do make a purchase, you know, I'm going to be covered.

Kevin Shaner:

Yeah. I think the other trend that we're seeing is, you know, if you are one of those, uh, origination engines that has good production and you have the potential to sell your motivation and, and your supply demand, uh, perspective on the market has probably changed somewhat. And so you're, you're, you're kind of in a little bit of the catbird seat, uh, and, and saying, okay, I've got a good asset here. And now, instead of having one or two potential partners, I've got, you know, five, six or seven, that, that really would like to look at this opportunity, and you can be a little bit more particular about the kind of partner you want to work with. Uh, and so we've definitely seen some, and in some cases, some of our very active sellers are saying, you know, I just don't have the pipeline of loan origination coming to where I need this, this outflow, uh, and liquidity source in terms of participations that I once did. So it's definitely changed, uh, some of the dynamics.

Mike Ensweiler:

Yeah. And that, that inherently makes perfect sense to me. So let's just assume I'm an institution looking to buy a pool. I found a pool, how do I perform due diligence in this environment? What are the tools I n eed? How should I be analyzing these pools?

Kevin Shaner:

Well, you know, and where did you find the pool? What I'd say is, you know, having been in the buyer's seat many times, uh, and, and not to pick on our friends that are broker dealers, but, you know, they're really primarily incented around transactions. And so I would get these tapes that I would get these sort of profiles that look very attractive. And then when you peel back, what would actually fit in my credit box, and you pull out the loans that don't make sense, what you're left with in many cases, is not what was represented at the email that you got. So what I would say is, you know, whether you use us or you use your own tools to do a loan level analytics on a loan tape, that's really the best place to start is looking at the loan level in terms of what's really in this pool that you need to take out that doesn't fit your credit box and look at the economic value of what's really left in the opportunity that fits your credit box and your economic needs. Uh, and, and that's kind of the good starting point, meaning in many cases, and I've yet to see one where after you peel that back, it looked better than the way it was represented in the beginning. And so I'd say as a first step, for sure, you know, get the loan level detail. And again, you don't need us. It's, it's, it's not rocket science, but you do need to go through a very disciplined process about looking at the assets at a loan level.

Speaker 3:

Yeah. I mean, I think you're hitting on that right there at the end. And I agree with all of that is it's about the process, right? You need to have a plan coming into it that when you're going to evaluate a pool, you're going to do X, Y, and Z, and you need to stick to your guns on that. Right. Part of it too, to Kevin's point is making sure that you're looking at the loan level information and not being swayed by, um, you know, averages and you know, that kind of thing. And I would also really caution against the, you know, I have to do a transaction, I have to give a bid by 5:00 PM this afternoon, and I've got three hours to look at it kind of thing. You know, these are important transactions. They require you to, uh, to dig into the underwriting, the dig into the, uh, the loans themselves. And this is not a, you know, securitized market where everything has been originated and securitized in a very standardized practice. So there's not the same thing as going to look at some CUSIP mortgage backed security. Um, so you really need to do your homework and start starts with loan level, and then building out the process of every pool goes through these phases that I'm going to look at. I'm gonna evaluate the relative value. I'm gonna look at the loans. I'm gonna evaluate credit assumptions. I'm gonna look at prepay assumptions depending on the premium. I'm gonna look at how well the premiums amortized, and I'm gonna start building out once I get through all the economic discussions about the evaluation process, then I need to do my due diligence on the seller because the seller's ability to service is at the paramount of your valuation, because you are effectively underwriting, or that's going to be your best to be outsourcing your underwriting capabilities to that seller. And so you've got to make sure you understand their practices, what they're going to do in certain situations and how they're going to handle things without that. You're going to be in for surprises along the way. And nobody wants surprises as, as you, you know, a year or two another program. So that can really only be done upfront. And so there's a fairly rigorous kind of evaluation process that, that a buyer needs to go through upfront, uh, to make sure that, you know, you're covering all your bases. That doesn't mean that everything's gonna be perfect or that you're going to catch everything, or that they're never going to have a loss in a pool. It should be an expectation that everyone's going to have some form of losses. Um, but the question is kind of understanding where those losses are going to be in developing a confidence interval around that loss.

Mike Ensweiler:

I think you touched on this and didn't answer directly. So I'm going to maybe try to frame this a little different way. And it's something you talked about a little bit earlier, Kevin. Is, you know, bringing the two teams together. You've got the finance team that's typically looking at these as well as the credit team who, who have different incentive structures who have different goals. And so when these, both of these parties are looking at these, these deals through different lenses, how are you guys able to reconcile those differences?

Kevin Shaner:

It's funny, you know, I'm thinking of one client and Travis will probably know who I'm thinking about, but, you know, I ended up talking to their Chief Lending Officer and, and Travis talks to the Chief Financial Officer. And then we kind of, you know, Travis and I talked together and we kind of bring the groups together. And I think the other thing is within our, and again, you don't need us to do this, but our analysis really has on, you know, on that front page. The thing that my credit partner at a particular institution is looking for and the highlights that a particular CFO is looking for. And so they can both see what they're looking for, whether it's the credit characteristics, or the economic value, um, and then, and then showing them and teaching them how the other group is looking at it. Uh, and, and in many ways, it's, it's really how they talk about it. Not that they're really looking at it all that differently, but sometimes language and backgrounds are different. So I think, you know, kind of bringing them together with better information, better transparency, uh, is, is really helpful.

Travis Goodman:

Yeah, I totally agree. And I think when we, when we think about kind of melding the, the lending side with the finance side, you know, finance likes to use quantitative analysis and get really deep into the modeling and that kind of stuff. Um, and the model is nothing more than a representation of what we expect the outside world to do and how it's going to behave. Um, and when Kevin talks to kind of the lending groups, I mean, he's certainly using that information and using that as the backbone of discussion. And I, and I know that he's educating a lot on why the models work and why they are used from a lending group, but he's also talking about it in lending terms, in why we like certain asset classes from a lending perspective, there's aspects about a transaction or a pool that, that make it attractive from a lender's perspective that are different than a model. For example, you know, you may like, you know, second lien home equities that have really low LTV. And from the lenders perspective, they liked that because it has low LTV. There's a lot of equity in the prospect. Um, there's, you know, a secondary source of repayment, these other pieces that a lender's really going to be focusing on that show up, they show up in a model in an, in a finance way as a credit cost assumption, but they get talked to the lending group from a, you know, LTV kind of possible risk perspective. And so Kevin has a great job of kind of identifying those types of benefits and then translating them into what we talk about on the finance side, as an OES and discussion. And I'm doing the same thing. I'm trying to bring the lending discussion to the finance team. Cause I think they understand a lot of times the models and why we're looking at it, but we're talking about that second form of, um, of rationale that's coming from the lender's side, so that both parties are really understanding the other side's perspective. So then when they come together, they understand why both parties are trying to do that. I think it also really helps that we're in the middle of it kind of, kind of actually being the one who's buffering it because when a lot of times when those groups kind of talked together, they butt heads or they, they don't always see eye to eye for various reasons. And us having that voice in the middle that's independent can clearly cut through to a faster conversation than what, what they would probably do if they're going directly,

Mike Ensweiler:

That's the internal kind of reconciliation, what are the biggest hurdles that you're seeing between institutions to actually getting deals done?

Kevin Shaner:

You know, there's, you know, if you think about it too, to get a transaction done, there's, there's really three groups and in each respective institution, so you've got the finance team, you've got the lending team, you've got the legal team and each organization, uh, and the finance team probably have to kind of look at economic value the same way, otherwise, one group seat looking at yield and the other, looking at a spread to swaps or whatever the metric might be. Uh, and, and, and credit tends to, you know, we're all regulated by the same, you know, the typically the same types of folks. So credit is largely looked at the same way, but you got to kind of understand the policies and procedures and kind of go through that process. I say the biggest friction point that, that we see in transaction. And it's been this way since I can remember starting to do transactions is, you know, if my attorney is, is paid by the hour and you have inside counsel who might not have a lot of experience doing participations, maybe they have more of a regulatory background, you know, they, they want to impress you that, that they're advocating for you. And so they kind of pick a fight about, you know, this word choice or that word choice. And, and the, you know, the counsel on the other side is paid by the hour. And obviously the longer this goes, the better they do. And, you know, I don't want to sort of disparage, you know, first thing we do is deal with the lawyers, but you know, that probably is where, you know, the most deals can have a potential to unravel. And it's typically further along in the process where people have invested a lot of time and energy, and then there's sort of a sticking point around, uh, you know, the heck with it, I'm just, you know, forget it. And, and really trying to get ahead of those kinds of issues early on and have those discussions as early as possible is, is really critical to being successful in a transaction.

Travis Goodman:

Yeah. I mean, I think I would definitely agree that once a deal has kind of been understood and the economics we've got past those pieces, legal is always the biggest issue. Um, and for whatever reason to more recently, I think everyone is very concerned about making sure their legal is as tight as possible. So we've seen a significant increase in time for recent transactions where everyone's legal teams are just, you know, kind of really doing their homework and going, you know, to the nth degree, which is great. And the fact that we want to protect everybody. But what we don't want to do is, you know, kind of unduly burdened the process because we're, you know, kind of dragging our feet. But I think in the earlier process, you know, there's some asset classes that just, they need education on. Um, and so just even getting that hurdle done of, you know, Hey, I've got this new product, um, it's new, it's different no, one's really heard about it. Um, do I want to go buy that product? It's a little more scary when you're not hearing there's a lot of other transactions happening, you know, by other buyers. So buyer education is, is, is a big piece of this, especially when you start talking about areas that are outside of maybe the big three, the big three are, you know, kind of consumer auto, you know, first lien mortgage, and then maybe multifamily CRE to a lesser degree. Those are kind of straight down the fairway. You know, everyone's kind of heard about on the understand how to value them. They understand what the risk are. You start going outside of that box and there's a, there's an increased amount of education necessary to get people to understand why, why is a home equity different than a, than a mortgage when I buy it, why is a solar loan different than, you know, mortgage? Or why is it different than boat loans? And why are leases different than auto? You know, all of those things create opportunities for education, and that ends up slowing down the transactions in many cases. It'd be interesting, what happens with that now with, um, people's kind of influx of cash and their need to generate returns in support the balance sheet. So I suspect there probably will be some elements that kind of goes away a little bit, but I think that that education upfront is also one of the big, uh, the big determining factors kind of outside of the pandemic right now. I mean, right now there's a whole, you know, other concerned about understanding when to make a purchase cause of credit and when to buy in. And that's, that's kind of a more recent issue of pandemic concerns.

Mike Ensweiler:

So that all makes sense to me, gentlemen, so that now the big question I have, and I'm sure it's on everybody's mind, especially given this environment, if I want to go down this path, how long does it take to get a deal done?

Kevin Shaner:

Well, I think, you know, if you've got a good process, a good decision making process, that that's a really great start. So if your finance and your credit teams kind of know what they're looking for, how they're going to evaluate an opportunity can make quick decisions, but good decisions and consistent, you know, that that's a really good place to start. You know, an opportunity comes in, we're looking at it, credit science off that this looks good economic value from finance looks good. Let's get an under LOI. Now we've got an under LOI typically, you know, pre COVID. We were looking at 30 to 45 days to get a first deal done, uh, allowing additional time for the participation agreement, which typically gets negotiated and again, as we mentioned earlier, that that's something that can take a little extra time. With COVID obviously with everyone working remote that lead time can take a little bit longer because everyone's trying to upload files into a secure data room from their home, et cetera, et cetera, wifi connections, aren't as good as they are at the office, et cetera. Um, and then I'd also say on the front end, in terms of making decisions to buy or making decisions to sell more people are getting involved in that decision, given the uncertainty and given, uh, the concerns around credit, more people want to be looking at things. And, and so whether we are deciding to sell or deciding to buy that can take longer for, to get all the chiefs, if you will, around the table to say, yes, this is something we want to do. So if you wanted to close something by the end of the year, and you were looking to buy or looking to sell, I'd say you probably want to start thinking about it now. Uh, and, and, uh, and, and leave yourself some cushion. I don't know, Travis, would you change any of that?

Travis Goodman:

Yeah, I mean, I think that's absolutely right. I mean, I think, you know, pre COVID we saw some deals close as quickly as 15 or 20 days, you know, for guys that were seasoned purchasers, uh, you know, knew their process, knew how to get in there underwrite, they had their own participation agreement. They knew how to negotiate legal, that kind of stuff. You can get it done pretty quickly. Um, but that really has not been the case post COVID-19 just about everyone is taking longer. The process is taking longer. The legal is taking longer, uh, underwriting and, uh, kind of audit is taking longer. Everything is getting dragged out. Uh, so I would echo what, uh, Kevin said, just, just prepare for a longer process here and be prepared to kind of have to circle the wagons a couple of times when some of these things, cause it just takes a little longer to get them done.

Mike Ensweiler:

As a former lender myself. I could talk about this all day. This is just exciting stuff and fun stuff to talk about, but unfortunately we're budding up against the clock here. So maybe I can have each one of you share some closing thoughts as we wrap this up.

Kevin Shaner:

Yeah. You know, my first thought would be again, just be really critical of, of those hooks that you get an emails, uh, looking at opportunities. As my dad would say, if it's too good to be true, it probably is. And just be very critical about how you look at those opportunities. And as, as soon as possible, get ahold of, uh, a loan tape and, and do loan level analytics, whether it's using someone like us or, or yourself internally.

Travis Goodman:

And I would echo with what Kevin says. I mean, I think understanding the true value of the position you're in, in, in creating that process to evaluating decisions is critical to making good decisions over and over and over and over again. Right. Uh, we don't want to make one good decision. We want to make 10 in a row. Um, and again, that's, that's kind of this idea of like, I'm not trying to hit home runs, I'm trying to hit singles and I want to have a good defined process. And I want to keep that good to say good decision making machine kind of rolling all the time. As I think about buying participations and using analytics, evaluating them at the loan level, you know, understand what my plan is of attack to do out and buy or sell participations is a pretty critical aspect of this to be successful in making sure you're sticking to that as you go forward.

Mike Ensweiler:

Well, thanks so much, Travis and Kevin for taking time to talk about the lending environment we're in and loan with us.

Travis Goodman:

We're happy to be here. Thank you for having us.

Kevin Shaner:

Great. Thank you very much.

Mike Ensweiler:

Thank you, Kevin and Travis for taking time today to talk about the current lending environment and loan participations with us. At the end of each episode, I'd like to take a moment and let you know about some of our events or articles we have coming up because this is such a hot topic and things are constantly changing. We are hosting another Loan Transaction Network webinar on August 27th. As always stay safe, stay healthy. And thank you for listening to In Your Best Interest: An ALM First podcast.

ALM First:

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