In a cyclical mortgage industry, hedging is key to maintaining a buffer against losses. For New American Funding (NAF), the country’s 33rd-largest mortgage lender, hedging is how the company was able to manage through the troughs of the mortgage business cycle, Rick Arvielo, co-founder and CEO of NAF, said in an interview with HousingWire.
“We’re always looking for hedges,” Arvielo said. “The outside distributor retail is a hedge against the call center in the different environments. Servicing is a hedge against origination.”
Since launching as a call center in 2003, the California lender has expanded into the outside distributed retail model with a target on the purchase mortgage market, serviced its own loans and developed its tech stack in-house.
But there have been rough points for the lender recently, too. As rates increased in 2022, the California lender laid off nearly 1,000 staff to cut costs and meet shrinking demand in the industry.
However, NAF said it is done with rightsizing and has been adding more employees this year. When rates start to trend down, the company expects to add more loan officers, call center staff and operation staff.
With increased M&A activity in the industry, NAF hasn’t ruled out the possibility of acquiring a regional lender with an established customer base, either.
“Yes, I’d love to acquire a smaller, independent regional player (…) Anything in the Northeast, kind of above the Carolinas, we really don’t have anything. The northern part of the United States – you get above the Arizona, Colorado market – we don’t really have much there,” Arvielo said.
Read on to learn more about New American Funding’s business model of outside distributed retail, their in-house tech stack rebuild, its expansions plans and prospects in 2023.
This interview has been condensed and lightly edited for clarity.
Connie Kim: NAF’s business model of a call center and the outside distributed retail business seems like a hedge against when the rates are low and when the market pivots to purchase mortgages. Now that the market has turned, do you see any challenges for your purchase call center agents? Because there are retail LOs building that in-person relationship with their real estate agents and financial advisors.
Rick: The way people purchase homes is going to be different tomorrow than today (…), so we developed a network. When we get a borrower that comes in online, we do our good work to get them qualified to buy a home – these are mostly early stage buyers.
That referral process is an age old, where the real estate community will give up a third of their commission for being delivered a qualified, pre-approved borrower that came out of the relocation world. The borrowers became more sticky with us, (and) then we were able to accomplish profitability to originating the purchase business through the call center.
That journey took about two years. We dabbled under the hood from mid-2016 to about mid-2018, and then really started to perfect it. And that’s why that business is bigger today than the refi call center, because rates are higher, so you don’t have a lot of refi opportunities.
Kim: So the model focuses on connecting the retail LOs and the call center agents together to bring up that efficiency to target the purchase market. It’s a different audience that NAF is targeting via the outside distributed retail channel and the purchase call centers.
Rick: Yes. If I could just add one little bit, we took it a step further. We realized through our analysis that a lot of these borrowers, even though they started the journey online, they really want to work with an in-market agent. The call center is going to be the in-market agent’s best friend.
We set up a program called LBC – which is local buyer connect, where an in-market agent can choose to join the purchase call center for a percentage of their business.
Kim: NAF bought Marketplace Home Loans in 2018. Are there plans to acquire a regional purchase lender?
Rick: I would love to take looks. It’s not something that we’ve really done. We’re in the process of talking to some of the business brokers out there to get some looks.
Anything in the Northeast, kind of above the Carolinas, we really don’t have anything. The northern part of the United States – you get above the Arizona, Colorado market – we don’t really have much there.
Texas is a big one for us. We do a good job in El Paso, Texas. But outside of that, we really don’t have much in Texas.
Florida, we’re okay, but I can see us filling in some geographies there. Nebraska and Louisiana. I could go on with a lot of these states that we just don’t really have a presence in at all. We have almost nothing in Illinois.
So the short answer is yes, I’d love to acquire a smaller, independent regional player, so long as it’s not in a region that I already have well covered with leadership.
Kim: One of NAF’s priorities is on lending to the Hispanic community. While Hispanic homeownership continues to grow, high DTI ratios is a main stumbling block to getting mortgages. What are some of the ways NAF is assessing credit risk for potential Hispanic homebuyers?
Patty: I’ve been underwriting the creditworthiness of Hispanic homebuyers the exact same way since 1994. We pretty much just adhere to Fannie Mae, Freddie Mac and the Department of Housing and Urban Development’s guidelines. You know, we’ve had to argue some points with every agency at some point. We still do a large percentage of manual underwrites.
Part of the process of the way we credit underwriting is that if we do hit a stumbling block, it’s not an automatic denial [for us]. We go back to the borrower and ask if they have a cosigner, if they can source the downpayment or if they can get additional funds. So it’s really just a slow play to close. A lot of lenders don’t want to do that.
Rick: It does deserve noting that Patty started the initiative for Latino lending back in 2013. But in 2016, Patty was challenged when was speaking one time from a Black gentleman who said, “What are you doing for African Americans?”
We’re basically replicating what we did in the Latino communities that got us a little bit of notoriety.
Kim: NAF has been building its in-house tech stack since its inception. Can you share some of the features that paid off? What are some of the features that NAF is building?
Rick: We built our system out, called Bank Review, but it’s 20 years old. It’s a flat system. Architecturally, we needed to essentially start over, and we couldn’t really do it with the resources onshore.
We decided to bite the bullet and actually form our own business in India. We literally did it from scratch [in March, April 2022]. We got an office and we currently have about 100 technicians in India.
They’re a lower-cost provider and we still have our onshore teams, because that’s absolutely vital to success. Now we’re going back through our tech stack, and we’re literally rebuilding it from the ground up, to be able to take us for the next 20 years.
Kim: It was a hard year for the production side, but what really kept a lot of lenders stay afloat was the servicing sector. NAF has been servicing its own loans. How did that help your firm’s business? Are there any plans to sell some of that?
Rick: We’re always looking for hedges, so it was very intentional to build this asset. When you start bringing a lot of African American and Latino borrowers into your servicing, we started with subservicers like everybody else. But they’re not equipped to deliver the level of service that those borrowers need.
We would have endured losses like everyone else had we not had the servicing business, because it’s a $65 billion servicing portfolio at this point. So it does throw an awful lot of cash. And the last thing in the world I want to do is to spend all the money I’m earning in servicing, but that’s why we did it. We did it to give ourselves that hedge.
We’ve been servicing our loan for maybe six years now, and we have sold servicing just to raise cash. We sold a grand total of about $3 billion out of $65 billion, and that’s a cumulative of what we sold going back years.
Kim: I believe it was in November 2022 when NAF said it laid off more than 900 employees. Were there additional layoffs in 2023? Is NAF done rightsizing?
Rick: I think we’re probably done rightsizing. You lose people through attrition, too. That’s very common, especially in a call center.
We haven’t had layoffs for this year. We were knocking on the door of 5,000 employees, and I think we’re probably at about 3,600 or so.
Patty: We’re actually up this year in employee headcount. We’re growing quite a bit. There are support staff that come along with them (loan officers). So bigger teams or a team will bring their operations people.
I would say that out of the last 11 years we’ve been doing distributed retail, outside of just initially growing and how crazy it was, this is the busiest I’ve been in recruiting since then.
Kim: I often hear that mortgage volume will be similar to last year, but more back-end loaded. What are your thoughts on this for NAF’s origination volume?
Rick: I wouldn’t say it’s going to be anything like last year. I think what you’re going to see in 2023 is a gradual rise; I don’t think it’s going to be big pops. My biggest concern, to be honest, is inventory.
Inventory is lighter now than I think it’s been in decades. Part of that is because of the government not letting foreclosures happen. There’s a foreclosure process for a reason. It feeds inventory to the market that benefits the new first-time homebuyers. If you don’t let that dam kind of break, all you’re doing is hurting the new family formation and the new homeowners of tomorrow.
The minute rates drop into the fives, you’re going to see real estate activity heat up, and you’re going to see house prices just start to pop again.
