On this episode, Jon Maddux spends some time with FundLoans Underwriting Manager, Jerry Tubbs. Since making the switch from Loan Officer to Underwriter, Jerry has quickly moved up the ranks, managing large networks of underwriters as well as personally u
"Mind-Bending Mortgage Lending" With Jerry Tubbs, Secrets from Non-QM's Top Underwriting Manager, As Featured On FundLoans' Vlog "The Million Dollar Mortgage Experience.
Here's The Full Transcription
Jon Maddux: 00:00 On this episode, I get to spend some time with our underwriting manager, Jerry Tubbs. You might be familiar with his voice from our intro. He's underwritten thousands of loans in his career and has seen almost every scenario you can imagine. We discussed topics from catching mortgage fraud, to how you can package a loan to almost guarantee an approval. Just, kidding, but definitely his advice will give you the highest chance to get your loan approved. Listen close as we hear about the craziest loan Jerry has ever underwritten, to finding creative ways to originate million dollar Non-QM loans.
Jerry Tubbs: 00:32 Welcome to the Million Dollar Mortgage Experience podcast. Listen in as CEO, Jon Maddux of FundLoans reveals tips, secrets, and origination ideas to fill your pipeline with million dollar opportunities.
Jon Maddux: 00:48 Welcome to the show, Jerry. Thanks for coming on.
Jerry Tubbs: 00:51 My pleasure.
Jon Maddux: 00:52 So all of our viewers, most of them are mortgage brokers, they're people that want to learn a little bit about Non-QM. This is a chance for them to really lift up the curtain and look under the hood, and just to kind of see what's behind a loan. When someone is looking at a Non-QM file, and I think we talked about this before we started the cameras, is for an underwriter, maybe it's in my mind, it's like they get a present. They get this present, they got to unwrap it and see what's in there, because you never know what's going to be in that file. It could be a big $3 million loan, it could be a smaller loan, it could be something crazy, but I know as an originator, how many different scenarios I've seen in 21 plus years. As an underwriter, I mean, you get to see every little detail about this person. So you get to look in their, you see their dirty laundry, you see everything about them. Tell us just real quick about how you got your start in underwriting.
Jerry Tubbs: 01:52 I actually started out in sales. I was originating loans, and kids started coming along and I made the decision that I might want at the end of the night, rather than being in a real estate office at 8:30 at night, I might want to be home playing with my kid.
Jon Maddux: 02:11 It's a good life choice.
Jerry Tubbs: 02:13 I took an opportunity to stay involved in the mortgage business doing that way. I had a really good track record as an originator, getting loans done. Went three years without a denial, so I was doing a lot of underwriting at the application.
Jon Maddux: 02:28 You were actually your own underwriter.
Jerry Tubbs: 02:30 I was, I was. It was a natural transition for me. One of the things that really benefited me and kind of skyrocketed my career was being able to take that ability to structure loans like an originator and not forget how to do that when I got into underwriting.
Jon Maddux: 02:47 Interesting.
Jerry Tubbs: 02:47 So being able to leverage loan structure as an underwriter and figure out how to make things work, verus how to make them not work has kind of helped me make my mark in the underwriting world. So pretty soon I'm being asked to manage underwriters and contribute in bigger ways because of that ability.
Jon Maddux: 03:06 That's very cool. So in your office, you have on your wall it says, "Mind-bending mortgage lending." What does that mean to you?
Jerry Tubbs: 03:14 For me it's a reminder that again, I'm trying to figure out how to make the business work for customers, not how to remind them how it doesn't work, and in the space-
Jon Maddux: 03:28 Coming from a place of yes, sort of.
Jerry Tubbs: 03:29 Yeah. The really cool thing that makes it fun for me to come to work every day is I'm not doing commoditized loans, I'm not doing Fannie, Freddie, and just reminding people how they don't fit into this cookie cutter that those agencies have created. I'm in a space where when people, when it makes sense that people have the money, and the wherewithal, and the desire to be homeowners or change their financial situation, that we've got products that accommodate them even if they don't fit into this cookie cutter that the agencies have created. So that's fun for me.
Jon Maddux: 04:08 Because you get to use a little more creativity in the process and it's not just anyone can do it. It's kind of like I think, and I almost look at it from a songwriter standpoint or from a musician standpoint. There's the people out there that can read music and then there's the people that can either play by ear or they can play by just kind of making it up. They can sit down in a piano and just kind of make up something, but it sounds good, right? Or they can go pick up a book and read, read exactly Bach or whatever the piece is and they learn how to do it. But often people who can read music have a tough time playing by ear or just making stuff up.
Jerry Tubbs: 04:49 Or coming up with something new like you're saying.
Jon Maddux: 04:49 There's some creativity I think that fits in certain people. It sounds like you're not just the kind of person that can just read music or make sure something fits in the box, but you can say, "Well, maybe this makes sense if I do these two different things or look at it from a different perspective." Is that?
Jerry Tubbs: 05:08 I would say, and in music, I'm a remedial reader. I can read it eventually, but after a fast, but when I can play the radio that's in my head, you lock me in a room and 30 minutes later, if you need a jingle, you're going to have it.
Jon Maddux: 05:23 That's cool.
Jerry Tubbs: 05:24 And I feel the same way about underwriting. This is going to be this mishmash of assets, and income, and property, and credit, and you'll look at it and once you evaluate it, you have an opportunity to say, "I can make something out of this."
Jon Maddux: 05:39 That's cool.
Jerry Tubbs: 05:40 Whether this would fit in this product, or I can't do it there, but I could do it there, or if I tweak this or pay that off, and keep molding it until, or almost like turning a Rubik's Cube until those colors start to line up and you can cross the finish like with a solution.
Jon Maddux: 05:56 That's a cool way to look at it, yeah. I don't really like the word Non-QM just because it's like, what does that even mean, right? But I know we call it make sense lending or alt-doc, or non-prime, but it's not really not even non-prime, because a lot of these loans are good FICOs, good credit, maybe one little thing is off here or there because they're human, right? And they don't always pay attention to their credit. Some people are paying attention to their business, they're self-employed and they just, either the person they've hired to take care of their credit, or just something missed, or something got missed, and so their credit score is not always perfect, but what about this as what we call make sense lending? What do you see is kind of the reason why Non-QM is make sense lending?
Jerry Tubbs: 06:41 Well, I think one of the things is sometimes you'll find a disparity between someone's FICO score and their credit performance, and it was something I struggled with when FICOs were first introduced back in the '90s. They were really introduced to create some electronic convenience for what was a new fangle toy in the mortgage business back then, which was LP and DU. It was a lot easier to program one box to plug a FICO score in that to actually create a computer that would look at a credit report and decide whether someone was credit worthy, and one of the first things we ran into then, that I still run into today, is some people have different attitudes towards using credit, and especially with some of the wealth profiles that we see. We have people that have so much money at their disposal, they would never have to use credit. They would never have to borrow money, unless it was a convenience for them, whereas certainly never a necessity to borrow money, and those people traditionally that don't use a lot of credit are going to have a lower than normal credit score, and it has nothing to do with their ability to repay.
Jerry Tubbs: 07:48 You can look at a sheet full of account they had years ago that they paid on time. So you'll get people with lower credit scores, and by that I mean someone in the 600s instead of the 700s, let's say, and they've got 10 or 20 tradelines they haven't used in years, and every single creditor they've ever had contact with has been paid on time, but they're pulling a 640, and someone with two or three tradelines they've used recently might be in the 700s, and I would rather lend money to this person that doesn't need the credit, frankly.
Jon Maddux: 08:21 Yeah, right, and that's what you see sometimes in banks. It's like if you don't need the money, that's when it's the easiest to get it, right?
Jerry Tubbs: 08:27 Yeah.
Jon Maddux: 08:27 You got all this money in the bank, and you got no real need, but when you're like gosh, I need to borrow another few grand for whatever, they're like, "Nope, sorry, no, no, no."
Jerry Tubbs: 08:36 Yeah.
Jon Maddux: 08:38 So without divulging private information, you've been in this business a long time, I know you've probably got at least one interesting story that you can share about a crazy underwrite, a crazy borrower, a crazy profile, whatever it might be, just something interesting. What would you say?
Jerry Tubbs: 08:55 The one that comes to mind almost immediately, and to your point, there's hundreds. It's like making me pick my favorite child. One that comes to mind that was one of the trickiest ones, I was working for a big bank in New York, and a very well-known formed baseball player came in and.
Jon Maddux: 09:14 Like walked in?
Jerry Tubbs: 09:15 Yeah, actually physically walked into the-
Jon Maddux: 09:17 Came into the bank.
Jerry Tubbs: 09:18 To the branch, and when he explained the situation they were like, "We can't help you. We need you to talk to this guy." So got ushered up to my office. Anyway, when he left baseball he was on this extended contracts that continued to pay him years after he played, so he was still at the tail end of these multimillion dollar contracts, dropping money in his lap and hadn't picked up a bat or a glove in five years. Anyway, post baseball he had got successfully involved with some real estate developers, and they began buying up high-rise apartment buildings that were in disrepair, and they would form an LLC for each building, each individual address. They would take the building from a bombed-out hole, they would completely rehab it, they would fill it with Section 8 subsidized rentals, and then when this investment was upright, it was full of paying tenants, they would present that as a turnkey rental opportunity for an investor that didn't want to get their hands dirty with the rehab process and the rental process. The numbers were astounding. Each building could be acquired for 10, rehabbed for five, held for another five, and sold for 30.
Jon Maddux: 10:43 Wow.
Jerry Tubbs: 10:47 The reason I came to pass, to even talk to this gentlemen is he was looking for a mortgage for his own home.
Jon Maddux: 10:55 Gotcha.
Jerry Tubbs: 10:55 He was moving his family away from the city and out to where he had grown up, buying a beautiful home, going through the traditional mortgage process, and confronted with the type of things that the traditional mortgage process slaps in your face which is I need two years of tax returns on all of your businesses. At that time, the moment that I met him, he had 60 of these buildings in the pipeline. About 10 to 15 that were in the acquisition phase.
Jon Maddux: 11:24 Were these each LLCs or corporations?
Jerry Tubbs: 11:26 Every single building was a single LLC.
Jon Maddux: 11:29 Wow.
Jerry Tubbs: 11:29 He had 60 LLCs.
Jon Maddux: 11:32 So what's it like talked to you?
Jerry Tubbs: 11:34 It was presented as a full doc double year because that's the only type of things that that big nasty bank did.
Jon Maddux: 11:42 Yep.
Jerry Tubbs: 11:43 And he was-
Jon Maddux: 11:46 And this is probably back in the day when you had physical files at your desk, yeah?
Jerry Tubbs: 11:50 It was digital. This is only a few years ago, but the idea of a single underwriter tearing through all 60 for both years, coming up with cash flows for a situation where every building was on some different level of spectrum of completion to.
Jon Maddux: 12:10 Man.
Jerry Tubbs: 12:11 Just blocked the building yesterday, got it rehabbed but not rented, fully rented and on the market, or sold, but this process of grinding these buildings through this process. They got so good at it, it was like printing money. In the two or three times that I met to get some documents, ask some questions, clarify, this gentlemen brought in multimillion dollar settlement checks from buildings that successfully closed, and he's just depositing them into his checkings.
Jon Maddux: 12:44 He's like, "Here's another one."
Jerry Tubbs: 12:45 Absolutely. But anyway, the solution for us was to leverage the portfolio power and isolate balance of the LLC's cashflow. So we actually ended up cash flowing all these buildings but did it at okay, one level, added back the millions of dollars of depreciation on all these buildings to show that this man didn't lose $10 million last year.
Jon Maddux: 13:11 Like it says on his returns.
Jerry Tubbs: 13:13 Yeah, but he actually made 30 million and didn't pay taxes on any of it.
Jon Maddux: 13:19 It sounds like a good model.
Jerry Tubbs: 13:20 Yeah, presenting it the right way, understanding those cash flows, knowing what we could add back, what were the paper losses, knowing what we could do with those loans, be able to prove that he was an extraordinarily wealthy person, a very good risk for the loan, and we were able to get him closed on his new purchase on time, and the last time I spoke with him he was wildly happy and still very grateful.
Jon Maddux: 13:46 That's cool. Were you a fan too?
Jerry Tubbs: 13:49 Had never met the person or had followed his career, but at the tail end got him to actually autograph a couple baseballs for the guys on our acception desk that said, "Thanks for getting me home."
Jon Maddux: 14:06 That's cool, that's great. These kind of deals are obviously different and there's a make sense approach to them, but how does it differ, what's some of the main differential or different points that you could say between agency, government, and Non-QM? What were some standout things that really could differentiate it?
Jerry Tubbs: 14:29 I think one of the mission for Non-QM has turned out to be making it easier for self-employed to get money that they deserve.
Jon Maddux: 14:38 Right.
Jerry Tubbs: 14:40 Typically if you're starting a new business, even one that gets traction immediately, you've got to sit out two and a half to three years to have enough of a paper trail at the IRS to be able to walk into a traditional lender and say, "I can prove to you I make enough money to afford this house payment."
Jon Maddux: 14:57 Right.
Jerry Tubbs: 14:57 And using products that have flexibility like bank statement loans gives me the opportunity to catch those people once they're already successful but not make them sit through the two or three years it's going to take to develop an IRS worthy paper trail.
Jon Maddux: 15:13 Yeah.
Jerry Tubbs: 15:13 So we can get people that have an immediate need for the money, they have a great ability to repay, they're not a big mortgage risk, they just don't have the paperwork they need to satisfy those big bad agencies.
Jon Maddux: 15:28 Right, and I mean, you said it just right with self-employed borrowers. I mean, that's something that's a trending up, especially more recent there's a lot of people that are just starting new businesses. People that are going from being a W-2. They're going from a W-2 job to being a contract employee. So they get let go, or they say, "Well, we still want you but we're going to pay you 1099." Or they've been doing, like say they've been a doctor at Scripps for many years, and then now they're a doctor but they're on their own practice. So it's like you really are going to say this guy's risk is much different? I mean, I know going out on your own versus having people walk through your door from a big hospital is different, but they're still a similar profession, things like that, they've been doing it for a long time. It's always interesting to see how the guidelines of Fannie, Freddie and government just, it really doesn't take into consideration the make sense approach.
Jerry Tubbs: 16:24 Yeah. They're biased towards wage earners.
Jon Maddux: 16:26 Yeah.
Jerry Tubbs: 16:27 When you think about it, self-employed people are still the exception and not the rule.
Jon Maddux: 16:32 Right.
Jerry Tubbs: 16:35 I would bet it's an 80 20 type situation, where 80% of us, 90% of us are wage earners, it's that special 20 to 10% of folks that are out there doing their own things. The rules aren't really written for them, and so those exception type borrowers need exception type mentality. You have to think about those people aren't going to be living their life just so they can come in and make it easy to do a mortgage once every seven years when need one. They're living their life the way they need to. They're managing their cash flow for what makes sense for their business and their business strategy. It's my job I feel to take a look at that, stand back for a moment and go, "You make more money than I do. You deserve a loan." How do I tell your story in a way that takes advantage of what you've done that is exceptional, and present it in a way that makes people realize there's not a lot of risk in this borrower compared to the one that has two W-2s and a pay stub and [crosstalk 00:17:40].
Jon Maddux: 17:40 Yeah, because they could get fired tomorrow and lose their job.
Jerry Tubbs: 17:43 Yeah, and then they'll be self-employed anyway. Look at the world.
Jon Maddux: 17:47 For sure. Well, on that kind of thought, what can brokers do to better, how could they do a better job at getting the loan prepared to be seen by an underwriter like you?
Jerry Tubbs: 18:01 I honestly think you need to be a better storyteller. If you, and I would take the time to type up a paragraph of what does this guy do, how does he make his money, how much money does he typically make, how often does he make it? It's so many times I can't tell you where you'll have a very generic sounding business name that really doesn't tell you if this is a product, if it's a service, or if it's any other kind of operation, and those type of details help make sense, because then when I look at bank statements, it makes the deposits that are going in make sense, like oh, that's probably one of his business deposits because it's the right size, it's the right frequency. So telling the story, understanding, and I got to believe if you're an originator, I got to believe that showing that much interest in your borrower to find out how he makes a living, it's got to be a great rapport builder.
Jon Maddux: 19:10 Oh yeah.
Jerry Tubbs: 19:10 So there's a great reason to do it anyway.
Jon Maddux: 19:13 Sure, you have a great chance. People like to talk about themselves too. So if you're asking like, "Tell me how you make money." They want to just talk and you can take notes.
Jerry Tubbs: 19:20 I would assume you'd have trouble shutting them up.
Jon Maddux: 19:22 Right, yeah.
Jerry Tubbs: 19:24 But you're going to learn things that are going to help you present the loan to someone like me and help me understand, because I'm going to have the same questions from a different perspective, which is I need to know how this guy makes money.
Jon Maddux: 19:35 Yeah, and you're looking at bank statements, so you're seeing all kinds of deposits, and some of these deposits you're like, "Gosh, is this income? Is it not income? Is it just somebody is transferring money from here to there?" So yeah, to understand that right off the bat would help you from going down some bad rabbit holes and thinking things that aren't necessarily true, right?
Jerry Tubbs: 19:56 It reminds me of a situation I had. I had a borrower where there was a Schedule C borrower, I actually had tax returns in this, and it wasn't really obvious what he was doing. What was really obvious that he was making a lot of money, and the expense ratio was really almost unrealistically low. So low that it felt like, could these be fraudulent returns? I actually ended up calling the borrower just because I was curious, because it looked like it had something to do with precious metals, but it's not like he had a storefront or he's buying and selling precious metals. I couldn't quite make the connection. So I finally just broke down and said, "If I have permission, can I talk to your borrower and find out." So I called them up, got them on the phone. Turned out what he had discovered is that catalytic converters in cars have a small amount of recoverable platinum.
Jon Maddux: 20:49 Really?
Jerry Tubbs: 20:50 And he had a process that would recover that. So his day was spent going from auto junker to auto junker buying as many used catalytic converters as they would sell him. He would recover the platinum, and he was so good at it, and platinum was like, I don't know what it is per ounce, but back then it was.
Jon Maddux: 21:08 It's expensive, yeah.
Jerry Tubbs: 21:08 Yeah. Back then it was a $1,000 an ounce and he was recovering pounds of it every month from junkyard salvage.
Jon Maddux: 21:17 Jeez. I wonder if he's still doing it. I mean, there's probably only so many of those.
Jerry Tubbs: 21:20 He's probably retired by now. He was making a lot of bread when I knew him.
Jon Maddux: 21:23 Wow. That's a cool thing. So went and called the borrower and found out what, that that's kind of what was going on.
Jerry Tubbs: 21:28 Yeah. Tell me the story, and then it just made me jealous afterwards.
Jon Maddux: 21:32 So I mean, that makes me think like, I mean, and I know mortgage lending is not always exciting. Trust me, it's not the most exciting business, but there are times when you get to look and see some things, and you hear some scenarios that actually are exciting in a way, because this stuff is interesting. You actually could probably.
Jerry Tubbs: 21:51 I've been doing it for 30 years and for me it was Shark Tank before there was a Shark Tank.
Jon Maddux: 21:56 Oh, that's cool.
Jerry Tubbs: 21:57 Because I would learn how every, especially self-employed, how they found a niche and exploited it with their knowledge or their first to market, or whatever their advantage was, and yeah. I've seen, I've had the benefit of seeing a 1,000 different ways to make money.
Jon Maddux: 22:13 That's very cool.
Jerry Tubbs: 22:14 And it's all fascinating.
Jon Maddux: 22:15 That's very cool to see. You mentioned fraud a minute ago. It's been a long time since I've heard about or seen fraud in the mortgage business, thank god, but before the crash, before 2008 there was some fraud happening, like forgeries and different things. Using debt appraiser's licenses, I mean, I've heard of stories and stories, but recently we kind of came across something that could look like fraud. I know that someone did something. It seems like a loan officer would not risk their livelihood, their potential freedom, go to jail or anything like that. I think loan officers are probably less likely to do fraud these days, and maybe it's borrowers. What do you think? Do you think that's something that's kind of coming back? Do you think there's more fraud coming or, with these type of loans or?
Jerry Tubbs: 23:12 That's a great question. One of the points you made was I think most loan officers, and most people in the mortgage business have that mindset that you kind of, once you're in the business, you kind of decide well, I really like this.
Jon Maddux: 23:27 Yeah.
Jerry Tubbs: 23:27 And I had that feeling very early, it's like, "I like this. I'm good at it, I'm going to do this." And as soon as you have that much skin in the game, you are very conscious of I got to make sure that my behavior doesn't jeopardize this, because this is something I'd want to be able to do, and I wouldn't want to do something that would prohibit me from being able to ever do it again. So that mentality is always on my mind.
Jerry Tubbs: 23:53 Also, I think the longer you're in the business, your personal reputation means a lot. I mean, if you end up working with other companies that are because you're selling them loans, or appeasing to their other quality process, and if they don't trust you, it impedes your ability to do business with that. So I'm a big fan of, once you've decided this is a business for you and you want to stay in it, it's pretty easy to stay on the right side of what to do.
Jon Maddux: 24:21 Right.
Jerry Tubbs: 24:22 In terms of the fraud question, I've been doing this long enough to where I see an evolution in fraud, and believe it or not, in the '90s when I'm managing large underwriting groups where we were at at the time, credit report fraud was our biggest problem.
Jon Maddux: 24:41 Really.
Jerry Tubbs: 24:42 There was a 1,000 mom-and-pop credit bureaus, and it would be very easy if some account that was jeopardizing your loan approval showed up on a collection account, let's say.
Jon Maddux: 24:54 Sure.
Jerry Tubbs: 24:55 It would be really easy to call mom-and-pop credit bureau and say, "I'm not ordering another credit report from you again if you don't get that off of the guy's report because that's keeping us from closing." So there was some undo pressure you could apply. One of the things that solved that was when DU and LP came out and people were ordering credit on their own untouched by-
Jon Maddux: 25:15 Right, [crosstalk 00:25:16].
Jerry Tubbs: 25:16 An unscrupulous player.
Jon Maddux: 25:18 Once removed, yeah.
Jerry Tubbs: 25:19 Yeah. Then you knew this is the real credit data, blemishes and all, and what are we going to do with it? And with it came kind of some doc relief where at that point then, the agencies knowing they were getting good data could then start to create relief or yeah, if it's this balance, you don't have to pay it off, or if it's this old, you don't care, you know?
Jon Maddux: 25:38 Right, right.
Jerry Tubbs: 25:39 So it actually, it solved the problem. The next biggest thing we had was tax return fraud, and once the cooperation was set up with the IRS to get transcripts, it really took a lot of the tax return fraud away, and companies that do a good job of making sure they transcript that information protect themselves from a lot of exposure. So you got two big chunks that have been taken out of the industry in my lifetime.
Jon Maddux: 26:05 And also appraisal fraud is probably way low now because there's just, you have to have an AMC, you can't just order an appraisal from their appraiser. You can't just, hey, I need a 2.2 value, can you do that? No. Okay, the next guy.
Jerry Tubbs: 26:18 Yeah. There was a lot of pressure.
Jon Maddux: 26:18 That's how it was.
Jerry Tubbs: 26:20 And it sounded very much like the credit report pressure.
Jon Maddux: 26:23 With the credit, yeah.
Jerry Tubbs: 26:23 Where I'm never ordering an appraisal from you again if it doesn't come in at this.
Jon Maddux: 26:27 Right.
Jerry Tubbs: 26:27 So now that that pressure is gone, I do think appraisal values are a little more solid, and computerized tools help as well. AVMs have come along so far that.
Jon Maddux: 26:38 You can pull up Zillow and Redfin and go, "That says it's worth only a million three, but you're saying it's worth three million?" And then there's no comps. You can really, call bullshit-
Jerry Tubbs: 26:47 You could start to triangulate.
Jon Maddux: 26:47 Really quick, you know?
Jerry Tubbs: 26:47 Yeah. You could start to triangulate what your appraiser is saying, and what your realtor is saying, and what data is saying and start to, yeah, it's probably somewhere in here, and the only thing that we haven't really done in the appraisal world that we need to do, is we need to give appraisers the ability to create a value range rather than a value. Because then any given day, depending on how desperate of a buyer you are or how desperate a seller, that million dollar property might go for 980 and it might go for a million 20.
Jon Maddux: 27:21 That would be an interesting concept to do a range instead, yeah.
Jerry Tubbs: 27:25 Because then you could as a lender, you could decide hey, this is in the upper part of the range, but it's still within reason. Maybe I'll do it at 90 instead of 95. You could play with that range and get comfortable.
Jon Maddux: 27:37 Change the pricing a little bit too, you know?
Jerry Tubbs: 27:40 Yeah.
Jon Maddux: 27:40 Going to the red. You get into the red zone, you're adding a little bit to the range.
Jerry Tubbs: 27:42 Yeah, exactly. Make me interested again. So the last bastion for me is bank statements, and unfortunately it's one of the few pieces of information that we still ask borrowers to provide because we don't have easy direct access to get the information ourselves, and with the tools that are out there, it'd be pretty easy to turn that $1,000 deposit into a $10,000 deposit and make it look like.
Jon Maddux: 28:14 Just [crosstalk 00:28:14] zero.
Jerry Tubbs: 28:15 Yeah, and I think the reason we're possibly even talking about recently after this evolution of, while the other things we've chased out of the business, is bank statement loans are now a popular way to get financing, and it's an easy platform to if you're not getting the answer you want with your bank statements, a little Photoshop might change that answer.
Jon Maddux: 28:39 Right.
Jerry Tubbs: 28:39 There is something that I'm sure the industry is going to have to address, and frankly, there's a lot more technology out there too that could possibly address it than there's ever been. I see that window closing because bank statement loans are getting so popular, and people aren't going to stand to get ripped off using borrower provided information that's not quite on the up-and-up.
Jon Maddux: 29:06 Makes sense. So we've kind of talked about some of the things you like about borrowers and just being able to see kind of interesting stories, and hear interesting scenarios, but what would you say is your least favorite borrower or type of borrower even? Would it be like crazy income tax stuff, or would it be just maybe someone who is just spending too much money? Do you ever get kind of not judgemental, but at the end of the day you go like, "This guy doesn't deserve credit." "This girl doesn't deserve credit." Because of whatever. Do you ever get personal in there? I mean, I know I'm putting you on the spot, but.
Jerry Tubbs: 29:44 I don't really have, I can't say that I have a prejudice on how people make their money or how they spend it, and most borrowers are pretty, it's amazing how self-disciplined they are. It always has amazed me when, but even before I figure out what someone makes or doesn't make, they're pretty good about coming up with a monthly housing payment number that's comfortable for them, and sometimes a challenge for me is figuring out, "Why do you think that's a good payment for you?" But then when I get all the facts in it's like, "Oh, a big chunk of your income is tax free, so it feels like you make more." Or, "You had this debt but you're not having to pay it, someone else is paying it." So there's different things at play where sometimes I don't get it initially, and then the longer I work with a borrower it's like, oh, I get it now. In terms of, I would say the only frustration I ever have with borrowers, and it's fairly rare, is occasionally you'll find a borrower that you've kind of created a roadmap on how to get them from where they are to the closing table, but you need this, this and that, and they've decided either from their personal frustration or lack of understanding about the business that I'm not giving you that.
Jon Maddux: 31:03 Yeah.
Jerry Tubbs: 31:04 So every once in a while it's like, you try to be patient with people, and I realize it could be frustrating for some borrowers because they don't go through the process very often, they don't understand it, but I would say if there's a borrower that ticks me off is the one that tells me what the documentation level is going to be rather than the other way around, but what are you going to do?
Jon Maddux: 31:24 You got enough stuff. Just tell me yes or no.
Jerry Tubbs: 31:26 Yeah, exactly.
Jon Maddux: 31:28 [crosstalk 00:31:28] Those people.
Jerry Tubbs: 31:28 It's like, "I don't think so." I think it's a little bit of the golden rule there.
Jon Maddux: 31:32 Yeah, and they always also ... But I gave you everything. You said that was it, and now you want more? And it's like, "Well, it's like conditions beget, put in conditions." It's like they just.
Jerry Tubbs: 31:44 Sometimes it raises another question that you didn't think to ask because oh, that's the answer. But that doesn't happen very frequently, but every once in a while you get someone that's just had enough and unfortunately they're giving up a few yards from the finish line. It's like, we got to get one more furlong down the track.
Jon Maddux: 32:05 So do you think these loans are risky?
Jerry Tubbs: 32:08 Well no. The type of loans that we're doing typically have really sexy LTVs.
Jon Maddux: 32:15 Yeah, they do. Skin, skin in the game.
Jerry Tubbs: 32:19 Yeah. When you have a borrower making that kind of investment either protecting an investment, equity they've already earned in a refi, or hard-earned money going down for a down payment. That's a big deal. That kind of skin in the game really helps predict what their behavior will be if they ever run into trouble, some life event that keeps them from being able to make the house payment. The hope is as a lender that you'll make the decision of whether or not you could truly afford the home anymore. Is this a temporary setback or is my income is going to be reduced for a while, this not the right house for me? And the hope is that you'll take the right kind of action and put the house in the market, grab the equity that you have and make a better life decision based on your new circumstances.
Jon Maddux: 33:06 Sure.
Jerry Tubbs: 33:06 Versus dropping the keys in the mail or not making your payments, or those sort of thing. Doing the larger down payment loans, you can see a lot of people that their intent is to make those payments, preserve their credit and enjoy that equity, and I love working with people with that kind of motivation all day.
Jon Maddux: 33:28 Yeah, that's true. I was thinking about, I've been seeing lately people talk about there's another crash coming, there's a big downturn, it's due, it's inevitable, and I always think about it like, I like to look ahead and try to look around the bend, but it's never easy to, you don't have a crystal ball, but knowing what we know about how tight mortgage lending has got, has been, and how all these laws are in place to protect us from getting crazy appraisals, to protect us from having fraud, to protect us from really, and then the inventory being small and builders not going crazy and overbuilding again like they did back in '05, '06. So what would you ... What are your thoughts about a crash? Do you think it's going to be centralized? I mean, I've heard corporate debt is going to be something that we got to watch out for, that's going to be a bubble that's going to pop, but as far as just residential real estate, what are your thoughts on that being that we've been so tight?
Jerry Tubbs: 34:38 This is going to go into a second hour, you realize. I'll give you my very short synopsis on what I feel the crash was, and it really gets back to if you go back to Econ 101 in entry level college course, supply and demand.
Jon Maddux: 34:57 Yeah.
Jerry Tubbs: 34:58 Traditionally in the mortgage space, housing there's a relationship between housing prices and median income, and that relationship narrows and broadens based on a couple variables, one would be interest rates. So even at the median income, median household income, if the interest rates get lower, you could support more house price with the same amount of household income, and if there's only so much real estate inventory out there, there could be a tendency, we can buy a house, the rates are really low, and you get some more bidders out there, and supply and demand, there's more buyers than sellers and it'll drive the price up.
Jon Maddux: 35:42 Right.
Jerry Tubbs: 35:42 Similarly, when rates increase, that gap narrows because this median household income can only support so much median house price. So that relationship's been in there for all the times that we've tracked both of those numbers, but it goes through times where it's not quite parallel. My view of what the crash did was because of some of the products, it removed the median household income cap.
Jon Maddux: 36:16 Like ARMs or interest-only, or neg-ams, is that kind of thing?
Jerry Tubbs: 36:19 That plus I could tell you any number for my income because you're not going to-
Jon Maddux: 36:23 Oh yeah, so you took that thing out and threw it out the window, the median household income.
Jerry Tubbs: 36:25 So now, so temporarily for a couple years my median household income is infinity.
Jon Maddux: 36:33 Right. That just makes unlimited demand.
Jerry Tubbs: 36:37 Unlimited buyers.
Jon Maddux: 36:38 Yeah.
Jerry Tubbs: 36:39 So now I have everyone in world could buy a piece of property if they wish to.
Jon Maddux: 36:44 Right.
Jerry Tubbs: 36:44 And many of them wished to.
Jon Maddux: 36:45 Right, many of them did.
Jerry Tubbs: 36:47 And when you have a 100 buyers chasing a property instead of 10 buyers or one buyer, the price just skyrockets.
Jon Maddux: 36:54 Right.
Jerry Tubbs: 36:55 I can tell you that that's happened a couple different times. It's happened in the '70s, where the spread, the traditional spread between house price and median income got 20% worse than its historic norms, but then prices froze and median income rose to get back to that traditional, and then the market could legitimately go up again. So something has to give, the prices have to plateau until income approaches, or income has to go up so fast that allows prices to go up again. In the '80s and late '90s, or early '90s, late '80s, it happened again, that it was like a upper 20s, and then it had to, the market had to close that gap.
Jerry Tubbs: 37:46 Well, during the height of the crisis, I said in a meeting where we could demonstrate that that traditional gap had stretched to 45%. The predictions were it was going to go to 55, where it actually did, but this is a year before the crash. We're seeing that bubble, and then historically we knew that bubble would have to close 90% of that gap. At that point the only way it could give, you just couldn't get household income to creep up that fast. So the only thing that had to give was, you actually had to have value decline. So which we hadn't had in the other bubbles, in the other bubbles you had plateaus, in this you had.
Jon Maddux: 38:30 Crash.
Jerry Tubbs: 38:30 It had to actually tank.
Jon Maddux: 38:32 Interesting.
Jerry Tubbs: 38:33 So it gave back, the market gave back, or had to give back 50% of the 55% bubble had to be given back before the market could ride itself. Getting back to your primary question. What could we have done differently to prevent that bubble? The thing that we did wrong in my opinion is that we continued to add fuel to the fire by doing those stated income or no income loans at extremely high LTVs.
Jon Maddux: 39:03 Yeah. Because the skin in the game wasn't there.
Jerry Tubbs: 39:06 Yeah. If we could've dialed back the LTV as the bubble grew, people could still speculate on housing, but they'd have to do it with their own money.
Jon Maddux: 39:15 Right.
Jerry Tubbs: 39:16 And then the losses wouldn't have been lender losses, they would've been-
Jon Maddux: 39:18 There would've been less demand because less people had their own cash.
Jerry Tubbs: 39:21 Yeah, and fewer people would, it would've eliminated some of the speculators, the highly leverage speculators. It would've been speculators that could afford to speculate with their own cash.
Jon Maddux: 39:32 Right, right.
Jerry Tubbs: 39:33 And then the losses that were taking place, again, going back to borrower repayment behavior, the losses that were taking place would've been losses out of people's cash not out of lender's vaults. So the thing we're doing differently today that encourages me is that even though we're doing creative products, we're doing them with people that have large equity stakes in the property. So even if they are speculating on a particular investment property or even a homeowner, but they're speculating with their money, they're not speculating with money I have in the vault.
Jon Maddux: 40:04 Right. People would play a lot differently in Vegas if they had their own money versus someone else's money.
Jerry Tubbs: 40:10 Yeah, that's a great point.
Jon Maddux: 40:12 That's why all the people.
Jerry Tubbs: 40:13 Yeah, if you get $10 of free play, you're like, "Woo."
Jon Maddux: 40:15 You're like, "Hey, give me some money." Bet it on black or bet it on red, I'm like, "No, I'll do it when I go to Vegas." You can bet your own money.
Jerry Tubbs: 40:22 Yeah. So that's my short opinion of what made prices go crazy is you took the cap off a median income, and I still think you could've controlled it if you hadn't accommodated it with extremely high LTVs on that type of product.
Jon Maddux: 40:38 So you think we're going to be okay.
Jerry Tubbs: 40:40 The skin in the game makes me feel like if people are going to take loss is because of a price correction, it's going to be out of their equity not out of their loan amount.
Jon Maddux: 40:49 Interesting. Yeah, yeah, that's good. So last question for you, Jerry. If you were to say, "To hell with underwriting. I'm going to go back to being a mortgage broker." What would you do today to try to find this kind of borrowers? How would you, would you buy leads, would you call up some referral sources? How would you go about getting these type of loans?
Jerry Tubbs: 41:15 I believe where the business may be going would be taking like an inbound marketing approach where you become a resource for people's questions. So long before they even think about buying a piece of real estate, they start to think about what does it even take to do that, and you create an area where people can navigate in and read, watch videos, type of things that you're doing, educate the self-educate, and then create a forum where as people get more and more educated, and they realize, "I think I'm ready based on these tools and the things I'm reading. I probably could afford a house." And create a launching pad to where when they're ready to get pre-qualified, it's easier for them to do in maybe an automated way.
Jon Maddux: 42:06 So maybe you'd build a website and create a little place for people to read, get educated, and then once they're ready they can do a little application online. So you'd kind of do some online marketing, I see that. Is there any type of other ways you would get it? That's creative and I think that would work.
Jerry Tubbs: 42:24 And I'm a big fan of pre-approvals.
Jon Maddux: 42:29 Yeah. For buyers, right?
Jerry Tubbs: 42:33 Yeah, using a platform like that of finding out how much, the toughest thing about buying a piece of real estate is figuring out how to finance it.
Jon Maddux: 42:42 Yeah.
Jerry Tubbs: 42:43 If you reverse that process and figure out your financing first, then go find a real estate agent.
Jon Maddux: 42:48 Right.
Jerry Tubbs: 42:49 [crosstalk 00:42:49].
Jon Maddux: 42:49 Usually it goes the other way around, though. Most people are like, "Oh, let's go house hunting this weekend." But they don't do the hard work upfront.
Jerry Tubbs: 42:56 Yeah. And it's really not that hard work. We make it easy, a lot of companies make it easy for you to come in, bring a handful of credit documents and figure out based on today's rates and these programs, you could afford this, and that number, then that's the time to go out and test the market and figure out what can I get for that kind of money. Is it something I want to put up with? What could I do to change those numbers?
Jon Maddux: 43:22 That's cool.
Jerry Tubbs: 43:22 So to me, being an information base for people that want to get involved and getting them involved before they fall in love with the house, let's fall in love with your financing first, and then leverage that into, you'll know what part of the market to be looking in and know what you can have.
Jon Maddux: 43:39 Awesome. Jerry, thanks so much. It's been very informative and I appreciate you coming on.
Jerry Tubbs: 43:43 My pleasure.
Jon Maddux: 43:45 Thank you for listening to our podcast. If you guys are looking for more content like this, we have a FundLoans YouTube channel where we give away more tips, secrets, and origination ideas. You can also email us at email@example.com, and if you've made it this far, I think it's safe to say you like our content. So please subscribe, share, and send us your scenarios. Let's FundLoans together.