A Letter From LendingHome’s Chief Risk Officer
Dear LendingHome Investors,
I joined LendingHome in May as its very first Chief Risk Officer. Right away, I was excited by the potential to create high-quality investment opportunities for investors. In the following months, industry veterans with decades of mortgage underwriting and portfolio management experience joined me on the newly-formed Risk team. The team is made up of people with diverse backgrounds, but we share one common motivation: serving the needs of LendingHome’s investors. Delivering solid returns to you is our top priority.
Building a reliable, high-yield investment portfolio requires a great Risk team. But it also requires advanced risk management capabilities built upon cutting-edge technology and analytics. Over the past few months at LendingHome, we have invested in acquiring additional data from external sources to better understand the risk profiles of borrowers. We can use this data to create higher-quality investment opportunities.
The Risk team also carefully assesses risk/return profiles in housing markets throughout the country. Right now, we believe that the vast majority of markets around the United States remain in the expansion phase, during which capital investment picks up. This is typically accompanied by rising home values and sales trends. Affordability is good, and construction activity has reached healthy levels. Job growth has come back nicely, with the lion’s share of expansion markets recovering all of the jobs lost during the Great Recession.
By monitoring both our portfolio and market conditions, we have been able to drive a series of initiatives to drive the quality of our loans even higher. We are about to implement an enhanced version of our credit policy, which we expect to improve credit quality and generate better risk-adjusted returns. Changes include credit tightening in geographies where home prices were not trending up, increased minimum FICO requirements, and customized offerings for high-quality borrowers. Strong underwriting and diligent portfolio management translate into solid loan performance. This can be seen in LendingHome’s delinquency rate, which has been very stable so far.
When a borrower does miss a payment, LendingHome’s Special Situations Group becomes active, providing high-touch special servicing and workout solutions in order to maximize the recovery of delinquent loans. The efforts of the Special Situations Group, combined with favorable housing market conditions and adequate equity cushions on our properties, have led to a very healthy recovery rate, even on foreclosures.
In most cases, investors have been able to collect full principal and interest payments, plus additional fees, on delinquent and foreclosed loans. Of all the loans that have gone into delinquency since LendingHome’s inception, we have experienced a total principal loss of $10,390, or 1 basis point of our total portfolio. In fact, in some cases, the return on a foreclosure has the potential to end up even higher than the return on a paid-off loan with the same terms. Of our loans that have gone into delinquency, 250 were resolved for a return that was greater than the initial expected Internal Rate of Return.
The goal of our risk team is to ensure that LendingHome is in the best possible position for sustained high returns and controlled risk exposure in almost any economic environment. We have used mortgage expertise and advanced technology to build a leadership position in this market. At the same time, we remain disciplined in our underwriting strategy to deliver consistent performance. We look forward to building on the progress that we’ve made so far and continuing to provide you with strong, sustainable investment opportunities.