Talk Your Book: The All-In-One Home Equity Loan

0:00Today's Animal Spirits Talk Your Book is brought to you by Northpoint bank. You can go to NorthPoint.com. That's point with an E on the end. NorthPoint.com to learn more about their all-in-one loan with home equity line. That's NorthPoint.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:35Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:44Welcome to Animal Spirits with Michael and Ben. Michael, for the last year, year and a half, two years or so, I've been talking about the huge rise in home equity that we've seen in this country. I think it was, it's up, I don't know,$15 trillion since the beginning of the pandemic, something like that. We're up to like$31.6 trillion at the last counting. People have a lot of money in their homes. Some of it seems locked away because they have a 3 % mortgage already. And kind of like, what do I do with this money? And so I've been saying for years that I think we're going to see more creativity in the home equity line of credits that are offered to people.

1:22And today's talk with North Point Bank is one of those opportunities. You want to touch, you want to do something with your equity, don't you? It feels like it's just sitting there, doesn't it? Safe and sound. Yeah. I don't know. There's a part of me that it's like having my house be more and more paid off or the value went up. So I have this equity is it is like a nice margin of safety, but I feel like you, you could handle having access to your, your house. Yes. The finance brain in me says I should be doing something with this money. and this was an interesting one. So North Point Bank, which is based in Grand Rapids, Michigan, it's right down the street from me, straight down East Beltline.

2:00They have this product that works essentially as a home equity line of credit that you can write against, but also it's like a bank account that you can use to pay your bills, and the money that you put into the account pays down the principal, so you pay less interest. It's really interesting, and we get all into it today with Jason Anderson from North Point. And I've never really seen an account like this before. Have you? No. This was totally new to me. Yeah. I feel like, yeah, my head was spinning a little bit, but definitely an interesting idea. And you have to be, you kept getting into this on the talk here, the interview of, you have to be a very fiscally responsible person to manage something like this.

2:39But I think if you are and you have this large equity sitting in your house and you want to do something with it, I think that something like this is very interesting. Yeah, I wonder if this is, I don't know, I'm making this up. I have no basis of saying this, but maybe not for the first time home buyer. Although with interest rates at approaching 8%, maybe not a terrible idea. But the idea of someone who does investment properties or rentals or wants to use a big amount of their equity for something else that feels like, again, it's just sitting there. I can see this idea taking hold for some people.

3:15Anyway, so we talked to Jason Anderson. He gives his email address at the end of the... Credit to Jason. Credit to Jason. First time we ever had that. And so here's our talk with Jason Anderson of North Point Bank.

3:30We're joined today by Jason Anderson. Jason is the regional vice president at North Point Bank based in Grand Rapids, Michigan, right? Jason, welcome to the show. Correct. Grand Rapids, Michigan. We lend in all 50 states, Ben, but focused and centered and headquartered in Grand Rapids, Michigan. Michael can't handle this many flyover people on the podcast at once. Jason, a couple of weeks ago, Ben and I were joking. We were joking. We were talking about the modern farmhouse, how that's just like, that is the house. And Ben started laughing. He's like, that looks exactly like my house. It's not just a Midwest thing.

4:02It's such a Midwest thing. So I spent 30 years in Indianapolis, guys, and I can tell you that that craze is for real. The Indianapolis suburbs are littered with that modern farmhouse, Michael. They are everywhere. It's spread all the way east to Long Island. I'm saying it's all over the place here. It's like a locust. It's the big thing, man. It's the big thing. You should see some of these in the Indianapolis and surrounding suburbs. Never say anything like it. So Jason, I've seen North Point Bank, the headquarters is not that far from my office. Give me some background on the bank because I'm really not that familiar with everything you guys do.

4:44Sure, sure, sure, sure. So the bank was founded in 1998 and we are an FDIC bank, Ben, but really we do focus on all types of mortgage operations, right? Warehouse facility lending, which is lending to other banks and mortgage companies, retail lending, which is what I do, which is just mortgage origination, servicing. So really, that's been our focal point is all types of mortgage operations. Again, we're depository. But from a revenue standpoint, that's really something we focused on. You know, the idea has always been, you know, offer a fantastic platform for top sales individuals to come to.

5:25And that's really what North Point has strived to do. We've got a lot of product and we do lend in all 50 states. So it caters to the higher level sales individuals. individuals. I like to think I'm one of those sales individuals. I've been with the bank for about 13 years and it's just been an incredible run for me. And look, focused on customer service, especially in these challenging environments and doing whatever we can do to help the consumer. Before we get to the all-in-one loan, which we're really excited to talk to you about, you mentioned providing a great platform. What does that mean from your vantage point?

6:00So really the platform, it's a combination of fulfillment, right? It's a combination of product. It's a combination of competitive pricing. Technology is important. So you put all these things together. And again, the idea is to be able to help the client in a stress-free process, a ton of product. And again, the idea is that it's going to attract your highest producers. But to that point, the platform is the entire lending platform. It encompasses everything. And like I said, it's pricing, it's product, it's fulfillment, which is really, really important. So, you know, you guys probably, you know, are aware, hey, I've had a bad experience with my mortgage company or a challenging experience with my bank.

6:43That all rolls under the idea of platform, right? Do you have systems in place? Do you have process in place? Is the culture in place? So, you know, 13 years for myself at North Point Bank, many can attest in our industry is a lifetime. And I think that speaks volumes about the platform that North Point does offer. I looked into the all-in-one loan today and you have a nice video on your website that explains it. And this to me seems like a relatively, it's like a creative product as far as I've seen in the mortgage. So explain to me how exactly this thing works. Yep. So basically the product itself, like you said, Ben, it's known as the all-in-one loan.

7:18The generic term is offset mortgage. And offset mortgages are readily available in other parts of the world. They're newer to the United States, but basically the foundation of the product is it's a first lien 30-year home equity line of credit that combines with a checking account. And then that checking account, whenever a deposit hits the checking account, it will sweep over and pay down that line of credit. So really, the concept and fundamentally, this is how the product works. On a traditional loan, you're paying interest first. Interest is front loaded. On this particular product, you're doing the opposite.

7:57You are actually paying principal first. And because of that, the results are, in some cases, absolutely phenomenal. OK, there's not really any other product in our space that functions like the all in one loan where the principal is paid down first as opposed to, you know, interest being paid first. So my checking account, I have money going in and coming out all the time. Not to brag. Let's say let's say there's an average balance in there. I don't know whatever it is. So as the money comes in and as you get a direct deposit from your employer for your income, that essentially pays down the principal of the loan.

8:31So you're paying less in interest. But then if you write checks out of that or you pay your rent or whatever it is, then the loan balance increases. So the loan balance is kind of yo-yoing? I tell you what, Ben, I do a presentation weekly. I may have you ride shotgun with me because that is exactly how the product works. We've all been groomed to believe that you've got to have money sitting in your checking and or savings to pay for your bills or pay for what have you. I mean, that's what we've all been conditioned to believe. But the reality is you need a funding source to pay for those bills.

9:01right? And that money, you know, 5 ,000, 10 ,000, whatever's sitting in that checking account, is it accruing more interest than it did two years ago? Of course it is, right? Just because rates being so high. But the reality is we are turning those deposits into equity in your property. That's exactly what's happening. And to your point, Ben, basically what happens at that point is you have a funding source. You've got a line of credit, okay? So checks, debit card, You can wire money in and out. So are these, is this product especially more exciting for a borrower with the 30 or above 7 %? Like would it make more in today's market versus say three years ago when rates were sub 3.5 %?

9:42Yeah, that is an awesome question, Michael. So look, does it work more efficiently in today's market? Does it cater directly into the market that we're in right now? Absolutely. I've been doing this since 1995. These rates are as high as I've ever seen. That being said, it can work just as effectively or very effectively still if we're competing against somebody that came out of the refi boom, let's say the 2020-2021 refi boom with those lower rates. It's not going to work quite as efficiently, but the key to this entire idea of the product itself is, you know, you may have a 30-year fixed where, you know, you guys know or you hear this, you pay an extra payment on a monthly basis and, or I'm sorry, on an annual basis, make 13 payments instead of 12.

10:30My mortgage got cut down a few years. Really the idea behind this is if it works really as efficiently as it can and the client takes advantage of that, we're talking about significantly cutting down the mortgage, not just a few years. So, So the difference, Michael, would be this. When we're comparing against a 3 % rate, yeah, there is a possibility that although it's going to work really, really efficient, it's not going to work as efficiently as it does in this current environment. How do clients typically come to you? Is it the kind of thing where they have a mortgage somewhere else and they apply with you to get this?

11:05How does that work usually when you get new clients? Yeah, good question, Ben. So again, going back to North Point Bank, we are designed to hire the best of the best. That's what the platform allows us to do. Really, it's probably one of a couple things, Ben. Maybe the client comes to us. They're referred by somebody. They come to us. All they know is 30-year fix. That's all we ever have been groomed to believe. Hey, 30-year fix. And it makes sense. From a capitalist standpoint, it's simple. We know 30-year fix, give me my rate, give me my payment. So a lot of times, they'll come looking for the 30-year fixed.

11:39Everybody's swimming in the same pool, right? It's just all about rate at that point. And if we see the need, if we ask the right questions and we see that there is a need, or this particular client may be just completely dialed in there, or their particular scenario makes a ton of sense, we can shift the conversation and offer it to them, right? You guys may see the challenge with this is in this environment, you know, there's almost no refinances, 30-year refinance is occurring, right? Because it's got to be such a need for cash out that somebody is willing to give up their low interest rate from the previous three, four years.

12:14This is a little old school, this product. We all have a client base that can use or find a need or potentially, again, we can figure out what the client's need is. So this is a little different too. This isn't just the clients coming to us, but I would say also it's something that we're selling a little bit more. We're no longer order takers in the industry, right? Just give me a rate on a 30-year that that's no longer what we're doing in this environment. Obviously, it makes sense that you're not seeing a lot of refinancing activity right now. So I assume because there's all this, I think the number I looked at last was like 31 point something trillion dollars in home equity.

12:48Like people have a ton of equity in their house. So are people more attuned to a home equity line of credit these days? I mean, because there's so much equity there, even if they're not, you know, doing a cash out refi? Yep. So we're going to, you know, in that case, Ben, we're going to look at every situation differently, right? We've really got to ask the right questions. To that point, is it super challenging or does it make financial sense for a client to give up a low interest rate that they secured two, three years ago? Probably not. So we have seen a pretty significant uptick in the clients that are calling saying, hey, I don't want to give up my first mortgage, but I have an interest in borrowing cash.

13:26I need cash. I mean, we're in a really, really interesting dynamic in the market right now. In those cases, though, they've got to understand when you hear that the Fed is increasing interest rates, it is a direct correlation with your HELOCs, your home equity lines of credit. We are getting a ton of inquiries for home equity lines of credit. This product gives us a different option. It gives us a solution, a potential solution with ancillary benefits over and above that. So again, like you said, Ben, the interesting dynamic is with where these rates have gone, there's an idea that equity or home values would be dropping, but that's just not the case because of our limited supply.

14:11So you do have everybody's, not everybody, but Joe Consumer does have, in a lot of cases, a significant amount of equity. So, you know, this product potentially gives them a reason to refinance off of their lower interest, first mortgage interest rate. Can we talk about exactly how this works? So let's say that I've, I've got a$3 ,000 monthly mortgage payment. I'm paying$2 ,000 in interest,$1 ,000 in principal. How does it, like, how are you all able to flip that on its head? Yeah. So the easiest way to explain it, Michael, is going back to the idea that it's not just a mortgage product. It's a banking product.

14:54Okay. The grooming financially is that on the first of every month, I got to make my mortgage payment, right? And I get a 15 day grace period. Okay. Basically what's happening with this product, like this is how it's actually working is it's accruing interest on a daily basis. Okay. And then, um, on the 21st of every single month, we are going to, uh, have that interest hit your all in one account. So you'll see the increase like you spoke to earlier, Ben, whether it's paying expenses or what have you, but then anytime a dollar,$10, your monthly deposit hits your checking account, it will sweep over and you will literally see it pay down that account dollar for dollar, if you will.

15:36So really what's happening is any expense, childcare, food, anything, anytime you are using your all-in-one loan, again, it's a line of credit and you're using it to pay your expenses, it's increasing the balance. And then anytime you have a deposit, it's your checking and or savings account, it's going to pay it down. The key to it is, and the reason why I keep referring to it as a banking product, again, from my own experiences, you know, I got to be careful here. I don't want to, I want to go with what my terms were, but I did refinance off of a very low interest rate with, you know, I jumped in with both feet, took me about 30, 60 days, but then you realize after 30, 60 days, best practices, everything hits that checking account.

16:22And then you pay that, you know, if you want to kill the mortgage or I'm sorry, kill the interest, everything's got it. So, you know, to answer your question, Michael, truly at the end of the day, it's just a different way to do banking. But the ancillary benefit, the foundation of the product is we're paying principal first while that's happening. So there really is no preset monthly payment. Like it's an interest only loan effectively. And the interest can just keep building if you don't pay it off. But if you are paying it off, and I guess if you were taking up a lot of money out of here, you'd want to put more money in each month if you wanted to pay it off and didn't want interest expenses to grow and compound.

17:01That's it, Ben. So the reason that we want to impress on our clients that it pays principal first is because at its core, that's what it does, right? It doesn't mean you have to specifically use it for that, right? It does have ancillary benefits. I always tell the story of a client that called us in a jam and his current loan was about to adjust. His income was decreasing. He was going to retire in three, four years, but he had a significant amount of equity in his house. But if you think about it, on a 30-year fixed, you're still handicapped. You are making that payment every single month. That's not all bad.

17:36This is exciting. It's something that I've never seen before. And I think for people that are very fiscally responsible, this offers a lot of flexibility. Yep. One of the beautiful things about the 30-year fixed mortgage, though, is that there is no flexibility. And so you know, come hell or high water, you have to pay your mortgage. Yep. And it's forced savings. And quite frankly, it's people's biggest asset. And a lot of this country needs that discipline. I mean, look, you're spot on. Yeah, because this could be seen as like, oh my God, it's a piggyback. Like, I don't need to spend, I don't need to even pay it down.

18:11Like, oh, this is so much fun. I wish you could get into my brother's ear, Michael, because he didn't listen to me. So he's cruising around in a brand new boat. Now he's got the means, but still that's what happened. So look, it's understanding truly what the product offers, right? But we can run simulators and some of the results are just incredible how quickly these mortgages get paid off. That being said, look, exerting some sort of discipline is really, really important. It is because it's not that it's not going to work. It's just that for it to work as effectively as you want it to be, you really do need to be somewhat disciplined.

18:50Okay. So what are you looking for in those cases? Is it when someone comes to you, are you looking for a certain credit score? Is it income-based? Is it, or are you looking at just the equity in the home? Like what are the triggers you're looking for? Good question, Ben. And so look, so the underwrite of the file of an all-in-one loan is comparable to any other conventional mortgage. Similar debt-to-income ratios, loan-to-values cap at about 80 % loan-to-value. So think about it. The client can borrow up to 80 % depending on what the occupancy status is. We're going to check income. We're going to check assets.

19:22We're going to underwrite it just like any other conventional loan. It doesn't go through an automated approval like a conventional loan, FHA. Those are automated approvals. But basically, the underwriter is looking at this and saying, hey, do I have the income? Are the debt ratios in line? So from that standpoint, it is a comparable underwrite. You don't need a really high FICO score. It's basically looking at those same variables that you may see on a conventional loan. And again, it's a manual underwrite. So we've got a person going through that thing. We've got one of our underwriters scrubbing through that to make sure it qualifies.

20:00So this is a banking product, as you mentioned. Does this not work if you're not doing direct deposit into this account? Really good question with that too, Michael, because here's the situation. Here's what we've realized just by selling the product the last two, three years like we have. It can work for an investor, right? Rental income hitting your checking account, right? It could be bonus income. Maybe you don't have your direct deposit going in there, but you get a significant bonus check every quarter. OK, just keep in mind for the product to work as effectively as possible. Every single dollar you earn should hit that particular should hit the checking account.

20:41Let me let me sidebar here, too, real quick, Michael. It's a huge win for a lot of our investors. OK, think about it. You know, the investors are going out. They're paying a lot of points right now on the investor on the investor loans. The rates are where they are. and basically this gives them a lending vehicle that they can pay down and then borrow back against, right? From a cashflow standpoint for our investors, it can offer some significant upside. Do you want to touch on - Oh, go ahead. Sorry, I was thinking about this because there are a lot of people who have the 3 % mortgages and they say, you know what, I'm going to rent out my 3 % mortgage house and I'm going to buy a new one, but I want that equity or I want to buy a vacation home on the lake or whatever it is.

21:25Is this an option for that? It's a huge option, especially in this market. So what's happened, guys, is the last year, couple of years is based on risk, you've seen, again, the cost of a second home or cost of an investment property increase quite a bit, right? Paying points. There's also refi risk. What if the rates do drop, then all of a sudden all those loans are going to refinance, right? So we're talking about paying points here. And I don't mean, hey, I got to pay a quarter point. I mean, these are some significant adjustments that we're seeing on investment properties and second homes. This product can be offered with no points.

22:02Okay. Few and far between in our industry are offering any type of financing on a second home and or investment property with no points. And again, you know, we do a lot of lending in South Florida and, you know, you know, the bigger loan sizes down there, you know, you're talking, you know, a conventional loan at X with three or four points. I mean, this is shocking. This is sticker shock for a lot of clients. The all-in-one loan does offer a par rate with no points. Is there a risk that people use this product and they just don't pay down their principal? Of course, it can happen. Some of it is intentional, right, Michael?

22:39Again, I've got clients that they don't want to make a payment. They're going to sell their house in three, four years. They're good with it. They just want better cash flow in the meantime. It can happen. Now, it's going to cap from a risk standpoint. It's going to cap, like I said, at roughly 80 % loan to value, depending on what the occupancy is. I would say this. It's possible. It's no different than being reckless with a home equity line. It's just no different than being fiscally irresponsible in general, Michael. Those are conversations that if we gravitate towards that this product may fill or suit a need for a client, we're going to have that conversation with them.

23:15We need to make sure the client understands the value, but also understand somewhat of what the risk could be if they are not disciplined with the product. One of the things, Michael, I've been talking about is if we see rates decline and they're 7.5%, 8 % now, I think higher than anyone could have thought possible, certainly higher than I thought was possible from what things were just a couple of years ago. Do you see a lot of pent up demand there if rates were to fall to 6 % or even 5 % that we see this huge flood in demand or unlocking people who are finally saying, okay, I'm going to sell my house now because I can afford to buy somewhere else.

23:50Do you see that pent up demand there? Yeah. So the challenge right now, Now, and again, I don't know that any of us have ever seen a market like this, right? Who could have possibly thought, Ben, that rates were going to go as high as they are, but yet home values and asset values are still staying afloat. It's purely because of supply and demand, like you spoke to, right? The interesting thing is this, the driver we thought was going to be, we just need the rates to drop enough that we get a little mini refi boom. But we've realized that that's not the driver, right? The driver is the rates have to go low enough that somebody does want to come off that 3 % rate.