Intro to RFA Bank of Canada

Good day everyone. My name is Colin Pyle and I’m here to introduce both myself and RFA to the community. This post will start with a bit of history and context about the real world asset class that we specialize in (Canadian mortgages), then outline the broad strokes of an opportunity for a long term strategic partnership which could add enormous value to both of our organizations—and change the landscape of finance at the same time.

I’m a serial entrepreneur across Finance, Adventure/Travel and Coffee. My crypto journey started when I was invited to a friend’s house back in 2013 for a Thanksgiving dinner in London, England and I had the pleasure to meet some early Bitcoin enthusiasts. At the time I was doing a tech podcast (called Silicon Real) and had a bunch of crypto people on in the early days. I started to understand how this technology could change the world

In 2019, I moved back home to Toronto, Canada to help the RFA team acquire a Schedule I Bank. I watched the growth of DeFi become a core area of innovation in crypto, and I knew the timing was right to put this knowledge into action. In September of 2021 I found myself at the Blockworks’ Digital Asset Summit in NYC speaking with Michael Serunian from Centrifuge. I opened the conversation like this:

“I’m really interested in learning how you guys are taking real world assets and putting them on-chain to be funded through DeFi. We are a financial group out of Canada with a Federally regulated banking license and originating billions of dollars a year in Canadian residential mortgages.”

Initially I wasn’t sure how we could participate—and I was frankly skeptical that there was appetite in DeFi for lower yielding, close to “risk-free” assets. I told Michael at the time that I could bring RFA to the table if we saw an opportunity to scale north of $1 billion.

From there, we’ve engaged in a multi-month conversation to scope this opportunity to find alignment between RFA, Centrifuge, and MakerDAO. We believe this opportunity allows MakerDAO to both deploy DAI at scale (billions) and diversify its collateral base. We look forward to working transparently through the collateral onboarding process to solidify what such a structure could look like

To date, we’ve spoken with the RWF CU a few times, and have gotten the following feedback:

  1. We like that you are a Federally regulated entity in a Western Democracy.
  2. We like that you are already an operating business with a track record of success over 25 years.
  3. We like that you’re prepared to innovate with us by bringing traditional mortgages on chain, with the ability to scale into the billions.

As we proceed, we want to introduce ourselves here to the broader community and give everyone a sense of where we stand today and as we move forward together.

Who is RFA?

RFA was founded by a small team of real estate and finance people in 1996. From the start, we were punching well above our weight class as early pioneers and controlling investors in Canadian Commercial Mortgage-Backed Securities (CMBS), a market that we helped create.

Over the years, RFA has grown through strong capital relationships and persistent innovation in transaction structuring and acquisitions. We are lucky to have been involved in more than $16B in commercial real estate deals with institutional capital across Canada, and our residential mortgage origination operation has over $25B of mortgages under administration. In 2019, as I mentioned, we acquired a Schedule I Canadian Bank and rebranded it to RFA Bank of Canada.

Why DeFi?

The regulated banking industry in Canada is fundamentally an oligopoly of 6 major banks (“the big 6”) with a long tail of roughly 30 more (you read that correctly: there are only ~35 federally regulated Schedule 1 Banks in all of Canada, compared to literally thousands in the U.S.).

When we acquired our license back in 2019 we started to strategize how we could truly compete in Canada. On the one hand, we lack scale against the big 6; but on the other, RFA has always punched above our weight. As a smaller and younger executive team, we take a first principles approach and try to develop strategic, capital, and technological advantages that allow us to compete.

But the reality is that access to capital is the most important element to scaling a bank efficiently to profitability. Our cost of capital isn’t even close to what our large competitors are able to achieve through customer deposits and sheer scale. We also still rely on The Big 6—leveraging their deposit boards for funding and leveraging their capital markets groups to acquire our originated assets for liquidity. Depending on those you’re trying to disrupt is not a sustainable strategy and so we knew we needed to keep looking elsewhere for a structural advantage.

Why Centrifuge?

Despite my personal knowledge and passion, RFA is a large organization and we need help navigating the emerging connections between DeFi and real world assets. We bring a wealth of knowledge on traditional finance securitization, but it’s certainly not trivial to translate that to DeFi. And time is precious. It isn’t in RFA’s interest to spend time or incur risk with transaction structuring, legal, and due diligence when that is work other capable groups have already worked on.

Getting to know the team at Centrifuge over the past year has allowed us to understand the vision and scale of what they are trying to do; they have held our hand in understanding and translating to RFA’s stakeholders and decision makers how we can leveraging their platform to transform our assets on chain into tranches that can act as collateral for DAI. We believe that our relationship with Centrifuge is just getting started. RFA’s success has always been built on long, trusted partnerships and we pick our partners carefully. We are excited by the level of knowledge and expertise that Centrifuge brings to the table to accelerate the opportunity, acting as our protocol to securitize debt on-chain while providing direct access to DeFi liquidity.

Centrifuge’s platform also enables us to offer these assets to MakerDAO through a simple on-chain structure, where the performance of the assets and investment can be easily tracked and managed.

Why MakerDAO?

Being involved in crypto on the fringes for many years, I have been impressed by the patience of MakerDAO and how it’s held true to the ethos of what it set out to do (especially in light of this week’s news with Terra). RFA is a big entity entrenched in traditional finance. I knew that the only way I could get our stakeholders over the line is if we worked with the best of the best in the digital asset space with a proven track record of success, proper governance and scale.

From the beginning of our conversations we’ve been encouraged by what we believe is clear alignment on the development of a mortgage funding program

  • MakerDAO wants to diversify DAI’s collateral base and increase DAI across the globe;
  • RFA wants to diversify its funding and liquidity with a low cost of capital provider with scale;
  • Real estate is one of the largest asset classes in the world;
  • Canada is a preeminent Western democratic economy with a stable rule of law;
  • RFA is an institutional group regulated at provincial and federal levels with our banking license;
  • MakerDAO can issue DAI at scale in one of the largest asset classes in the world, in one of the safest countries in the world, with an institutional, highly regulated entity;
  • RFA gets access to capital that will enable us to compete and innovate our financial services on Web3 rails.

For this partnership to really make sense for RFA, we envision this relationship reaching north of a billion dollars quickly. With a mature asset origination machine built, we can scale that up as fast as the community is willing to go.

The Real-World Asset

Our proposal will outline an asset that is traditional in structured finance: a credit-enhanced pool of mortgage loans structured on-chain through Centrifuge, where the Senior component would be purchased by MakerDAO and the Junior component would be purchased by RFA. he Junior “credit-enhances” the Senior by taking the hit on any losses (I.e., it is subordinate in the structure), the Senior piece will be made nearly risk-free.

“Nearly risk-free” may sound hard to believe, but there are two key components to why we are comfortable saying so:

  • First, Canadian mortgage default rates are historically very low; our originated assets under administration are consistent with that as we have had zero defaults and currently have zero loans in arrears. Canadian averages for mortgages in arrears are typically around 0.20%, however, with Loan To Value (LTV’s) around 70%, that means in a default situation, a loss is usually not realized. For this reason, the magnitude of defaults rising above the size of the Junior component has never happened in history (not even close), even during the 2007-2008 financial crisis.
  • Second, we are structuring the deal with the same approach RFA has taken with all its deals over the years: we are putting our own capital in, and in the riskiest tranche. We have never been comfortable asking for capital from others if we are not also putting in our own, and that will not change here. As co-capital providers in the arrangement, we will be buying the Junior piece ourselves, so we are fully aligned to ensure we originate the highest-quality assets within the expected yield/risk parameters. Further, as we retain servicing responsibility of the mortgage pool, we’re also responsible for managing payment arrears and any issues related to loan performance.

Why we believe this proposal will be exciting is due to its potential scale: we have built a mortgage origination machine that is capable of producing $5B+ of mortgage product annually and can scale higher from there. Therefore, perhaps the most compelling component here is MakerDAO’s opportunity to have an institutional partner that can provide high-quality, credit-enhanced assets at significant scale.

Market Outlook

Whether it’s inflation, recession, war, famine, de-pegged algo stable coins, the reality is that it’s pretty tough to avoid risk in the current moment. In Canada, we have recently seen mortgage rates increase faster than at any point in time in history, however, we are still in a hot market and the reality is that the Canadian housing market is currently driven by Supply/Demand and demographics rather than the economy.

Canada has large inflows of immigration every year and our ability to build new houses fast enough just isn’t there. Combined with the demographic shift of an aging population staying in their homes later into their life (often choosing in-home care over retirement housing), the supply and demand relationship remains under pressure. We believe very strongly that the housing market will continue to grow into the future, and we have been transacting in Canadian real estate for decades. With a mature mortgage origination engine supported by strong underwriting policies and guidelines, we believe we will see minimal defaults and even fewer losses in our portfolio. Combine this with RFA taking the first loss on this structure and you realize this is as close to a risk free asset as you’re going to get in this macro environment. And the only thing holding back our increased scale is a lower cost of capital.

Next Steps

  • Come meet me! I’ll be the project lead and I’m flying down to Permissionless in West Palm Beach, FL next week and would love to meet any of you who have a free window for a coffee or a beer (on us).
  • Upon my return we will work with Centrifuge and the RWF CU to meet MIP67 guidelines and submit a formal application via both communities in the coming weeks.
  • We will host a community call through Centrifuge where you can get to know us and ask any questions to help inform the community about who RFA is, more detail on the Asset Class, Structure etc.
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Welcome Colin! Great to see the RFA Bank of Canada in the Centrifuge Ecosystem.

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