Dear Community,
In this monthly update, I will focus on briefly discussing company updates, and spend some time on explaining how New Silver is thinking about real estate and adjacent markets in the short and medium term, how we are thinking about the macro-economic environment, and how we use data to forecast our credit environment.
TL;DR
Markets are adjusting to the higher rates, housing supply is still much lower than demand, materials are ever more expensive, housing prices continue to appreciate. We do not anticipate a repeat of the last housing crises because the fundamentals are very different today. We are tightening the credit box and making a few adjustments to be on the safe side.
Good news - New Silver has signed a $20mm term sheet with an institutional structured finance lender with $2b+ AUM, we are now going through due diligence. If the deal goes through, the lender will be in the mezzanine position, strengthen New Silver’s position as a lender, opening up opportunities for growth, and speaking to our efforts over the past year to create a unique, valuable offering and institutional-grade processes.
New Silver was the first pool to go live on Tinlake and the first “real world” asset voted in by the MakerDAO community, and our team has worked tirelessly building and improving on the 3 Ps of Credit - People, Process, Policies. We are now more than a year in, with no defaults, a better process, a bigger team, and agile credit policies. With the next leap, we believe the DAO will be even more protected as a senior lender, and will benefit from a robust process we are developing in conjunction with Centrifuge and in consultation with the RWF team.
Lets touch on the macro housing market trends and increasing rates. First, let me say that we know what our borrowers (real estate entrepreneurs) want: quickly accessible capital that is competitively priced, and a fast, convenient process that can be (mostly) done online. This is what we are/will continue to deliver. We were never the most nor the least aggressive lender, we are “middle of the road” on rates and leverages, but we are faster than most others. In an increasing rate environment, we hope to also become more competitive on rates viz a vie utilizing the Maker vault, but at the same time, use data and technology to choose the least-risky borrowers and projects to finance, thus creating a win-win scenario for everyone involved.
Data
- Research on “hard money” lenders from 2008-2013 timeframes, showing that our competitors had overall defaults of <2% with 1% average, and we believe market conditions were more adverse back then - we had a general recession, housing supply stood at 9-12 months in 2008 vs <6 months today, and personal savings are much higher today, so consumers have more money saved up.
- We believe that lack of supply will continue to drive price appreciation, or price stability, and this will allow for very small principal loss even in cases of defaults, as evidenced by a large bridge loan aggregator (<50bps principal loss on 4.4% foreclosure rate)
- However, housing is getting less affordable, though because of the supply constraint, we do not believe we are in a “bubble” territory at this time
- Banks have loosened some of their underwriting, allowing more people to obtain a consumer mortgage, but not to the level of pre-2008 crises. This bodes well for consumers who buy homes from our clients.
What New Silver is doing in the short term
- We believe FICO scores are great measures of borrowers ability to repay debt, they have been used for many years and have undergone many stress tests. Our portfolio is in the Prime category with an average of 700+, so this is healthy. We are increasing the minimum allowed credit score to 650 (from 620) for borrowers with experience, and 700 (from 680) for those without.
- We are decreasing the maximum LTC on ground up/heavy construction loans to 85% (from 90%) for non institutional level borrowers
- Increasing the profitability test to ensure the project will be profitable for our borrower even with a 5% price correction.
- Continuing to pay close attention to material pricing, this is partially driving up per square foot renovation costs, we review budgets closely and ensure that borrower has sufficient budget in place to cover possible increases in the coming few months.
Loan Originations in Tinlake
based on origination date
New Loans:14
New Loan USD Volume: $4.4mm
Average Originated Interest Rate: 9.1%
Average Tinlake Finance Fee: 6.4%
Average Loan Amount: DAI 320,776
Average Loan to Value: 72%
Average FICO score: 716
Average Term: 12 months
Loans Paid Back: 12
Current MakerDAO Debt Ceiling: $20mm with about $13.6mm used
Portfolio Analytics
Loan Performance
90+ day late: 0
Forbearance: 0
Foreclosure: 0