Poll: Community support to onboard Havenly Digital Mortgage Backed RWA fund to Tinlake

[wroakley]

POP link here.

Dear Centrifuge Credit Team - we would be delighted to get your view and input on this proposal as well: @Davidjeng @JamesChan @ChrisDiamond @Mayoe @fanhong.123 @JeremyKim @roo @collincerickson

About Us:

Havenly Financial Inc.’s (HFI) vision is to increase home ownership in America. With a focus on underserved markets, we seek to provide financing opportunities to home buyers typically locked out of the residential home loan market. HFI has access to efficient mortgage origination platforms from which to acquire loans, namely our affiliates American Portfolio Mortgage (APMC) and Town Square Mortgage & Investments, LLC (TSM). TSM funded over $1 Billion in residential mortgages in both 2020 and 2021, and $815 Million in residential mortgages in 2022 despite the rapid increases in interest rates caused by the Fed throughout the year. APMC and TSM ownership came together on 3/1/2023 and is in the process of merging the origination platforms resulting in an increased lending footprint covering 36 states. Both platforms focus on the home purchase market through retail loan origination. HFI’s subsidiary, Havenly Digital (HD), was created to leverage emerging decentralized finance (DeFi) to provide liquidity to APMC and TSM for originating loans in underserved markets while providing a return to digital investors backed by real-world asset yields.

HFI’s business model creates a unique platform allowing us to bridge the lending gap and match borrower risk with investor risk appetites.

• Revolutionary Credit Risk Process: Innovative and highly predictive credit risk assessment drives loan approval for homebuyers with little-to-no traditional credit history by focusing on the stability of cashflows based on income, assets, and expenses.
• Specialized Mortgages: Portfolio home loan products with stable income potential designed to match borrower risk profiles to investor risk appetites.
• Digital Finance: Integration with De-Fi markets to provide alternative stable liquidity channels to underserved home buyers while offering residential mortgage yields direct to digital investors.

To date, HFI has raised $500k in capital from its founders and has $0 external debt or capital.

Our executive team has decades of experience originating, securitizing, and managing portfolios of mortgage loans throughout diverse interest rate and residential real estate environments. Our team members have well-established reputations and industry connections, many of which were created while completing over 300 whole loan and mortgage-back securitization transactions over the last twenty-five years, totaling in excess of $500 Billion.

• Lisa Thomas: CEO of HFI, HD, APMC and TSM. mortgage industry entrepreneur and executive with a reputation for servant leadership, innovation, revenue generation, cost control, and continual process improvement, 25+ years’ experience in capital markets, securitization, portfolio acquisition and risk management.
• Ryan Oakley: Co-Founder and President of HD, and chief visionary. A dynamic transformational leader and driving force behind the company’s digital finance strategy with a demonstrated track record of improving operational capabilities and achieving targeted objectives within global financial services firms such as HSBC, Credit Suisse and Deutsche Bank.
• Leon Daniels: Chief Capital Markets Officer of HFI and HD, and EVP of Capital Markets for TSM. 20+ years’ experience modeling asset and bond cash flows for structured finance vehicles across a variety of asset classes, product development, pricing, hedging, and portfolio management expertise for MBS and ABS.
• Kevin Sawyer: Chief Technology Officer of HFI, HD, APMC and TSM. Serial entrepreneur with 30+ years of technology leadership and digital transformation for clients across many industries/sectors. Reputation for holistic approach to problem solving through divergent thinking, nonlinear logic, exploration and innovation.
• Brian Simons: Chief Operations Officer of HFI and HD. Successful entrepreneur and mortgage industry executive, formerly with Credit Suisse and JP Morgan, and founder of Altavera Mortgage Services LLC, a mortgage fulfilment provider, sold to Computershare (ASX: CPU), a publicly traded multinational financial services firm, licensed mortgage loan originator in 32 states plus District of Columbia.
• Riad Bacchus: Head of Delivery for HD. Digital project management with expertise in software development including custom applications, planning, analysis, design, implementation, quality assurance, and delivery execution. Well versed in traditional Waterfall, Agile development (RAD, XP, and Scrum), and Rational Unified Process.

How it works:

HD purchases loans originated by our affiliates that meet our risk-return requirements for the portfolio. The mortgages are held in our proprietary ‘revolver’ fund structure, from which we issue short-term notes in the form of digital collateral. The short-term notes offer yields tailored to meet digital investor risk-return appetites. Digital investors provide liquidity in the form of stablecoin investments (e.g., DAI, USDC) in return for real-world asset yields. At redemption, digital investor capital is returned, and investment opportunities are opened for new digital investors.

Investment Pool Parameters:

• HD plans to launch with an initial investment pool of ~1M USD, growing to 100M over the next two years, according to continued investor interest.
• Senior tranche notes issued from the loan pool with ~4-5% yields and subordinate tranche notes offered with higher risk and returns.
• HD will maintain revolving credit facilities to support mortgage acquisitions using existing credit providers such as major US banks.
• HD will leverage existing secondary market investor relationships to drive adoption and investment into the DeFi pools across senior and junior tranches in accordance with investor risk appetites.

Mortgage Asset Parameters:

The investment pool will be comprised of mortgage assets with the following characteristics:

• Average Loan Amount: ~300k
• Mortgage rates: 6-12%
• Average expected life: 7-10 years, factoring in prepayments.
• Expect Default Rate: < 3.5%

Risk Management:

Our team is comprised of industry veterans with decades of experience in managing mortgage portfolio risk. Our risk management approach starts with asset selection, due diligence, and portfolio structuring, considering rate environments and broader macro factors. All assets will be collateralized by a Deed of Trust or Mortgage on the residential property securing each home loan. As with any mortgage-backed product, the principal risks are centered around Credit Risk driven by borrower prepayments and ability to repay the loan; Market Risk from property value fluctuation, natural disasters, etc.; Interest Rate Risk impacting new loan origination supply and payment/cashflow performance on existing loans in the portfolio; and Liquidity Risk impacting redemptions, payouts and notes refinancing. Continuously monitoring of the risk-return profile of the portfolio, and our unique revolver structure will allow us to manage the underlying asset risk as or more effectively than a traditional mortgage-backed security (MBS). Additionally, Regulatory Risk plays a factor given the likely evolution of crypto regulation globally. We continue to monitor this situation as the market develops.

Next Steps:

We intend to be a premier provider of real-world asset yield products to decentralized finance. We are evaluating decentralized finance networks including Centrifuge and others to identify stable, high-volume platforms to support our planned product expansion. We are also engaging DeFi lending facilities with several stablecoin communities, including Maker, Aave, and Circle USDC to fund senior tranche investments. Our business development team is actively engaging our capital markets and venture capital partners to increase investment into our loans pools as well as direct equity and debt issuance to support continued business development. HD’s revenue will be based on Origination Fees: c. 1% (100bps) and a target net interest margin of 1-4% (100-400bps).

Pool Size:
We intend to launch with an initial $1M in order to support scaling discussions with an additional $5M in investment we have lined up, with the ultimate goal of growing to a pool size of $100M.
Note: the $1 + $5M initial investments would comprise both Senior and Junior Tranche as per our investor risk / return requirements.

For more information please visit our website at https://hello.havenly.digital or contact us at hello@havenly.digital.

Please indicate your support to onboard Havenly Digital Mortgage Backed RWA fund to Tinlake.

• Yes
• No

[PathrockNetwork]

Can you give some more background on your track record APMC and TSM in terms of defaults and delayed payments?
How do you “protect” investor against the current rate hikes?
Do you believe that home owners are capable to cope with current and future insecure market conditions?

[wroakley]

@PathrockNetwork Thank you for the question, we will respond in full shortly.

[wroakley]

@PathrockNetwork.

please find our responses:

1. Our track record in servicing delinquent and defaulted loans comes from our experience in Master Servicing $100B+ in residential mortgages, which are sub-serviced by rated servicers with a rating of above average or higher by US rating agencies.

2. The Drop token delivers a fixed rate of interest. As rate hikes occur, the fixed rate on the Drop does not change.

3. Yes. With the new residential mortgage regulation and lending standards instituted after the Great Recession of 2008, such as the “Ability to Repay” rule, we believe homeowners are better positioned to cope with current and future market conditions.

[PathrockNetwork]

thank you but could you be more precise on:

1. what’s your track record in that aspect of defaults / late payments
   and
2. if we turn into a recession, homeowners must have a solid cash flow in order to pay mortgage; clever investors would wait till rate hike come to its end, no?

[wroakley]

@PathrockNetwork

sure,

1. Our track record allows us to project an Expect Default Rate: < 3.5% as identified above. Here is a chart of mortgage delinquencies over the past 30 years where you can see the spike during the Great Recession of 2008 due to lax lending standards that have been shored up since and are reflected in the more recent delinquency rates in the chart. Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks (DRSFRMACBS) | FRED | St. Louis Fed.

2. While a recession may affect homeowners’ financial situation, underwriting standards applied today require seasoned cash reserves and the ability to repay. Mortgage underwriting standards are tighter in more volatile markets to protect against higher-risk borrowers. Investors in residential mortgages may increase or decrease their appetite; however, they continue to invest vs. wait for rate hikes to come and go.

-Havenly team

[PathrockNetwork]

Thanks but point 1 is a generic market figure. I was referring to your companies real figures. Tx!

[wroakley]

The actual default rates for our mortgage loan pools vary by product and vintage due to market conditions and interest rate movement; however, throughout various cycles have remained below the 3.5% threshold.

-Havenly team

[Bek_T]

Hi @wroakley thanks for providing an overview of your business model and proposed partnership structure with Centrifuge. @ctcunning and I would be happy to speak further with your team and go into greater detail as to economics, flow of funds, as well as other considerations raised above: underwriting standards, credit / interest rate mitigants etc. Will draft a message to your distro email shortly.

[ItsJake]

@wroakley

HD plans to launch with an initial investment pool of ~1M USD, growing to 100M over the next two years, according to continued investor interest.

This seems a bit ambitious at first glance. Can you please provide more color on where the other $99M will be sourced over the next two years? Who are these investors you are talking about?

@wroakley

Average expected life: 7-10 years, factoring in prepayments.

imo, DeFi typically prefers RWAs with shorter maturity horizons. Is there a plan in-place to allow Centrifuge investors to redeem their tokens on an on-going basis. I would like to see our investors have the option to redeem their tokens at any time regardless of maturity dates on assets.

Thank you for all the up-front work on your end!!

[wroakley]

Thank you @Bek_T and @ctcunning, looking forward to it !

-Havenly team

[wroakley]

hi @ItsJake, please see our responses:

1. We’re introducing our investor relationships, who are already comfortable with our team and residential mortgage investments. However, they are new to the Centrifuge platform and DeFi investment process. We will also look towards Maker et al. to support scaling to the 100M mark, similar to other Centrifuge pools. Acknowledging Maker’s current focus on the Endgame transition, we plan to re-engage them once our pool is launched. Equally, we are open to other Defi scaling opportunities and are keeping an eye on the recent Centrifuge / Aave discussions and developments. More generally, this approach is core to our thesis that there is a win-win opportunity to provide RWA yields directly to Defi communities while opening up new funding channels to support expanded homeownership opportunities.

2. Our mortgage assets will be placed into a fund structure from which we will typically issue shorter maturity notes. Each note, therefore, represents fractional ownership across the entire pool. This not only mitigates investor exposure to any single default event, it allows us to manage the underlying pool of assets to maintain our investment objective. This ongoing management of underlying assets is a key differentiator of our product and provides enhanced management of the overall risk and return performance. Regarding redemptions, we will adopt the current protocols established on the Centrifuge platform.

-Havenly team

[mark_hergen]

Thanks for the write-up, team!

• The biggest thing for me here comes down to pricing & risk/return. How do you think about the 4-5% target yield? Spreads on publicly rated BBB credits are a bit wider at the moment so it could be difficult for lenders to justify the risk/return here vs a diversified pool of publicly rated credits (with <1% default rates).

• What’s the typical/target LTV on new loans?

• What’s the breakdown/target breakdown of fixed vs. variable rate loans?

[wroakley]

Thank you for the questions @mark_hergen, please find our responses below.

Question #1

HD views Centrifuge’s platform as a DeFi securitization platform that would allow us to create a “DeFi-REIT” opportunity for stablecoin owners looking to invest in RWAs. Consequently, HD benchmarks its DeFi investment pools to TradFi mREITS (Mortgage Real Estate Investment Trusts) for capitalization rate (price and yield), portfolio investment and diversification.

• REITs historically offer an attractive yield higher than broad equities or fixed income. REITs can also offer a potential diversification benefit to an income portfolio.
• Mortgage REITs provide additional yield potential and exposure to a different segment of the real estate market through mortgages, as opposed to real property.

Historical REIT yields:

Sub Sector Relative Value Yield Cap Rates

In TradFi, Mortgage-Backed Security tranches would be offered at yields over current treasuries. HD will look to price our Senior Notes (Drop) ~1-1.5% over the 3-year Treasury rate. Based on the above, the long-term cap rate of residential yields has been about 5.2%. In the current inverted yield curve environment, the 3yr Treasury is 3.4%. With a 1.5% spread over, HD will offer ~5% rate on the senior tranche Drop token.

Please note that BBB corporate bonds, currently at about 5.4%, are the lowest of all investment grade tranches with longer terms than the AAA, AA & A tranches. BBB bonds are also subject to write-downs from losses and rating agency downgrades versus Drop investments which will have a 15% loss cushion in the HD structure. Given the different risk position and loss potentials, comparing senior position (Drop) yield to a subordinate bond position (BBB) yield is not a direct comparison in our view.

Question #2

Loan-to-Values (LTVs) on new loans are determined by the product guidelines in place for homebuyers. LTV is one of many components used to measure the risk of the loan and determine the rate and price to the borrower.

Question #3

With the inverted yield curve, adjustable-rate mortgages are generally less attractive to borrowers than locking in a fixed rate. Therefore, the majority of mortgage origination activity is fixed rate today. More generally, our unique revolver structure allows us to manage the underlying asset mix and derive shorter term notes that reflect the overall portfolio composition vs. any individual loan.

-Havenly team