Bloomberg Audio Studios, Podcasts, radio News. This is Master's in Business with Barry rid Hoolds on Bloomberg Radio.
This week on the podcast, I have an extra special guest. Sean Dobson has really had a fascinating career as a real estate investor, starring pretty much at the bottom and working his way up to becoming a investor in a variety of mortgage backed securities, individual homes, commercial real estate, really all aspects of the finding, buying, and investing in
real estate. And on top of that, he's pretty much a quantitative geek, so he is looking at this not simply from the typical real estate investment perspective, but from a deep quantitative analytical basis. If you're interested in any aspect of commercial, residential, mortgage back real estate, then you
should absolutely listen to this. It's fascinating and there are a few people in the industry who not only have been successful as investors, but also very clearly saw and warned about the Great financial crisis coming because it was all there in the data if you were looking in the right place. And continues to build and expand the
Amherst Group into a real estate powerhouse. I found this conversation to be absolutely fascinating, and I think you will also with no further ado my discussion with Amherst groups Sean Dobson.
Thank you very much. It's great to be here.
So let's talk a little bit about your career in real estate. But before we get to that, I just got to ask on your LinkedIn under education, it says didn't graduate none, working for a living. What does that mean?
I think I answered questions of of when did you graduate? And so I said I didn't graduate, and then that was your what degrees did you achieve? And I said none? And then I think the question was what were you doing or what were your interested in? So I was working for a living, but I didn't.
Go to college, did not go to college. So that leads to the next question, what got you interested in real estate?
It was it was happenstance. I took a temporary job at a brokerage firm in Houston, Texas the summer after high school, between high school and college. Really as the office runner, run around picking up people's drying cleaning, grabbing lunch, opening the mail, that sort of thing. And I took the job really because a friend of ours a friend of the families had worked there and just said, what
an interesting sort of industry it was. This is back when mortgages were sort of a backwater of the fixed income market, so they were traded a little bit like UNI bonds or not really well understood, not.
Well followed nineteen nineties or eighty.
Seven, wow, nineteen eighty seven. So after that it was I later was given some opportunities to join the research team, and then took over the research team, and then took over the eventually took over the trading platform, and then by nineteen ninety four a group of us had started our own business, and that's the predecessor to Amherst, which we bought in two thousand and have been running it since then.
So when you say you were running the trading desk, you're running primarily mortgage backed securities. That's mortgageback exactly. Anything else swaps, derivatives and anything wrong.
So back then it was really just mortgage back securities and structured products that were derivatives of mortgage backed securities. We sort of carved out a name for ourselves in quant analytics around mortgage risk, and that's still a big core competency of Amherst is understanding the risks of mortgages are kind of boring, but they're also very complicated. The borrower has so many options around when the refinance, how
to repay, if the repay. It takes quite a lot of research, quite a lot of modeling, quite a lot of data to actually keep up with the mortgage market. It's really forty million individual contracts, forty fifty million individual contracts and a million different securities, so it takes quale. We've built an interesting system to allow to sort of monitor all that and price it in real time.
So if you're running a desk in the two thousands and you're looking at mortgage backed then you're looking at securitized product. One would think, especially from Texas as opposed to being in the thick of Wall Street, you might have seen some signs that perhaps the wheels are coming off the bus. Tell us about your experience in the two thousands, what did you see? Comment?
Yeah, So from the late eighties until the really the late nineties, we were focused primarily on prepayment related risk in agency mortgs backed securities. By the time you get to the early two thousands, Freddie mc fanny age and may were losing market share. A lot of mortgages were coming straight from originators and going and being packaged into what later became the private label securities market. So as
part of our just growth, we attack that market. And up until that moment in time, we didn't spend a lot of time on credit risk in mortgages. We didn't really have the model credit risk because that risk was taken by the agencies. But in these private labels you had,
the market was taking the credit risk. So we took the exact same modeling approach, which is loan level detail, borrower behavior, stochastic processes, options based modeling, and we said, let's just take a little detour here and make sure we understand the credit risk of these things before we sort of travel start making markets and banking and making
these a core part of our business. At that time, this market was about a third of all mortgages, were the ones where the credit risk was going into the capital markets. So that little detour was in two thousand and three and we found a couple of things we modeled. We modeled defaults the same way with model prepayments, which is an option for the consumer to not pay most.
Of it rarely here it described that way.
Well, it's a unique approach, right, and it was unique at the time, and so we thought there were conditions under which the option probably should be exercised. If you have a two hours set out, if you have a two hundred thousand dollars home and one hundred thousand dollars mortgage, and the consequence for not paying is ding on your credit report, you're probably not supposed to pay, is the
position we took. So through that lens, we said, okay, let's price these securities, and we found a bunch of interesting things. For example, we found that the follow on rating surveillance for mortgage backed securities doesn't follow the same ratings methodology that the initial rating does. So over time the risk composition of the pool which would change dramatically.
So think about two thousand and three. Home price has gone up a lot from two thousand, So mortgage position in two thousand were way more valuable in two thousand and three than they were they originated because they weigh less credit risk. Not the same thing couldn't be true as you went forward.
In time, each subsequent vintage became risk, and risk became risking risk as prices went up because rates had gone lower and lower.
And that's the way we thought about it. The way we think about it when you make someone alone. This is sort of the credit oas world. So we think about when you make someone alone on a building, whether it's this building or or a home, you're implicitly United States, you're implicit giving them the option to send you the keys. So jingle mail is exactly and so we thought it was least Okay, we've been pricing complicated options our whole career, so let's just price the option to default as if
it is a financial option. When you do that, and then you looked at the types of loans or being originated, and this is where Amher's story is a little different than some of the stories you've seen are on the financial crisis. What we figured out was that the premium that you were being paid as this option seller was way below the fair market price of their premium, meaning that the default risk you were taking was way higher than the market had appreciated. So they were underpricing the
fault risk dramatically. Then, as we dug in and dug in and dug in, we realized that there were a lot of loans that were really experiments. There were financial experiments where the bar hadn't been through dal diligence, the LTV was very high, the underlying risk of the home market was very high.
Other of these were the no dock or Ninja.
Loans were limited DOC no dock, no.
Income, no no assets exactly, Ninja no pulse seem seems reasonable exactly.
So you look back at these things, you're like, how could it happen? But we're low level people, right, so we don't see the mortgage backed securities market as a market. We see it as like I said, about fifty million assets, and we're modeling up the value of every home in the country every every week basically, and we're modeling with the value of every mortgage in the country, and we're modeling with the value every derivative of that mortgage, of
the structure, products, and so forth. So through our lens, it was like, Okay, we've made these financial experiments. The underlying real estate has become very volatile, so we could construct trades that had very very low premiums to sell this volatility, to basically join the consumer on their side of the trade, which is in essense buying insurance on the bonds that were exposed of these great risks. Soult.
We did that for a lot of the market, so a lot of the headline names you see, a lot of the stories you see about the financial crisis, a significant number of those investors we were helping in security selection, modeling and analytics. That sort of put Amherst on a different pack because prior to that, our core business model was investment, banking, brokerage, market making and underwriting. By the time we got to two thousand and five and figured out that there was such a large sector that was
so mispriced, we started hedge funds, opportunity funds. We took sub mandates from the big global macro hedge funds, and we started to build our model around investing in our research. Co investing our research and earning carried interest in sort of big complicated trades that we thought we had figured out the market, maybe the market had imprised something properly.
How did that end up working out?
It was a wild ride.
It was a wild ride.
Because by the time you got so in two thousand and five, we went on a road show trying to tell people we had learned and there wasn't a lot of reception.
We literally, let me, let me interrupt you and ask you. Did people laugh at you?
They were more polite than that, but they didn't invest. So there were very few people that thought because at that time the triling credit performers, for you, single thing mortgagees great, impeccable, peckable.
I want to say five was where we peaked in price and six's volume or am I getting that?
So six O five was six? It started to turn over and our thesis on a lot of these mortgages and the very very exposed securities within these structured products wasn't that home prices needed to go down. It was that the only way that the loan was going to perform is that the consumer could refinance out of it quickly. Right, So you really just wanted the music to stop, right or if you mean, this whole thing was going to
come down if the music stopped. So by the time the music stopped, it was pretty apparent, but we had it. There's a there's a big industry conference called AFS that happens twice a year, and in the two thousand, the two thousand and five conference, it's kind of wild. So these big brokens frooms get together and they set up a convention like like plumbers, and they also give out choski's and they have a and then they give presentations
in their business. And so we participated in this. Our choshki that year was a hard helmet, was a was an orange hard hat, and they said beware of falling home prices. And our whole thesis was that was what I'm trying to describe.
Which is that's a great swag. Do you do you still have?
I have one in my office now. I have a helmet from Beware of Falling home Prices, and I have one for our new construction division where we build entire neighborhoods. And that's really to sort of bring it all together with this core competency and analytics, and we're probably the only, maybe not the only, but but I don't know of a competitor. We're the quant shop in real estate and
the quant shop in physic glasses. So with that core competency, that's the reason we're in the single play rental business. You followed that all the way through. There were amazing trades to do, amazing opportunities, wild scary things to do. I got to spend a lot of time in DC consulting on the response to the financial crisis and trying to sort out sort of what was really going on.
And what we figured out in two thousand and nine really when we started buying homes is that we made the bet that I mean, it wasn't a very exotic bet, but we made the bet that the sub primorgage market wasn't coming back at all.
So wait, let me unpack some of that. Christ there's a lot of really interesting things. When you mentioned DC, I'm aware of the Act that you briefed Congress, the Federal Reserve, the White House. Who else did you speak to when you were there? Well, what was that experience?
So I lived in Washington, d C. For five years, my family and I moved to McLain, Virginia in two thousand and eight. So we were down the street, and we were in a pretty interesting situation because we were we were one of the biggest, if not the only, investment banks specializing in the core risk that the nation was facing. And we didn't need any help, right, So we weren't there looking for changing of a reg cap, you know, of anything. We weren't looking for a bailout.
We were looking for recapitalization or anything. We were just there as a source of information. So we met a lot of interesting people in DC, and it was the whole gamut. We were consulted on the recapitalization in Freddie mckin family. We participated in that with Treasury and FHFA
and the regulators of the White House. And I would say that Washington was pretty interesting because we had gone and spoken to people in two thousand and five, two thousand and six and to kind of let people know that there was something these this is a trillion dollars worth miss price risk right.
And I very vividly recall six even o seven. People were, hey, we're in the middle of a giant boom. Why do you have to come, you know, rain on our purrass? But what was your experience?
It was lonely, I tell you. The analogy was something like this, is that we had seen what had happened, and by two thousand and six it was over right. The mortgages were defaulting. People were taking out mortgages and defaulting in the third payment, the fourth payment.
Ninety day warranty on those non conforming non Fanny May mortgages from those private contractors, like a toaster comes with along a warranty, it's amazing.
So eventually even that was gone, even that they wouldn't provide nine day warranty. Eventually it was take it at cash for keys or cash and carry. So like for us, it was weird though, because the analogy I give is it in two thousand and six it happened. It was over first four to two thousand and six, the market
was over. The market kept issuing securities, And I think the analogy that we think about it is that if you're standing, if you're sitting in front of a bank, and you know, a van rolls up and people with masks run in and they empty out the bank and they leave with all the money, and you see it, and then people keep coming and going from the bank
for another year. You're like, yo, there's there's no money in that bank, right, And so so we sort of felt pretty stupid for a while because we did a lot of losing trades in two thousand and six that were the you know, the obviously didn't come to fruition until the actual people could see the losses. So in mortgages, the barber can stop paying maybe a year to two
years before the lenders actually book a loss. So there's this great lag in housing that is affecting the market, affecting today's CPI numbers that the market doesn't do a great job of adjusting the real time for information that they already have. So when the barber hasn't paid in twelve months, probably not going to get back the loan,
probably not going to start paying again. And then you can model up what happens, like what's the home going to sell for, what are my expenses to sell, awa, how long it's going to take, And all of a sudden, you have a loan that was worth, you know, one hundred cents on the dollar, and now it's worth thirty cents on the dollar. And you knew that eight months into the loan or eight or maybe a year ago or two years ago, But it takes that long to it takes that long for the losses to get through
to the securities. And so I don't know if it's sort of just the fact that we're so myopic into the minutia of each little detail, or if it's the fact that the market kind of doesn't want to buy an umbrella until it starts raining.
Really very fascinating. So so coming out of this in nine, home prices on average across the country down over thirty percent, but really in the worst areas like Las Vegas and South Florida and you know, parts of California and parts of Arizona, Phoenix.
Two thirds in Phoenix.
Unbelievable. So you say, I have an idea, Let's buy all these distressed real estate and rent them out.
Yeah, I had. I had a very good idea. So I have very good partners, are very patient with me, and I said, Okay, we don't think the subprime market to mark is coming back, which was a non consensus view at the time. People were buying up mortgage originators and things waiting for the machines to sort of get turned back on. We were thinking, this is investors are never going to buy these loans again at any price.
So what's going to happen, what's going to happen to the homes, and what's going to happen to the people that were living these homes. And what a lot of people I think didn't follow is that there was a concept that job loss is called mortgage caused to mortgage defaults. But in the Amir's view, a mortgage default can be rational, as distasteful as it may sound. And when I give this presentation in Europe or the EU or the UK, they look at me like you're crazy. Or in Australia
or in Canada they're like, what do you mean? Mortgage is a recourse and so like, well not in the US.
Well, actually some states are recourse.
In some states I try to tell people, is that one person's default you have, you can handle. But when seven or eight million people default, we don't have debtors' prisons right their recourse, I mean, they're not recourse. So in this in this context of a mortgage now being clear to everyone that this default risk is present, it's real, and it's hard to price because following the borrowers economic profile, there are defaults that are related to just life events,
but there's also defaults related to a macroeconomic event. So the position, you know what, investors are not going to buy these loans anymore. The homes are here, and the job loss wasn't as big as the mortgage defaults were, right, so the people still had jobs, they slid revenue, and the homes were very affordable now because the prices have been reset. So we asked ourselves, Okay, we've seen this movie before. Can we at Amherst make a three hundred
thousand dollars home investible to a global financial investor? Which we spent our whole careers turning a three hundred thousand dollars mortgage investible in the global capital markets. So we said, okay, this is probably not a long put for us because we've been following the mortgage with all this minutia for thirty years. Now we're just going to follow the house
the same way. So we took our same analytic and modeling team and we said, let's press down one more level so we can actually price the home instead of the mortgage with precision. And then let's set up an operating capability that allows us to acquire the homes, renovate the homes, manage the homes, and then more importantly, scale the homes in to an investible pool. So we created pools of homes just the same way we created pools and mortgages in nineteen eighty nine.
So are you keeping these homes and leasing them out or are they flips?
So they're kept and leased out, So we're starting in two thousand and nine. There was no flip market. There was no one to sew them to because the mortgage market had basically closed on a large section of the consumer base.
So think about and that credit market was frozen pretty.
Much, and it's still frozen for most people. So really still today, still today. Basically the barrier to entry to getting a mortgage became irreversibly higher, and we spent a lot of times. You mentioned my time in DC. I got to go and brief the Fetal Reserve, which is kind of cool. I got to go into the FMC room and I got to sit with with Yelling and Vernaki and walk them through kind of in our view,
how we got here and the best way out. And I asked them not to shut down the sub prime mortgage market because it does serve a large swath of the American public who has a slightly higher rent in or debt income ratio, or has defaulted on a credit card in the past or something, but they can pay, they've had a problem in the past, they've cured it. Well, those people now are pretty much blocked out of the
mortgage market. So I was unsuccessful in talking people and still to this day unsuccessful into talking to people to get back into lending to lower credit quality consumers. Because you can do it, you can risk base prizing. So we took we took the view like, hey, that market's not coming back. People are not going to listen to us. They're not going to say there's some good subprime loans
and some bad sub loans. They're just gonna they're just going to draw a line and say you have to have a credit score above a certain level, you have to have income above a certain level, you have to have a debt load below a certain level, or the price for you is zero. You just get the answer is.
No, you're out of the market.
Used to you would say you would pay one percent more or two percent right now. He said no, that's so that's how we So we said, okay, well, how's it's going to work. And we had seen this movie before aggregating mortgages, strapping services on them, getting them rated,
getting them available to the global capital markets. So we also so saw the conflicts and the frictions of the mortgage market when it went under duress, the problems with getting service to the consumers, the problem with getting service to investors. The litigation. A lot of people don't know it, but were We represented a large swath of the US investor base and their litigation for buying these bus and securities.
So we said, you know what, let's just build under one platform everything you need to originate, managed service, aggregate and the long term service. These homes on behalf of the residents and the investors. So that's the single platform we built.
H absolutely fascinating. So let's talk a little bit about who the clients are for Amherst. I'm assuming it's primarily institutional and not retail. Tell us who your clients are and what they want to invest in. Sure.
Over the years, we've migrated really to what I would say is the largest customer base in the world, the largest single investors. So we do business with most most of the sovereign wealth funds, most of the big US national insurers, global insurers, the largest pension funds, and we try to position ourselves as an extension of their capabilities. And since we're smaller, more nimble, we can kind of get in there and do some of the gritty things,
the smaller things. Imagine setting up a platform with in thirty two markets that has to buy each individual home and execute a CAPEX plan on a thirty forty thousand dollars CAPEX plan on a home. So these large investors need someone like us to kind of make things investable in scale, and so that's where we've been. So it's all institutional investors. It's the call it five hundred largest investors in the world.
Is that patient capital? Did they have the bandwidth to hey, we're in this for decades.
Yeah, it's super patient, it's super sophisticated. Their asset allocation model driven folks. The bulk of our investors are investing on behalf of consumers, on behalf of taxpayers. So we're partners with the State of Texas. The actual state of time is not one of the pension funds, but the state itself. So we have a lot of sovereign wealth on types that are investing on behalf of tax payers.
So it's very long dated capital. They're lower risk tolerance, I would say, very high standards on quality of service and quality of infrastructure decision making. So we're very proud that we're a partner to that type of capital.
So let's talk a little bit about the residential side. Before we look at the commercial side. You mentioned you are in thirty two markets buying single family homes. How many homes have you, guys?
So their platform service is about fifty thousand units now. So we've purchased and most of the homes were purchased one at a time, independent due diligence, independent construction management to get the home back up to current market standards, and we manage each home independently.
So that implies that some of the homes you're buying are kind of project homes. A wrecked or otherwise neglected doesn't even have to be a willf elected destruction, just time and tide.
Just what we like to say is it's deferred cappex. So you'll find that owners that have owned the home for ten, fifteen, twenty years become pretty comfortable with a smudge paint or a stained floor, or old countertops, or appliances that may make noises at night or that or that you know, that bathroom set that leaks and whatever, and so people just get comfortable in their homes and they they tend not to reinvest in real time on
keeping that home up to current market standards. So we buy those homes that haven't really been touched in fifteen or twenty years. They've still got the original builder interior. We make sure that, of course that the bones of the house are good, the foundation and the walls and so forth, but then we pretty much trip them down to I wouldn't say down to the studs, but down to the sheet rock and put a brand new interier
in on. We oftentimes people don't buy a roof, they'll let the roof go a longer than maybe the staple exact or a third one, or bought a lot of roofs and buy a lot of hvacs. We take out a lot of compressors that are still running on those old toxic gases. So we basically bring the home up to a current monitor standard and there's a there's a profit in that that the home you get paid to go and improve PA's real estate.
And then how do you figure out what to lease these for? And do you ever sell any of these homes?
We do sell we do. The platform is pretty nimble. So if for example, we were talking before the show, we were talking about how some markets have really benefited from the post COVID migration and it's changed their customer based dramatically. So think about Naples, Florida and clear Water and those types of places. So in those places, home prices since pre COVID are up maybe forty fifty percent and rents are up twenty twenty five percent, so they really don't really make much sense more as a as
a rental investment. So we're cleaning those homes back up and selling them back to the consumers. So that's an active part of portfolio trimming and optimization, and it's cool to have the capability to sort of execute in both markets.
So it's funny you mentioned Naples and Clearwater. A few of the areas adjacent to those really got to lacked by that last hurricane that came through last year. What do you do when you have a natural disaster? Is that does that create any interest or is it just just too much may.
Have It's well, we've been hit by hurricanes several times, floods several times, tornadoes several times. Given that the homes are in thirty markets, the good news is no one event has a big impact on the portfolio. The bad news is all events you get to experience.
Right, So diversified, which means you're embracing every natural right.
So in Houston one year, we got hit in Houston and in Florida at the same time, two different hurricanes. So what's interesting is that now we have a natural disaster of team and response unit and a playbook which is a little bit unfortunately you have to have that, but we use it every couple of years.
Now.
We tend not to invest when those markets are busted. We do see a lot of demand for our rentals because when you know, a few percent of the housing stock gets taken offline for a storm, it creates pressure on demand. But now our job is just to go in there and get the homes fixed as fast as we can and get them back into service.
So fifty thousand homes, I'm going to assume you're a self insurer on all those homes.
We do so Amerus is completely verted integrated. We own our own insurance platform, so we're the we're you know, we basically access our coverage through the reinsurance markets. At our scale, it's hard to go get insurance through the normal channels, and so we set up our own insurance brokerage and risk attention platform and now we we insuran through the resurance markets.
Huh really very very intriguing. Uh So let's let's talk a little bit about some data and technology you use. Sure, you guys created your own platform. Tell us a little bit about what it was like developing that and what makes it specific and unique to Amhurst.
It's interesting because you know, today we talk about AI and and uh, you know, high speed computing, and what I look at, what we do is being comically you know, simple compared to what we talked what we're talking about today with generative AI. But when we started this in the late eighties, so that was the job I was pronted into, which was, hey, let's figure out how to
differentiate pricing from one mortgage pool to the next. They've got different interest rates, they've got different LTVs, they've got different credit scores, they must have different values. So I was part of a small or the our team was part of a small group of people tackling this problem in the late eighties early nineties, and what we do today is just now growth of that original project. So
it's a quantitative analytics approach. It's highly data driven, but we need to know the price history for us, that's the correlation to to what drives price, and then we have a big consumer behavior modeling infrastructure because we have what's nice is that over the thirty years of our history and then we purchase data that was probably twenty five years old at the time, we can measure how consumers behave to changes in their economic environment, and that
consumer behavior will affect home prices and will affect performance on credit. It's that So that's the core competency, and it's just leveraged into if it's a loan, if it's a security back by a loan, if it's the actual estate itself. So from a data perspective, think about it this way. So obviously the S and P five hundred is five hundred names and they report four times a year, and God loved the analysts that have to figure out how to price these things with so little information. We
have one hundred million items that we're following. Is one hundred million piece of real estate in the country. We've gathered up all the information you would need to do an appraisal, and we keep that information current in real time, and we've automated the appraisal process for evaluation both intrinsic value, meaning like where would we pay it, where would we buy it, and where is the fair market price that asset?
From that level, from price and from consumer behavior. Now, so now we're watching the payments on every mortgage in the country, so you can see who paid, Did Maryland do better than Texas last month? And more importantly, versus the model, who outperforms, who underperformed. Because there's a schedule, there's an expectation for not everyone to pay every month.
So when you're trying to put a value on a home, you're not just sending a third party appraiser oute to do a drive buy and go. Yeah, that's about two seventy five. You're actually crunching a lot of numbers. And this is proprietary you're running.
We're running a ten year Monte Carlo. That's probably twenty thousand, ten thousand paths of outcomes on that asset. It includes all of its changes in its property taxes, it's depreciable life for the improvements of the assets, and course it's revenue stream from rental demand.
So it's interesting that you started this after the financial crisis, given your technological expertise and your unique way to value these things. I'm curious how much of this is a legacy of your experiences during the Great Financial Crisis. How did that couple of years affect how you look at risk and pricing of real estate process?
It's infecting, I would say. So the problem, the problem for me, I'll speak for myself personally in the financial crisis is that once you find something like that, because literally we were saying to people these loans aren't going to pay off in two thousand and five, two thousand and six, and they were like, Sean, in the worst of fault rate, it's been geographically focused. Rather it was the farm belt crisis or the California crisis. What are
you talking about? National home prices going down? And oh, by the way, the defaults in those micro markets were ten or fifteen percent and the losses were five percent. So if you we had five percent losses on a market and the market was only five percent of a pool, the losses are going to be nearly zero, right, And we're like, yeah, except for none of that's going to happen this time. And they were like sure, Sean, pat you on the head and send you down the road.
So so one of the problems is once you see something like that, you kind of look for them everywhere, So we spend our time a lot of time looking for looking for sasquatch. And so the other thing is is that, and I think it's our core risk management culture, is that we think that tiller risk is way more probable than everyone else does. So we manage the business for extreme shocks to prices, for home prices moving twenty five to thirty percent in a year, for interest rates
moving dramatically in a short period of time. And we found you know that check check is all these tail risks. Well, it's like the one hundred year floods every ten years or so. I've been doing this for thirty years, and I've had how many hundred your floods? More than more than point three?
You know. The fascinating thing is I have a vivid recollection of a paper, a white paper coming out by professors rein Hart and Rogueoff. I remembered it was five financial crises. So it was Helsinki, it was Sweden, it was Japan, it was Mexico, maybe US, and the Great Depression was the fifth one. I don't remember exactly what. By the way that paper eventually becomes this time is different.
Eight hundred years of financial folly. But the average of the real estate drop in any modern financial we're not talking about tulips. Right. The last century was over thirty percent in real estate. And once you once I saw that paper, I remember saying, hey, this is in a theoretical possibility. This has happened once in decades.
Right. So people think of home prices as being sort of four to five percent price movers per annum, and that's the case most of the time. But the problem is we don't get to live most of the time. We get to live all the time, and so sometimes that five percent move can be thirty five percent and forty percent. So think about that eighty percent l TV mortgage.
That doesn't seem like a risky loan. The bar will put up twenty percent, the lender put up eighty percent, but there's a one in something chance that the home price goes goes to sixty five, And if the home goes to sixty five, the loan is no longer going to pay off. So that was the sort of the thing that we built that people hadn't thought through, is how to you stochastically forecast a range of outcomes for the asset price? Then how does it affect the repayment risk on.
The loan, So you have to have boots on the ground. With fifty thousand homes, how big a staff do you have? Is it regional? How do you manage since since you're now the landlord for these homes, how do you manage the regular maintenance the one off you know, things break or refrigerator stops, the toilet kits backed up. How do you manage that?
Yeah, it's complicated. So we have a both of an on balance sheet group of repairmen. So we're an investment management platform that also has trucks with plumbers crews around the country and fixing air conditioners. We also have a great vendor network and we have a lot of technology that the team, as you mentioned, is about fifteen hundred people that are just in that single venderaial platform. This's
is one of the things Amherst does. But that fifteen hundred person team is augmented by about two thousand vendors of companies and we're able to handle the properties because we have a team in the field. So we literally have a repair and maintenance team that's assigned to a group of homes. So that person has their three hundred homes or something, and then they're part of a local
team that's managing about fifteen hundred units. So it's not that different from how you would manage a multi family an apartment complex. It's just that the rooms are further apart, the units are further apart, and it causes our drive time to be higher. But one of the things that we went into this that was one of the big questions is could you provide good service and could you manage them? And we don't get it right all the time.
But if you think about the fact that how easy it is to get someone out to a home, and that's part of our filtering criteria of how we buy a home. But think about the fact that for ten bucks, you can have Dominoes bringing a pizza and somehow of that ten bucks they get the delivery person from their store to your home with a hot pizza, and they were able to pay for the Super Bowl add out embedded in that ten dollar cost, like the transportation cost to get people to and from these homes, it just
isn't a barrier. It's really timing and technology to really to rout them.
So let's talk a little bit about technology over the past two decades, real time monitoring of things like fire, flood, carbon monoxide break ins, whatever, they've become very inexpensive, very ubiquitous. Everybody can have it on a phone. Is that anything that you've explored in terms?
We spent a lot of time on it. There's big privacy concerns. So we have families, we have fifty thousand families living in their homes and they're their homes and we're proud to be part of that process. So, you know, a lot of that stuff gets a little creepy to us, and so we haven't done well.
There's a difference between a puppy cam where you're seeing what's going on in the bedroom and I know in my basement I have a flood.
Like a high water alarm, that sort of thing. So that we're still on their network, we're still so that technology for us to go at it stronger. We would like for those devices to communicate back to us, uh directly, not like.
A like a cell phone.
So we are looking at that. There's locks now you can buy that have little cell phone transmitters in them, right, So we may we may look at things like that, but at this point we have so many people on the field. We're touching the houses six, eight, nine times a year. We have good relationships with our with our residents. A lot of that stuff is a little bit of pizaz and we see other people charging residents, you know, fifty dollars a month for electronic door lock or something.
We don't think that that's sustainable cost.
It's a fifty dollar product. How do you chrusee fifty dollars a month.
I no, I don't don't. I don't get it. So we will will it's coming along. If I can get direct cell phone connections to a high water alarm, I would take it. But really, what we have as a person go out there and look and touch the property eight times a year, and that's how that's how we do it. A lot of this is not so complicated, but we have you know, through COVID was fascinating because that field team and we have a big construction management team.
So these guys, those fifty thousand homes have all been renovated. So that those teams during COVID man they up and they went out and they made us so proud they provide a service to the residents. They finished construction jobs. They got homes back in service so people could move out of wherever they were and get into a home. So it's been fascinating to watch this business run through a crazy COVID cycle, and then a crazy post COVID cycle, and now an interest rate cycle. The team has had
to be pretty nimble. Huh.
Really quite intriguing. Let's talk a little bit about about your space. What are you doing these days in mortgage backed securities? Does that market exist remotely like it did in the two thousands.
Well, it's great that you ask about it. So the bulk of my career was spent in the mortgage backed securities and structure products markets. The single family riendal of business kept us very busy while the FED was monetizing so many mortgages, so, as you know, they own about a third of all mortgages that were ever issued. The relative value for non government investors was so bad that we wound down a lot of our capabilities in that space.
We actually sold our investment bank to Manco Santander as part of just the frustration with how much intervention had sort of driven down value in that space. Well, now that's completely reversed and there's a real vacuum today, a real vacuum. As the FED stopped buying mortgages, they bought a third of the whole market when they stopped buying them.
I think the belief was that the market would get back to its regulary scheduled programming and the traditional investors would show up to buy them, and they didn't because a lot of those traditional investors don't exist anymore.
You lose a whole generation, there's no succession beyond.
This is the largest debt cautter market in the world, the largest, most liquid, and it's lost its sponsor. So the sponsor went from being the big investment banks, the government agencies, the big bank balance sheets, a lot of the insurance can be balance sheets, and the money managers. The FED displaced all of them. Then they changed regulations
to where the investment banks can't really step in. The agencies are no longer allowed to run balance sheets, the reats are not really well positioned to step up in the size, as we just saw in the four quarter. So there's a real lack of sponsorship with the assets, and they've become incredibly attractively priced. So we've been ginning back up those strategies. We still we've always run strategy that space, but they've been very sort of boring strategies,
index tracking, index outperformance, that kind of thing. But now there's opportunity to really go in and build proper hedge fund strategies, proper total return strategies. The relative value is sort of startlingly attractive now.
So I always hated the term financial repression, but what you're describing really is the FED engaging in financial repression on that corner of the market.
Well, what I would say is that they were investing for a non monetary focus or motivation. Right, They didn't care what their returnal the mortgages were they trice and sensitive, right, they cared what the lower mortgage rate did to the economy.
So as a person that's just investing for an economic return, you can't compete with that, right, So their motivations were totally different, and they and they basically drove down the relative value to where on a hedge adjusted basis, if you looked at a mortgage and you'd sort of get it back to where it's got the same risk a treasury, it was yielding almost half a percent less than a treasury. They normally yield half a percent more. Now they yield
one percent more. So in fixed income terms, that's a lot. So so now we're really focused on mortgages that we're way more active than we have been in the past, and we're excited about the opportunities there, and we have a commercial morgage lending strategy as well.
Huh, that's kind of interesting. So let's talk a little bit about what's going on in the commercial space. We were talking earlier about sixty minutes. Did a piece recently on the New York real estate market is never coming back and all these big office towers are you know, empty. I'm old enough to remember the sea through office towers right.
Dallas back in the eighties and Dulles the whole right the Washington Dulles Quarter was full of sea through right see through buildings.
So we're not there, but certainly the typical high rise has you know, a vacancy rate of ten fifteen to twenty percent, and the occupancy rate during the day is probably another ten to fifteen percent less than that. What's going on in the office space.
So the castle data is pretty fascinating and you can get it on your Bloomberg terminal the castle. The castle ocup data as we talked about before.
But by the way, that's all swipe cards of employees literally going down.
The real time physical occupancy data is pretty and it's not perfect, like no data set is, but it's pretty startling. The last time I looked at it, most markets are peaking at fifty percent physical occupancy. Remember I said before that in the mortgage market, in the residential mortgage market, a borrower can stop making payments and it might be two years before the investor actually takes a loss, sometimes five years. Well, I think that same thing's been happening
commercial now for the last since twenty twenty one. Is that physical occupancy is the leading indicator to economic occupancy. Economic occupancy is who's paying the rent, and in corporate leases are of incredibly high credit quality, incredible very few leases ever default. Those leases, however, are going to come
do and the renewal rates are tragically tragically low. So if you model out what's going to happen to the commercial space from an economic perspective, you don't have to be a wizard to figure out that monetary or physical, fiscal or financial occupancy is going to track physical accuracy. Companies aren't going to be able to give back one for one as much space as they're not using because they've got this peak and load problem where everyone likes
to come to work on Wednesdays. So you still need the space, but that quantum of space that people need has been reduced dramatically and we're seeing it in that
Castle data. So it's a scary thing to do. But if you forecast that the lease payments track the physical usage, meaning that what you're seeing today, it's fifteen percent vacancy because some leases expired and to get renewed, well, all those leases that are being underutilized by half, if those don't renew or they renew it much smaller spaces, you could create thirty forty percent physical you're actually financial vacancy in the commercial space. Now, it's dangerous to forecast that
far in the future because behavior can change. How much space do people need or do they do out the fact they want their whole team to get together three days a week, so they do they just eat the space on the Mondays and Fridays. Some companies are never coming back, some jobs are never coming back. So the way we look at it, we have some loans in the office space. We do feel like it's like bottom
fishing time and we're taking back real estate. Now that is fifty dollars sixty dollars a square foot space for big, beautiful buildings that need to be repopulated. But so the way we think about is this is that occupancy is probably going to drop by a third, but it won't be a third for everyone. Right, some places going to go to zero, and some guys they won't, They won't feel it. So asset selection becomes incredibly important.
So there's a huge difference between the A class buildings and the B and C class. And I've heard people say even within A there's a big ring.
There's the super A stuff, you know, the one Vanderbilt thing at two hundred bucks half foot that you can't get enough of it. But a block away some traditional commodity office space that's just a little draft or whatever, you know, that people just don't want it at any price. So now that super A space is a very very
small fracture of the market. So it's not what happens there probably isn't going to be sort of impactful, but we think that, you know, they're people have to adjust to a new normal of demand, like demand function for commercial real estate has come down. Now this is, by the way, just another domino in a long series of what the Inrice Norwitz guys call software eating the world.
This is technology eating real estate. And so if you look at this over longer the time, the way we think about it is that technology eight retail and we all kind of saw it, right. It was Amazon killed the shopping mall. Airbnb has eaten up a lot of hotel demand. So technology matching a home to a to a rent or a leaser has eaten up a bunch of the hotel demand. Now work from home is eating is eating office. So we can we kind of have a playbook for how this goes. And it's not great.
And all of these are technology enabled. Without tech, you wouldn't be able to do this. The ironic thing is the I love people discovered like screen sharing in twenty twenty one, right, that tech has been around for a dozen plus fifteen years.
I know, I think about the people that created Skype. They must be sort of jumping off a bridge somewhere because you know, you couldn't give away Skype pre covid, and now now I don't even have calls on my phone, my office phone ever anymore. Everything happens over teams are over over zoom. So the behavior has changed so quickly.
But I think that, you know, the CEO from Cisco made a good point that the home has become the enterprise, and what it was saying is that Cisco is seeing people buying really sophisticated communications equipment for their homes because now they're they're they're pushing their use case. I so for us, it's also kind of fascinating. And this is a little bit about how the single trintal trade has
becomes interesting. Is as people stop going out to the mall and they shop at home, as high speed communications allows them to stream at home, as delivery allows them to and eat at home. Right, these real estate sectors are all seeing their demand dry up, the demand for usage.
All that demand is showing up in the home. It's showing up in that eighteen hundred square foot three bedroom home because and everyone's use case and demand for real estate's changing because they're spending so much more time there.
So I kind of feel like a lot of those big technological shifts we'll post the peak of that like, I'm a big online shopper and I've kind of come to recognize there's certain things that you just can't buy them.
Yeah, I have all the time with clothes and things.
Close is a perfect example. A lot of times you order certain things like it's hilarious. You think you're getting a four foot tall you know, lamp and this miniature and I guess the photo is what the photo is, there's just no tape mail tape measure next to it.
But let me ask you about this, because pre COVID, you couldn't have convinced me I could buy groceries on an app.
Oh I was doing that, That's easy. Now.
I don't think I would ever go back to grocery.
In fact, Amazon began that when they bought Whole Food.
So think about what that means that grocery store, that grocery store anchored retail. Ordinarily, the grocery store space was undwritten at a loss by the real estate developer, right because that was your magnet.
Now it's your distribution hub and there's no people.
So what happens to the dry clear, what happens to the ice cream shop? What happens to the T shirt shop? What happens to the travel agent.
They have to adapt the same technology and do pick up and delver.
So e commerce is changing, like the footprint for a business, it's addressable market. And so I don't think this is over. I think that that the pricing of it kind of like we talked about the loan starts, the loan defaults, and then two years later someone takes a loss. Today we're CPI prints higher than people expected because owner equivalent rents is higher that OER number was calculable four months ago.
So the market isn't doing a good job of forecasting what it already pricing in what it what already knows in any cases. And I think that we're still in the repricing phase of real estate for a new a new type of demand.
So some of the solutions to these are wholesale changes to the way we built out suburbia, which is so car dependent. If we were creating these more walkable communities like back in the Andy Griffith days, it's fascinating, suddenly fascinating you have retailed that's survivable because everything isn't. Getting your car and drive to Target that's right, or have Target make a delivery exactly.
So we spend it. You think about how European cities work. That's that's what that's how they're that's how they're designed.
So so the question is is that something we can build here? Is there an appetite for that? Is there?
I'm spending a fair amount of time on just that is. Can you respond to this? Should you respond to it? Because as you said, like you know, maybe this is a flash in the pan. If all the companies decide that employees have to come to work every day, then then these trends and occupancy will change and quantum of demand will change. But I recently was given a book and I read it. It's a companion of essays called The City Is Not a Tree. It was written in
nineteen sixty five, and it was about this. It was about how a city should work to optimize the experience for its residents and think of a city as a product. And so we give the speech to mayors when we're asked about sort of how we think about their city from a migration investment perspective, and we try to tell people that a city is a product. So New York City is a product and the customers can choose a different product, and it's a great product. It's one of
the greatest products in the world. But like all customers, like all businesses, in all product delivery systems, you have to freshen your product to keep your customers happy. And we see some cities doing that and some cities not doing that. So you have to modify. You can't just completely tear down and change.
So one of my favorite YouTube channels is this kind of wacky Canadian expat who moved to Amsterdam, and it's called Not Just Bikes, and he talks about walkable cities and how different countries in Europe do a better job of it, and how there are pockets of it in the US right and North America, but they're few and far between. It.
Yeah, I think it's something we're spending time on because we're with our vertical integration of manufacturing homes, building homes, real estate development. The ability to monetize a home either as a cell to a consumer or a rent and have into an investor. It gives us the ability to think big about development and I haven't seen anyone pull
off yet. So the master plan community the United States, other than maybe the woodlands in Houston very few of them are actually master planned for multiple product types where you have office, medical, civil, residential, entertainment, all kind of thought about together the way you would the way European cities were developed. But remember Europe, like you said, you
said a very key thing. European cities were developed before the cars became years a lot of our cities stopped growing as core cities and started growing as these suburban driven cities because of the car. And so this will be simple, this will be think if will you reverse? And this is something that global real estate investor are
thinking about a full time basis. There was a paper written about five years ago, I think it was put out by the research team Prudential, and it was all about urbanization and all of the investment themes across our investor base, the biggest invests in the world. We're very focused on urbanization as a global theme, and you could see it in Southeast Asia, you could see it all over China, you could see it. Of course, has happened in the United States where people left the small town
to go to the big city. COVID may have reversed one of the largest global trends in investing in the last one hundred years. It may have turned. It may have turned us from urbanization to de urbanization and the
impact of that. Now we're not calling that just yet, but it is probably one of the most important things that people can focus on, or are we going to shrink the size of these megacities that all benefited from urbanization for the last you know, sort of fifty years in the US, maybe the last fifteen years in Southeast Asia.
So it's an interesting time where the I wish I could say I was going to turn out, but there is a the ball is bouncing around and we need to understand which way it's going to land.
Tell us about Main Street Renewal.
Is that so that's the operating platform for the single fundamental business. That's our construction management, our real estate brokers platform, our leasing platform, the customer service platform. So that's the brand name that the consumers see, that our their operating partners see for the whole vertically integrated single family rental strategy. That's basically analogous to the entire ecosystem of the mortgage market, wrapped up under one one corporate label.
And we've been talking a lot about single family homes to be purchased and rented a couple of years ago sixty Minutes to a piece talking about, hey, is private equity pushing out local buyers? I know you have an opinion on this. Tell us a little bit about your experience with sixty minutes.
Sure, sure, So, first of all, I love sixty Minutes. I don't know it's just because I'm finally old enough to age into their demographic. But I think it's one of the best news shows on television because in that twelve or fifteen minute segment, they really can simplify a topic and make it and make it understandable to everyone. The topic of where do we fit in the system of the single family housing market is what we're doing
a good thing or a bad thing? Obviously, you know, I've got a couple of thousand people that wake up every day and go to work. They don't think they're doing a bad thing. So I can tell you our perspective of it. I can kind of give you both sides of the argument, and people can decide for themselves. I mean, part of the argument is that if Sean buys the home, or if amorist buys the home, some family couldn't buy the home. And it's true that if we buy the home, no one else could buy the home.
I'll give you that part. Now, in the US, we track the home ownership rate over time. The home ownership rate has grown to sort of mid sixties and babble around. It got really really high when we were giving away mortgages in two thousand and seven, and then it came back down. But that number has been a six handle for the last fifty years, right, So sixty something percent of people own their homes. The inverse of that number
is the people that don't own their homes. So that number has been between thirty and call it thirty and twenty five percent for a very long time. So that third of how of families in the US that rent their home rent for a mere reasons. One of the reasons that they rent is because they can't get amorage.
And part of our bet in two thousand and nine was that the group of people who are going to be locked out of the mortgage market is going to grow substantially, partially because the standards became higher, and partially because student loans became kind of a predatory financial product. So having a student loan makes it way more difficult to get a mortage. So in this argument of are we buying a home that a family is not moving into,
I put the paradigm in a slightly different way. When that home comes up for sale, a lot of families show up that want to live in that home. A group of those families show up and they can get a mortgage and they can buy the home. A group of those famili show up and they can't get a mortage for that second group of families to get to live with that home, and investors got to buy the home. And that investor can be and historically has been very
small investors, people that own one or two homes. Maybe they owned a home, lived there, moved away, kept it, rented it. And now through the through technology and through significant investment platforms like ours, allow larger investors to go
and invest in that home. So when I sit down with policy makers and they're sort of of this mindset that I should have stayed away and let the family buy the home, what I like to do is say, can you guys just put together the pictures of these two families and who's going to get to live in that home? If the only people who can get a
mortgage can live there? And who can live there if Sean buys the home, because demographically they look more like the people that get served by the home when I buy it, look a lot more like the people the government should be trying to help. And that usually takes people and they step back and they go, wait a minute, what do you mean. I'm like, well, so Shawn doesn't
live in fifty thousand homes. Someone's living in there. And the people that live in those homes, for the most part, are not candidates to get a mortgage in the twenty twenty four mortgage standards.
And it's not because they don't have a jobs and they aren't.
Currently they're paying two thousand dollars a month in rent. Our average customer only pays twenty five percent of their income in rent. For two thousand dollars. They cover everything, They cover the chance that the ac breaks. They don't have to pay for that, property taxes, insurance, the whole nine yards. So right now, the cost to rent is
probably thirty percent cheaper than the cost to own. But more importantly, if you're not given a chance to get a mortgage, it doesn't matter what the cost to own is. The cost for you is infinite because you're not allowed to get a mortgage. So when they when Dodd Frank passed and the standards for mortage credit became unfairly high, we said, Okay, this is what's gonna this is what the nation to decided it wants to do now against my advice when I sat, when I sat at full reserve,
I said, this doesn't have to happen. This way, we can sort out for you what the good subprime was from the bad subprime. People are like, we agree, you can, but that's not how policy works. That mortgage market has been shut down and it's going to stay shut down.
So what should we do to reopen that mortgage market for people who are currently employed have a half decent credit.
Now, you're baby, we're gonna give in the two hours for the podcast. I got a whole list of things need to do, but the give us a short PNT. The primary, the primary thing you have to do is you have to put risk. You have to make risk based pricing legal in the US mortgage system. Dodd Frank
made risk based pricing illegal. So if someone comes in with a lower credit score, a higher likelihood of default, and remember the likelihood of default could mean that they go from being five percent likely to ten percent likely, not ninety percent likely. But if someone comes in that that has a likelihood default above a certain level, the answer is you can't make them the mortgage.
At any price as opposed to where it's I'll make up a round number. If we're at five percent, they could buy get a mortgage at six and.
Three we used the rate used to be three points hire two points are so Dodd Frank basically carved out the maximum premium you can charge to anyone, and then they created recourse for the borrower. So I give this presentation in the UK, and I gave this presentation to France once and I said, okay, the US passed. They were like, why is the demand for rental so high?
And I said, people can't get mortgages. He said why, I said, well, Dodd Frank created a precedent that said that if I lend you money to buy your home and then you can't pay me back, you can sue me. And even in France, the guy would say no, no, no,
you mean the other way around. I lend you the money you don't pay, I can sue you and I'm like, no, no. So there's there's this concept that that that was part of the the ether in the financial crisis, that the banks were the proximate cause for the default, and so the bank should not be allowed to make these loans. There were some bad back that's a.
Wild statement because as someone literally wrote a book on this, banks did a bunch of stuff that wasn't very smart. But it's hard to say the banks making loans were approximate, cause now there's a handful of banks doing the ninja stuff, and but that was.
There really enough bad acts to go around. The banks had culpability, the securitization industry had culpability, Serving industries culpability, The ratings agency agencies had culpability. And this is why I spend time washing trying to explain to people. But the consumers had culpability as well. So a lot of people with fraudulent loans six eight loans. So we bought
a bunch of these loans. Something people don't know is that we audited eighty thousand loan contracts that we bought, and we there's a return to cinder clause in mortgage contracts that most people don't know about.
Right.
And if the bar were defaulted and the contracts were in a certain way, the person that sold your loan has to buy it back. So in these eighty thousand loans you kind of had sort of two big populations of predatory borrowers. One with a little mini we call the little Minnie Donald Trump's. They would have like twenty five or thirty or forty homes, no equity down. They're all rented, no management, kind of like yolo of like
if they go up, we're going to refinance them. If they don't, we're going to send the keys back in. And these were loans that were made with no equity from the barrower eighty percent first, twenty percent second investor loans. And then then there were a group of people who really just wanted a house and they were willing to fib about their financial standards to get there, right, and so and the banks and the mortga originators. In many
cases there's eighty thousand files. You would open up the file and it would say the person was a dental hygienist and made one hundred thousand dollars a year, no document, and that loom was loans approved. Now in this you file would be the application that got denied that said that they were a dental assistant and they made fifty thousand dollars a year, so they would give us the file that so they was.
So those were the I heard stories at the time of the mortgage brokers who were able to guide an applicant through coaching. Coach, don't write this, don't write here what you got to say? And basically, you know, we're co conspirators to fraud.
And you know the Mortriges broker was making five or six percent of the loan amount, right, it's a lot of incentives.
So I blame them much more than the person who just did what they were told they were wrong. At this point, really the professional is the one got a whole scount.
I think that we're hung up on who to blame, not you and me. But if the market is who to blame, and the market isn't paying attention of who got harmed, because in the first degree, the person that got harmed was the person who got four clothes up on and got addicted from their home, that's a very
clear harm to see. The harder harm to see is that maybe eight million families that haven't been able to buy a home since this law went and it's fifteen years and there's no progress, So the rental market has to grow. Institutional capital is going to play a part in every home transaction. Its social capital has to be there to make the loan if they're not going to buy the home. Providing service to the third of American
families who rent for various reasons. Now, about a third of our customers, or twenty percent of our customers move out every year, so they were never like long term committed to that location to begin with. The credit scores of our customers suggest and the financial condition of our customers suggests it would be very difficult. It's not it possible for them to get a mortgage on average. So this is the solution for people to move out of the Other thing people think about it is that it's
okay to rent apartments. So that's socially acceptable to invest in apartments and rent them. But apartments are primarily one and two bedroom products, so we're a three bedroom product. So as you age out of an apartment or you need more space because you work from home, or you have a family or whatever, and you age into the single family product, which is location driven, local amenities driven blah blah blah. So you would go and get a
mortgage and buy. But that cross section of the customer base that the mortgage market serves has shrunk so much that we set up this platform because we knew they were coming. We knew that they're going to want to live in that product and they're going to need to get there with a different financial solution than a mortgage. So we developed an institutional scale, securitized financing vehicle for
the pool of homes. We developed the services that wrap around the pool of home to lower its cost to capital, So the cost of capital for single time really today is in the five to five and a half percent range. Prior to us getting involved, the cost of capital for rental was probably eight hundred over and nine hundred over because it was provided by small investors taking very specific location risk. Now we can have a thousand homes, all the adiosyncratic risk is pretty much gone. So we feel
very proud of what we're doing. And I wish that the conversation about this crowd out would focused more on the specifics of who didn't get to buy, but who got to live there, and when people see that and they see that, Oh wait a minute, these are three
hundred thousand OAR homes. These are not you know, these are homes that that bar, that resident would have a very difficult time getting into without us, and we were able to provide a really good service at a very effective price for that customer base.
That's a really interesting answer to a complicated question, and it still leaves open the problem that there are eight million people that might otherwise be on be homeowners. But the rule change has been and the.
Way I think about it, the way you get me a slopbox. But in the worst of the worst mortgage pools that we were short and the dirtiest of the pools, where everybody was lying the bar, where the banker, the securitizer, everything age, everybody was lying the worst of the worst. About thirty five percent of the loans defaulted, which means that two thirds of even those dodgy things paid. So those are two thirds of those families got to get on the economic ladder and own the piece of America.
Because the third worked out so poorly, we shut out the two thirds. And that's kind of the frustration I had with Washington. It is like guys like I know there's to throw the baby out with the bath or what other. But you're thrown out. You're throwing out an opportunity for people to own a piece of the country and act as owners in their community because you don't have a good way to manage the ones that don't work out. So we should be focused on what to
do when they don't work out. We shouldn't prohibit the activity because some of it doesn't.
Work out well. Congress seems to have its act together.
I'm sure, I'm sure it's next to the docket, right.
This will be worked out, all right, So I only have you for a limited amount of time. Let's jump to our favorite questions. We ask all of our guests starting with what have you been entertained with these days? Tell us what you're either watching or listening to.
Oh wow, So I'm a very boring person. I spent a lot of my time buried in data and analytics. I think that I really love the whole Yellowstone series. I'm upset that Costner backed out because I thought the production quality was so good. So I've seen all of the pre the you know, the prequels and so forth. So on the entertainment side, I think that streaming has set a whole new bar for quality of broke.
Yeah, no, that's absolutely on my list. Tell us about your early mentors who might have helped shape your career.
Wow. Well, so I've got a big family. I'm one of five kids. My parents were serial entrepreneurs. I've got four big sisters, and so they're all successful in various ways, and so the family has always been the primary motivator and leaders. You have to this in our business. You know, in finance, who you marry really matters. So I've been married for twenty eight years. My wife was in finance. She ran an investment management business, built it up and
sold it. So having support at home and having a real partner in the business is super super important our jobs. When you're the founder of a business, you know, the hours are long and the mental exercise is significant. So having the right teammate at home is absolutely paramount.
I was.
I had a high school economics teacher who later went to work for the Federal Home Loan Bank of Dallas named Sandy Hawkins, who was just fantastic for a high school economics teacher. She covered everything from Milton Friedman to free lunches in a way that made it fun for high school kids, and I absorbed every second of that
I could. And then I had this really unusual situation because I was at this brokerage firm when I was very young, and mortgages were just getting some science around them, and I was always good at math and I had been writing code since I was in the sixth grade. So I had real support around Wall Street because at the time there was a small club of firms that were helping solve this problem together. And so I had a guy named Frank Gordon who ran mortgage research at
First Boston. That was just a great support to kind of bring me up up the learning curve.
Huh interesting. Tell us about some of your favorite books and what have you been reading recently.
Well, I mentioned I read A City Is Not a Tree. It's a little bit boring, but it's fascinating because I do think that there's an opportunity for us to rebuild microcities instead of instead of going to the exerbs and trying to adjoin a city. I do think that is something that we're working on, to just PLoP in the middle of nowhere and build a full stand up city,
which would be fascinating. My my daughter and I listened to crime Junkies and on the entertainment side, I think it's one of the most popular, other than Years of course, one of the most popular podcasts in the country. It's fascinating. It's it's a couple of young women that that tell the story of some sort of unsolved mystery or solved mystery of real time what they call it there, it's a it's the real crime dramas. I think it's been
pretty fascinating. And I've got we have two kids, and my wife and I have a freshman at Columbia and a sophomore at Stanford, so we're spending a lot of time learning about the college.
Experience freshmen at Columbia. Oh, so you're you're back and.
Forth, but my poor wife is on like the coast to coast tour.
Are you are you guys in Austin?
A lot home is in Austin, so you're halfway or exactly, we're equally it's equal travel to either place.
And uh So, our final two questions, what sort of advice would you give a recent college grad interested in a career in mortgages real estate cra anything along those lines.
Yeah, So whenever we have interns come in or we have young executives start, I buy them a couple things. So I buy them the Frank Fobose Handbook on mortgagsback securities, the Mortgage back Nerds Bible, and I buy them a
book Bernstein's book called Against the Gods. And I really think that maybe it's just because I'm such a quant nerd, but I think that Against the Gods it's a very small book, a very quick read, but it does a really good job of teaching people that you can apply quantitative analytics and probably a theory to almost anything and
to everything, to your life decisions, to everything. And I think it provides a nice paradigm in a world where today it feels like, because of the political environment, people are sort of it's black or it's white, it's zero or it's one, and it's never zero one, right, There's
always some difference in between. So that's a book that I think is sort of required reading at Amherst to really understand the history of risk management, the history of ability theory, how it first turned into what are the big missed pricings have been? So it's not a super complicated read, but I think it does a really good job of taking people from thinking about the world as trying to predict a thing, instead of saying, wait a minute,
there's a range of things. Can I be okay with a broadery of outcomes versus just betting on that one thing?
And pretty much everything Peter Bernstein writes is great, awesome.
The gold One's even good too.
And our final question, what do you know about the world of real estate investing today? You wish you knew thirty so years ago when you were first getting started.
Wow, that's fascinating. The ecosystem of real estate has been hard for me to follow, coming at it from the fixed income markets, so just understanding the various players of what they do and how they're motivated has been something I wish I would have just sat down and mapped out early on, because understanding how people are sort of
economically rewarded really helps you predict their behavior. And I was kind of confused by that for a long time, trying to pick the thing that was the right answer instead of the thing that would benefited to most people. It's like in the financial crisis, we were we were short countrywide in scale hundreds of millions of dollars, and Bank of America.
Bought them but for like next to nothing though right, well, but but.
Yeah, but it was worth less than nothing, and so zero was a good was a good outcome for that thing. So at that point we realized that the consequence of countrywide failing was so great that the system was going to find an alternate outcome. So we switched to our thesis to that point to understand that the value an asset might have more to do with the consequences of that asset failing than the assets actually probably a failing.
And that's something I wish I would have figured out before, because it.
Was so you and I could go down this rabbit hole because we were short c T, we were short Leahman, and we were short AIG and AIG similarly too systemically important. It couldn't be allowed to crash and burn. But what was so fascinating was, Okay, how come Leman Brothers was left out to fall on its face, uniquely amongst the giant financial players. And I have a pet theory which I've never been able to validate anywhere. People forget, you know,
Warren Buffett very famously made alone to Goldman. Sachs sure that at very advantageous price has got a nice piece of Goldman. Great bit of business for Berkshire Hathaway. What people forget is a few months earlier he had offered that deal to Dick Folds, and Dick Fold said, what is this so man trying to do? Steal the company? Tell him to go jump? And once you turned down Warren Buffett, how can the Treasury Department or the Fed? Yeah right, you know, all right, we're gonna bail you
out of a couple hundred billion dollars. Chuse you had a chance to save yourself, but you waited for us.
It's super complicated. We were a little bit on the outside looking in on that deal. We did price Leman, We priced more than Stanley for a lot of different investors. We priced bear Stearns. The magnitude of the losses was hard to get your head around, but it felt like the capital markets had it about right. So when bear Stearns was sold, their CDs was trading thirty five points
up front for the senior unsecured piece. So it's meant that the bond portion of the capital structure had about a sixty five dollars recovery if you marked the market bear Stearns, that was about right. But the consequence of wiping out the equity, it had effects that we couldn't even years later I figured out what the effects were.
But like the you know, it's kind of like the old anti hall, Like there's what they're saying, and then there's what's in the subtitles, like the macro of who owned the equity, who was going to get crammed down, who owned the fixed income? Who was going to end up with control? Like there was a much bigger That's what I'm trying to say about what to learn is that the first instance of what you see if something probably is a fraction of the story.
Sure, and if you remember, oh, you have a weekend to figure this out. We expect a deal before markets open.
These trillion dollar ballance sheet's a full of complex liquid assets and you have a weekend. So it was I think that's the thing is, it's probably never as obvious as it looks would be one advice, and to understand the whole ecosystem, not just one asset's you know sort of risk profile.
Huh. Well, Sean, thank you for being so generous with your time. This has been absolutely fascinating. We have been speaking with Sean Dobson. He is the chairman, chief executive officer and chief investment officer at Amherst Group, managing about sixteen point eight billion dollars. If you enjoy this conversation, well, be sure and check out any of our previous five hundred or so. You can find those at iTunes, Spotify, YouTube,
wherever you find your favorite podcasts. Check out my new podcast at the Money ten minutes of conversation about earning, spending, and investing your money with an expert. You can find that in the Master's and Business feed, or wherever you get your favorite Sign up for my daily reading list at rehelts dot com. Follow me on What's left of Twitter at rahelts dot com. Follow all of the Bloomberg Family of podcasts at Podcasts. I would be remiss if I did not thank the correct team that helps us
put these conversations together each week. Kaylie Lapara is my audio engineer. A Tick of Albron is my project manager. Pariswold is my producer. Short Rousso is my head of research. I'm Barryhots. You've been listening to Masters of business on Bloomberg Radio