Mortgage Investing Startup Looks to Profit From Urban Exodus

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AlphaFlow, an asset manager that buys real estate loans from lenders, sold the first of what it expects to be a series of securities linked to mortgages often used by house flippers.

The company expects to buy more of this debt, known as rehab residential loans, as the pandemic spurs people to move out of U.S. cities and into the suburbs, said Ray Sturm, co-founder and chief executive officer of the technology-based firm, in an interview. Some consumers will refurbish homes themselves, but many will buy renovated houses from investors that fix up and flip properties.

“People forget that 60% of the U.S. housing stock was built before 1980. There’s a need for rehabbing to bring the housing stock up to date,” Sturm said. “This type of lending is booming right now.”

AlphaFlow sold $95 million of bonds last week whose proceeds will be used to buy rehab mortgages, also known as “fix and flip loans.” Those loans tend to be short term with relatively high interest rates, ranging from 8% to 11%. Once they are paid off, the firm will use the proceeds to buy new loans, Sturm said, creating what’s known as a revolving warehouse facility.

The firm is paying a yield of a little more than 3.2% for the biggest portion of the bonds it sold, which have an average life of around 2.35 years. Loans are only being bought after the bonds are sold, which is unusual for mortgage securities.

Flippers suffered in the last housing crisis, helping to create excess homebuilding and in the end often getting stuck with properties that they couldn’t sell. But in this market, where inventories are at record lows and prices have been rising, fewer investors are worried about that situation returning anytime soon, Sturm said.

Funding Faster

AlphaFlow’s technology platform evaluates loans and standardizes disparate data from different lenders, which streamlines the entire process, Sturm said. The San Francisco-based firm buys loans from lenders to go into the securitization and collects payments in the loans. It can also sell some of the loans out of the securitization to institutional investors.

“This means the lenders can get funded more quickly, which opens up liquidity,” he said. Loans can close in a week, and the speed is key if you’re a house flipper. Banks used to take a month to close such loans, Sturm said.

The process of repeatedly buying new loans after old ones are paid off funnels Wall Street institutional money to regional fix-and-flip lenders, said Ryan Craft, the founder and CEO of alternative real estate investment firm Saluda Grade. Those funds in turn get passed on to local real estate developers. Craft’s firm is an investor in AlphaFlow that also helped put the securitization together.

Jefferies Financial Group Inc. was lead underwriter and structurer for AlphaFlow’s transaction.

©2021 Bloomberg L.P.

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