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The CU2.0 Podcast
This podcast explores contemporary, critical thinking and issues impacting the nation's credit unions. What do they need to be doing to not just survive but prosper?
The CU2.0 Podcast
CU 2.0 Podcast Episode 361 Takara on How to Solve the Mortgage Lock In Effect and Originate More Mortgages
About 55% of outstanding US home mortgages have interest rates below 4% and a byproduct is that those homeowners are deeply reluctant to move because it would usually mean taking out a new mortgage at 6% or more.
Enter Takara which says it has a way to resolve what it calls the mortgage lock in effect.
On the show is Takara CEO Jonathan Arad who says the solution is to use a Danish-style mortgage payoff model to the U.S. market.This gives credit unions a way to offer principal discounts that unlock member mobility while creating new revenue opportunities and balance sheet flexibility.
This is not hocus pocus.
But I’ll let Arad explain it in the show.
It’s for you if you want to light a fire under your mortgage originations.
It also may be for you if you currently have a 30 year fixed rate mortgage with a very low interest rate and that’s stopping you from moving.
Understand this: the 30 year fixed rate mortgage is a US product. It just isn’t common around the globe. But yet mortgages and home purchases flourish globally.
Just maybe it’s time for a change.
Listen up.
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SPEAKER_01:Hi, and welcome to the CU2.0 podcast with big new ideas about credit unions and conversations about innovative technology with credit union and fintech leaders. This podcast is brought to you by Quillo, the real-time loan syndication network for credit unions, and by your host, longtime credit union and financial technology journalist, Robert McGarvey. And now... The CU 2.0 Podcast with Robert McGarvey.
SPEAKER_02:About 55% of outstanding U.S. home mortgages have interest rates below 4%. A byproduct of that is that those homeowners are deeply reluctant to move because it would usually mean taking out a new mortgage at 6% or more. Enter Takara, which says it has a way to resolve what it calls the mortgage lock-in effect. On the show is Takara's CEO, Jonathan Arad, who says the solution is to use a Danish-style mortgage payoff model. This gives credit unions a way to offer principal discounts and unlock member mobility while creating new revenue opportunities and balance sheet flexibility. This is not hocus-pocus. But I'll let Arad explain the technique in the show. It's a product that just may work for you if you want to light a fire under your mortgage-reward donations. Also may be for you if you currently have a 30-year fixed-rate mortgage personally and your mortgage rate is very, very low. And that's stopping you from moving. Understand this, the 30-year fixed rate mortgage is a U.S. product. It just isn't common around the globe. But yet, mortgages and home purchases flourish globally. Just maybe it is time for a change. Listen up. Why are you interested in the U.S. mortgage market?
SPEAKER_00:To answer that, I have to tell you a little bit about myself. So in the past 20 years, I've been in finance and, in fact, in the intersection of finance and innovation and technology. But my formal education is water distribution system engineering. I spent many years identifying disturbances and clogs in water distribution networks and designing solutions to restore flow. And in many aspects, that's what I'm doing today, just in a different system. So I believe I was originally drawn to the U.S. mortgage market because I've identified a few problems that I believe are solvable. A lot of the tools that we use from an engineering perspective, ironically can be used also in the mortgage industry. But basically just a glorified plumber, if you'd like.
SPEAKER_02:Now tell me about the two credit unions that have signed up to be pilot partners of yours.
SPEAKER_00:Absolutely. So I can't disclose their names, but I can tell you that they're both multi-billion dollars credit unions. I've been working with them for the better part of the past few months already, four or five months with the go-live date in early Q3. And each of them has different motivations. Basically, the benefit to the member is what drives the conversation. but from a lender's point of view, one of them is extremely interested and motivated by the ability to induce new origination. And the other one is in fact very much interested in the balance sheet flexibility that our programs generates once transaction are completed. The common denominator, I think, between both those credit unions is the ability to go live and test the program without investing significant resources before the value is proven. So that's one of usually hurdles of implementing innovation and especially in banking and especially in consumer lending. So we have created an implementation plan which allows those credit union to test the waters before they have to put a lot of skin in the game, in fact.
SPEAKER_02:As I'm sure you know, you talk to pretty much every credit union in the United States. They all say that their mortgage business is down. Oh, you hear different percentages, but as much as 50 to 75 percent from what it had been just a few years ago. So all of them certainly would be interested in more origination. Well, we'll discuss how you help on the origination side in a minute. But on the other hand, A, this credit union piece of the mortgage market isn't that big anymore. It had been, but it's way down. It's mainly fintechs that are driving the mortgage market in the United States. Now, two, most credit unions of any size securitize a lot of their mortgages. I mean, they bundle them and push them out the door. So that ceases to be their problem in a way. They're kicking a can down the road. And in the United States, something like two-thirds of mortgages are securitized, one-third are held. Are you addressing in any way that securitization issue?
SPEAKER_00:Yes, absolutely. So to your first point, obviously mortgage, whether origination or operations is... It's a significant portion of any bank and credit union.
SPEAKER_02:Credit unions would love to have a lot more.
SPEAKER_00:Yeah, absolutely. But it's not just the ability to originate. It is, in fact, the retention tool. And we can talk about why a bit later. But exactly because credit unions are finding it very hard to compete with banks and fintechs, like you mentioned, Our program allows them or provides them with a tool which others don't have in order to be much more sticky and to retain customers and, in fact, attract more. To your second question, so, yeah, absolutely, about 70% of mortgages in the U.S. are securitized and then Freddie Fannie and capital markets. Our target audience are banks and credit unions, and we currently deal with their portfolio loans. So the$4 trillion of mortgages that sit on their balance sheet with an average rate of, which is sub below 4%. Granted it is the smaller part of the market, but very significant from our point of view in terms of addressable market. And of course that drives the key problem for those portfolio lenders in terms of low origination volume, compressed margin, and overall, freeze in the market, if you like.
SPEAKER_02:Now, why does it take you so many months to get up and running at a credit union?
SPEAKER_00:So we have been going into market for the past six months, so not that much. I believe having the traction that we have and the engagement is very positive.
SPEAKER_02:The engagement is very positive. I'm just wondering about the time between, okay, let's do this and implementation, even in a pilot.
SPEAKER_00:Yes, well, there are some things that we can't solve and we have to operate in the framework that is provided to us. And building something that is innovative and transformative in many aspects takes time. in financial institutions, especially when it relates to consumer lending and mortgages. I probably don't have to tell you how many people are involved. It's the core business of the bank and the credit. It's the core business of the credit union, right? So a lot of people have always something to say about what's going on and if this is good or bad, what needs to happen. So that takes time to... describe and to make sure that all the stakeholders are aware of exactly what it is that we're doing, and you comply with the internal policies of that organization, which differ from one to another. And of course, there are differences between states for a state-regulated credit union versus a national credit union. And the second aspect, I believe the From our perspective, the turmoil in the market and the mortgage lock-in effect that occurred because of the interest rate cycle creates a lot of turmoil. And that merged with other challenges from a regulatory point of view, with the administration making a lot of changes in the agencies. That, in many aspects, deter institutions to make decisions that are avant-garde, even if they're, of course, positive. They sometimes prefer to wait and see and see that the waters are a bit calmer. I have to say that those who are moving forward will reap the benefits because there's so much to do, and those who will will take a bigger share of the growth and market that our program offers them.
SPEAKER_02:Right now, and you just touched on it, we're in a period of something bordering on paralysis since nobody, unless you have a really good working crystal ball, has any idea what's happening in the next day, no less than next month. It's almost become theater of the absurd. But When you go into a credit union, what itch are you scratching? What says to them, okay, we want to talk to you?
SPEAKER_00:I believe it's two things. First, the fact that we're telling them something that they don't know about their own business, not in the US, but that the problem that is currently compressing their business is actually solved elsewhere. And they are very much interested and curious to hear more about that. So they're interested about global solutions and why the mortgage lock-in effect is in fact an American problem.
SPEAKER_02:And- I agree with you there. At one point, I was looking at possibly buying property in Ireland. And if you went to the Irish banks and said, geez, I want a 30-year fixed rate mortgage. A, they wouldn't know what you were talking about. B, when they began to understand it, they would just laugh at you and kick you out the door. Yeah, the product doesn't exist.
SPEAKER_00:Yeah, yeah. Different mortgage markets behave very differently, and you have different retail mortgage products in different mortgage markets. But even markets with 30-year fixed-rate mortgages do not have the mortgage lock-in effect that the U.S. has because the system works differently, and we can talk about that.
SPEAKER_02:Yeah, yeah. Tell me how that system works differently.
SPEAKER_00:So for example, in Denmark, the 30-year fixed rate mortgage is also the most popular retail product, but they don't have a mortgage locking problem. So one of the key differences is when a Danish mortgage is originated, it is covered by a single bond, unlike the US. So one mortgage connected to a single bond, which is then sold and traded in the open market. And the
SPEAKER_02:Danish- So it's kind of securitized instantly. So
SPEAKER_00:it is not even securitized, if you think about it. But it's just a bond. Right. You don't know. It's
SPEAKER_02:right. It's standing there on its own. Exactly. That's a big difference. Yes.
SPEAKER_00:Exactly. And a Danish borrower can pay off their loan in one of two ways. The first is to prepay the outstanding principal. So just like in the US. And the second is to buy the bond. So a Danish borrower always has the option to buy their bond in the open market. Does the bond price
SPEAKER_02:float in
SPEAKER_00:the open market? Exactly. Oh, that's interesting.
SPEAKER_02:So you can look, if your bond dips, you can pounce on it.
SPEAKER_00:That's exactly what happened. So in 2022, when rates spiked in Denmark, prepayment rates tripled 30%. That's exactly what happened. They paid 80 cents on the dollar when they bought their own bonds. And that's the reason why they don't have the lock-in, because the lenders remained active and liquid, and people moved and relocated and refinanced, and the market continued to work. So the 30-year fixed rate mortgage creates the stability, but in the U.S., there is no flexibility. And in Denmark, you can have the best of both worlds, in fact. And in many aspects, that's what Takara is doing. So we are... We took that feature, we created a product, and we adapted it to the US market, and we are providing that solution to credit unions so they can offer their members to pay off their loan with a significant discount without the credit union requiring to write any kind of loss. In fact, they're making revenue.
SPEAKER_02:Now, if I'm a credit union executive, I'm interested, but I have a concern. My concern would be, how the hell do I explain this to my members? Yeah, how do I get them to understand this? You know, you come out of the cradle and you understand 30-year fixed rate mortgages. I mean, that's pretty simple to understand. Now I got to explain this thing and there's a bond involved and geez, okay. How do I do this?
SPEAKER_00:So if you are talking about explaining this to a member.
SPEAKER_02:Yeah, that's, yeah, yeah.
SPEAKER_00:A lot
SPEAKER_02:of credit union initiatives die because they do a terrible job of explaining the benefits for the member to the member. They'll understand. I've talked to a lot of FinTech guys, great ideas, great ideas, but they're marketed horribly.
SPEAKER_00:There's a saying in the startup world that the cemeteries are filled with great ideas.
SPEAKER_02:Yeah, and they honestly are great ideas. They've just been marketed horribly in many cases.
SPEAKER_00:Yeah, I couldn't agree more. A lot of the time, a great idea is good, but if you don't have a solid go-to-market strategy, it would be hard to make it a success. There's two
SPEAKER_02:pieces that go to market for the fintech industry. There's the immediate piece where you have to figure out how you take this to market to buyers of your products, i.e. credit units. But then there's the second piece is how do credit unions sell this to their members, which is a whole different problem. I
SPEAKER_00:completely agree. And I think it's true with every new consumer-facing product, especially so in consumer finance. From a formality point of view, what the member is offered is a payoff discount. So you owe a certain amount and now your lender offers you to be released from that mortgage by paying 85 or 80 cents on the dollar. That's it. And there are no fine print or small letters. That is it. It is in fact legally released from the liability and the lien is released from the property. Now, that's from a formality point of view. Now, granted, when you start off with an offer that was never been made before, people want to know more and sometimes it sounds a little bit too good to be true. And what we provide to the credit union and to the loan officers, other than scripts and brochures and a landing page with consumer facing information, what we're saying is that there will be a learning curve. There are a lot of things that Takara is not a consumer-facing company, that we don't know what would be the optimal way to explain this. Because perhaps different members and different segments and different target audiences would need to hear this a little bit differently. And whether you're a real estate investor or a family who is moving, perhaps the explanation is a little bit different. So being a startup and a finting, and that's part of the challenge and part of the adventure, is finding that out, as part of the journey. But what's nice about what it is that we're doing is in both of our clients and in every conversation that we have with a credit union, the people who hear about this program, there is always employees who want to take part of this. So in fact, the first transactions are employees, friends, and family. So we are learning a lot from that conversation. from that audience as well. And of course, the credit union themselves learn a lot about what's the best way to communicate this externally.
SPEAKER_02:You talked to companies, fintechs involved in the mortgage business and to credit unions. Why aren't mortgages being originated today? People come in, if they come in at all, and they say, geez, I don't want to pay 6%. That's too high. I'm going to wait for it to come down. And they've been waiting now for a year or two, three. And if they ask me, I say, that could be a really long wait. I don't know.
SPEAKER_00:I completely agree. I completely agree. I think you have homebuyers who... who 6% and 7% is just too much for them?
SPEAKER_02:Hey, I had a mortgage. I thought it was a great mortgage like 20-some odd years, 25 years ago. It was 6.75%. I thought that was great. I didn't complain for a minute. By the way... That was 30-year fixed rates. Yeah.
SPEAKER_00:There were people who took 16% rate and thought it was a great deal at the time in the 70s and 80s. So it's... I mean... the memory is very, in many aspects, is short-term. And people remember the ultra-low rates of COVID. And that's why a jump from 2.5 to 7 is much more painful than the jump from 10 to 15, for example.
SPEAKER_02:It's
SPEAKER_00:much more
SPEAKER_02:painful. Now, something that took hold in the United States, I've never done it, but I certainly have had friends who did it compulsively, is refinance. So the interest rate would tick down like half a point. And a lot of places were offering like$100 refinancing or free refinancing. I mean, there are essentially no fees. And so they would refinance literally every year, sometimes twice in a year. To me, this was just crazy behavior. But why not do that instead of doing what you're talking about?
SPEAKER_00:Well, if you want to refinance today, it depends on the current rate that you have. If you took a 7% loan and you can refinance to a 6% loan, perhaps you should. You should run the numbers. But if you took a 3% loan...
SPEAKER_02:Well, that would be stupid.
SPEAKER_00:But that's the point. So refinance in its core is a way for borrowers to benefit from declining rates. But... But the other way around doesn't work. If you have a low rate and rates are rising, there is no mechanism for borrowers to tap into the trapped gain in their low fixed rate mortgage, right? Freddie Mac just released a couple of months ago a research that showed that on average, on their loans, there's over$50,000 of trapped gain. And there is no pressure valves in the US mortgage market. That's one of the reasons Only the US has this extremity of the mortgage lock-in program. And the majority of people who refinance traditionally are people who are going from high rates to low rates. And those are just the minority of mortgage holders today because you have close to 60% of mortgage borrowers with rates below four. So they will never refinance and they will never move unless they really have to. And like you said,
SPEAKER_02:that is a huge problem in the real estate market now where people are in houses they don't really want to be in anymore. But it's a mortgage and they say, I ain't moving. I ain't moving. Can't do it. I'm not going to take a 6% loan.
SPEAKER_00:They are stuck in their forever home, whether they like it or not. It's like living in rent control.
SPEAKER_02:Yes, it is. That's a good analogy. I know people in New York who hate their apartments, but you'd have to shoot them. to move them out of it.
SPEAKER_00:Precisely, precisely. And the point, and I think this is sometimes is missed, the ripple effect of this decision when it is repeated millions of times by millions of families is extensive for, that's why we have supply problems in real estate. That's why home buyers can't, can't find homes. That's why rent is getting higher and higher because people are not going to move. And I'm not even talking about the moving industry or the renovation industry. The ripple effect is just extensive. And of course, if you look at it from credit union's point of view, it's no wonder we see consolidation in the market because what else can they do? There's no growth when your market is shrinking 200,000 mortgages per quarter, that's what's happening in the last two years, right? The mortgage lock-in effect has prevented 60% of home sales in the US. So that's 200,000 transactions per quarter. No wonder they have to consolidate. There's no other way to create growth and to generate business.
SPEAKER_02:So in your testing, when you... seek to explain this to a consumer? How does that go?
SPEAKER_00:Well, the starting point is easy. You want to pay off with a discount? Here's 15% discount. So you owe$500,000 outstanding principal. If you want to get out of that mortgage, you need to come up with$425,000. And that's it. You're completely released. Where do they get that money? Usually they sell the property and they are$75,000 better off. But then, a lot of the members are asking, okay, this sounds a bit too good to be true. Where does that come from? Who is taking the hit? Who is taking the loss? And that's where, and that's exactly directly relates to your question. Then you start to explain that, okay, there's no loss in fact, and there's no fine print and you're not reliable to anything. And there's a legal release from the obligation. And if they want to learn more about the process, we actually provide them with any information that they want. We try to be as proactive and transparent with the information that we provide. But the feedback in terms of adoption is off the roof. Like we talked about Denmark, when rates went up in 2022, when repayment rates tripled from 10% to 30%, in the U.S., At scale, this will be even higher because you have demand that wasn't executed. So you have people who wanted to move and didn't. So you have accumulated demand that people that are sitting at the gate, if you'd like, who would jump on this. But
SPEAKER_02:it goes back to the COVID era. I mean, that's when people stop shopping for homes. Do you really want to go into that open house with strangers and look at this house? You could die, literally. That was the thought. So, I mean, we've seen a slowdown in this market for some years. It's not just the interest rates today.
SPEAKER_00:No, absolutely. So it's not just one thing. You're absolutely right. There's the asset prices as well. And, of course, other factors, too. COVID being one of them, like you mentioned, and the ripple effect of that. So the remote work has a significant portion of that as well. But in fact, the FHFA did a comprehensive research about the... They quantified the rate increase and its effects on real estate. And as I mentioned, 60% of home sales were prevented, isolated... reason is the mortgage lock-in derived by the changing rates. And granted that people are working from remote, but that's also changing over time now. Many of the places that were 100% remote a few years ago are now back to 100% in office. And yeah, and people who in COVID got their 2.5% 30-year fixed-rate mortgage, had kids, and those kids now need bedrooms. And that's a challenge. That's a challenge for many, many families. You have older couples that their kids left for college. They can't downsize and save capital. The numbers are just staggering when you look at the implication of this issue.
SPEAKER_02:Yeah, another issue here is... We did a kitchen renovation a year or so ago. And it was delayed for a year or two because of COVID. But the price also went up by about 25%. Yeah, everything. It wasn't the labor. It was everything else. The refrigerator, the stove, you know, all that. Everything was more expensive.
SPEAKER_00:Yeah, inflation is... It's really painful, absolutely.
SPEAKER_02:And it's going to go more expensive, assuming these tariffs stick for any length of time. Because so much of that stuff comes from abroad. Yeah,
SPEAKER_00:I think it remains to be seen what will be the effects of the decisions made by the administration. Because it's not just a unilateral decision. Well, it is a unilateral decision, but then you have the counterpart or counterparts who need to react to that and their reaction will affect what the result would look like here in the US. So I think the jury is still out and it's not really clear. And that's part of the problem. Like you mentioned yourself, I think it's, and I completely agree, the uncertainty in the markets is probably the worst thing and markets like stability. And that is what is currently deprived from them. And that's true with the tariffs. It's true with actions done on the regulatory front, the taxation front in the credit union space. And we see that. And I think that what drives a lot of the sit and wait approach, the consolidation, the consolidation that we see in the market. Absolutely.
SPEAKER_02:Well, you know this better than I do, but private equity, guys. sitting there on piles of millions of dollars. As long as they think they know what's going to happen in the next year or two, they're very comfortable. They don't much care what's going to happen as long as they know what's going to happen. If you say, hey, dude, you don't know anything. Well, I'm not putting any money in anything. No way, no how, can't do it. Too much risk.
SPEAKER_00:Absolutely. And you see capital markets, equity markets, and bond markets behave differently in ways that we haven't seen for many, many years and sometimes for the first time. So,
SPEAKER_02:okay, I'm a mortgage guy at a credit union. I have your product. I'm talking to a consumer. Consumer says, geez, I just, I'm not comfortable with this 6% mortgage. I say, okay, I've got this other product here. How do I explain it to the person?
SPEAKER_00:So your member has a 3%.$500,000 outstanding principal loan. And they want to move, but they can't afford the 6% that is waiting for them on the other side. What our program enables you as a credit union to do is to offer your members a 15% discount on that outstanding principal. So instead of paying off 500,000, that member is offered to pay$425,000. And you got my attention there. Exactly. And the members usually.
SPEAKER_02:Yeah. That's what I mean. I'm pretending to be the member.
SPEAKER_00:Yeah. So as a member, you sell your property. And instead of repaying$500, you repay$425. So your gain net is$75,000, which goes to the home equity and goes to... You can use it however you see fit. You can take a smaller new loan. You can buy a bigger home. You can do whatever you want. It's yours. So the offer to them, this is in fact why our program solves the mortgage lock-in effect because we are in many aspects liquidating or extracting the trapped gain in those ultra low fixed rate mortgages. And we split them between the member and part of it also to Takara as our business model, as well as the lender. Now, importantly, and that's the secret sauce, which we won't go too much into detail, we're doing that in a way that does not cause the credit union to write any loss. Again, going back, this is a portfolio loan, so it sits on your balance sheet. So we allow you to offer your member a significant discount without writing a loss. It sounds like black magic, but that's what we're doing.
SPEAKER_02:You got to explain that. That does sound like a carnival trick.
SPEAKER_00:Well, I can say just in high level, but the basic concept is in many, it relates to what I described about what happens in Denmark. So that mortgage, there's no question that it is not worth$500,000. So if the bank, if the credit union had to sell that loan in the open market, they would get 80 cents on the dollar and write a loss. So we are taking advantage of this spread, which we didn't create. The market created it. And we are making sure that the borrower gets the majority of that spread while keeping the credit union whole on the loan. And we are, in fact, utilizing a process which is well-defined and heavily executed in real estate called Deficience. I'm not sure if it's not very, it's relatively niche in real estate, but it is$10 billion market here in the US, which allows the replacement of collateral without the impairment or modification of the loan on the balance sheet side. And the adaptation part of the Danish concept to the American market is in fact based on the existing rails, the operational rails, as well as accounting, taxation, legal of this process that I just mentioned.
SPEAKER_02:The credit unions that are going to be your pilots, where are they located?
SPEAKER_00:So we are in fact talking to local credit unions, so operating in one state, but also national. One
SPEAKER_02:has a national charter. Okay.
SPEAKER_00:Yeah. So our sweet spot are credit unions who have at least 10% of their total assets as portfolio long-term residential mortgages. The reason why that's our sweet spot is because they feel the pain. And in order for them to have the motivation to pursue this at a timely manner, we prefer to talk to those institutions because we solve a bigger problem for them relatively. And again, our target audience, our institution with a billion or plus total assets with at least 10% of long-term one to four residential mortgages, traditionally, they have somewhere around 3% average rate on those loans. So the average discount that is offered to their members is around 15%.
SPEAKER_02:What size mortgages are you particularly interested in? Now, there's parts of the country where a typical home price is$200,000, and there's parts like Manhattan or San Francisco where a million will buy you a studio apartment. So... And if you want something bigger, you need more millions. What kind of size are you interested in?
SPEAKER_00:So we actually don't mind. We don't like the millions and millions of dollars of mortgages, but that's just because we're relatively early in our journey. We won't have any problems to do that at scale. But as you mentioned earlier, the majority of mortgages are securitized. Those that are not and remain on the balance sheet are, in many cases, jumbo loans. So they are larger than the national average. So what we find is that if the average U.S. mortgage is around$450,000, portfolio loans are traditionally a bit larger. But as you mentioned, when we go to certain credit unions, sometimes the average is 250, and that's fine.
SPEAKER_02:No, I mean, look, the reason I'm talking to you is because clearly this market right now is suffering from severe inertia. No one's doing anything. Credit unions are seriously unhappy. Their members are seriously unhappy. You can't sell your home because no one wants to get the mortgage to pay for the home. So the whole system is stalled right now. And it takes some innovative thinking to do this. And as I discovered in Europe, the idea of a 30-year fixed rate mortgage is not common. It's like, huh? It's an absurd idea, really, if you think about it. Because we've had so much turmoil just over the most recent 30 years.
SPEAKER_00:Well, I think it's important to look at the time axis. Originally, the 30-year fixed rate mortgage was conceived to solve a problem, to generate stability after the Great Depression and to solve the five-year bullet bankruptcies in the 20s and early 30s. And it did just that, in fact. It was never intended to become the mammoth that it is today. But from an evolutionary point of view, it created stability, but in an extreme manner, but also surrounded by a rigid system. So the system is not flexible and it doesn't have any pressure valves in unique market conditions. And I say unique because the current market conditions that we see did not happen before. So we never had here in the US a sharp increase in interest rate from very low to what the long, it's not far from the long-term average, but it's 500 basis point increase. So that never happened before. And so, because the system was not built with pressure valves, it is completely frozen. And like you said, it's stalled. And the real estate problem is in fact a finance problem. Like you said, people don't want to move because they don't want to take the mortgage that finances that move. So in our perspective, the way to solve many of the real estate problems that we see today in the US is in fact from a finance point of view. And again, going back to your very first question, that is where the institutions need to look at innovation and on new ways and new perspectives to solve those design problems in a manner that was never discussed. And we think that we bring proven solutions from abroad, which help people imagine what the bottom line of the result will be. So just imagine if your members could pay off their loan at mark-to-market at 15% discount. Imagine that. And you can imagine that because it is done elsewhere. Is
SPEAKER_02:there any potential downsides for the member? Yeah, I remember when adjustable rate mortgages came out, the original packages did not cap the amount that it could go up by. So people were freaking out. It was like, I'm going to make up numbers. They had like a 4% arm. And then the next year it went to 6.5%. And the monthly outlay was way up. So the institution said, fine, we're going to put a cap on the maximum amount of increase over a year. So that kind of solved that problem. Are there any potential problems with your product?
SPEAKER_00:So the power is once they pay with the discount, they are completely released. They get a legal notification from the lender. From the credit union, you are released from the liability and the lien on your property is released. That's it. Period. No small print, no long terms and conditions. That's it. And what's important is for the member to understand the transaction. And when a member has a 3% loan and they're getting a discount to pay it off and they're moving, their new loan will be at a higher rate. It might be in a smaller amount relative to the alternative because they use the discount to take a smaller loan, but the rate will still be market rate. So there's no magic here. There's no rabbit in a hat. It's economics. And members will only transact if it makes sense to them from an economical point of view. Now, The point is that many, many members and many homeowners and families in the United States would have moved if they could afford it. And that's what we allow them to do. There are no strings attached and there's no residual risk for the member whatsoever in no way, shape or form. This is extremely important and it's black and white.
SPEAKER_02:Interesting. If I were going to, yes, I'd say the 30-year fixed rate mortgage actually took really took root in the United States shortly after World War II ended, when a lot of veterans were returning. They were in their mid-20s, late-20s. And the government said, hey, great, we have this GI mortgage. Zero down, zero down. And you got 30 years to pay it off. I think that thing just went skyrocketing. It's everybody wanted, every GI returning wanted to start a family, blah, blah, blah. So they were all buying these new... And it was great for the economy. Home building just went on drugs. It was on cocaine for like five, 10 years, building houses to accommodate these people. It was quite something. But did we still need that stimulus 20 years later? I don't think so. It really served a purpose back in 1946, 1948. But it's... Yeah, I
SPEAKER_00:can... I completely relate. And I think what is sometimes missed in the discussion about the US mortgage industry is that it's the biggest in the world by far, but it is an anomaly from a product point of view. So in the US, the capital market side is extremely sophisticated and liquid and dynamic, but the retail product is in fact quite benign and hasn't changed significantly for many decades. And if you look at other mortgage markets, that's rarely the case. Usually it's more balanced. So the capital market side is less sophisticated and liquid, but you have more flexibility and variety on the retail side. And that variety on the retail side is what provides, in many cases, the cushion and the pressure valves that are required in extreme market conditions. And that is what is lacking in the US. By the way, I myself come from Israel, and the Israeli mortgage product is considered one of the most sophisticated retail product in the world. And on the other hand, the capital market side in Israel is benign. It is, in fact, it was not until recently illegal to securitize mortgages in Israel. So all the loans are portfolio loans, in fact, in Israel. So in many aspects, Israel is the complete opposite. of the U.S. with a sophisticated, consumer-friendly retail product, but a benign capital market structure. And in the U.S., it's the complete opposite. So I find it very intuitive that mortgage retail product innovation comes from Israel or generally from outside the U.S. into the U.S.
SPEAKER_02:Yeah. No, I'm glad we're doing this because I think what we need is some innovative, fresh thinking about mortgages rather than sitting here complaining that rates are too high, people aren't buying, people aren't selling. Boy, this is cruddy. Well, it is cruddy, but what you're supposed to do is think of a solution to
SPEAKER_00:that. Well, you know what they say, to sit and wait is not a strategy.
SPEAKER_02:Yeah, and unfortunately, I think that's what a lot of financial institutions are doing with mortgage money right now. And as they're doing that, the FinTechs continue to move aggressively. So they're actually doing some thinking. And the market share of credit unions in the home mortgage market continues to shrink, which is not a good thing for credit unions. But anyway, this has been a good call. This will go up in probably about a month and a half. I thank you. I thank you for persisting and getting in touch. It's because, yeah, we definitely need some fresh thinking about mortgages. And so I thank you very much for your time. It's been fun. Take care.
SPEAKER_00:Thank you so much, Robert, for your time, for digging in and for bringing this into the light.
SPEAKER_02:As I say, we need some fresh thinking. Absolutely. And that's what you're doing here. So thank you. Take care and good luck to you too.
SPEAKER_00:Thank you so much, Robert. Cheers.
SPEAKER_02:Bye. Before we go, think hard about how you can help support this podcast so we can do more interviews with more thoughtful leaders in the credit union world. What we're trying to figure out here in these podcasts is what's next for credit unions. What can they do to really, really, really make a difference in the financial scene? Can't all be megabanks, can it? It's my hope it won't all be megabanks. It'll always be a place for credit unions. That's what we're discussing here. So figure out how you can help. Get in touch with me. This is rjmcgarvey at gmail.com. Robert McGarvey again. That's rjmcgarvey at gmail.com. Get in touch. We'll figure out a way that you can help. We need your support. We want your support. We thank you for your support. The CU2.0 Podcast.