“Buy before you sell” bridge loan provider Knock Lending LLC announced Tuesday that it’s now able to provide homebuyers with up to $1 million in financing and will be making its product available to more lenders nationwide after unlocking a new source of capital: the bond market.
Institutional investors in mortgage-backed securities snapped up a $100 million securitization of bridge loans this month, paving the way for Knock to “significantly scale its lending operations” by nearly $1 billion over the next 2 years, the company said.
Oh, and by the way, Knock is profitable, CEO Sean Black told Inman.
Sean Black
“We got profitable a couple of months ago,” Black said. “We’re generating more cash than we’re spending … and we’ve done it on significant growth.”
Knock has more than doubled its bridge loan funding volume this year, and “where we were really hitting our limits isn’t in demand, it was in capacity,” Black said. “So the bond issuance gives us the ability to uncap our growth. ”
The average duration of Knock’s bridge loans is around 83 days, meaning the $100 million bond issue should provide Knock with about $900 million in revolving capacity over the next 2 years.
While mortgages are routinely bundled up into securities that are sold to investors, Black believes this is the first time bridge loans have been securitized.
But the strong demand for Knock’s first securitization — which closed on Aug. 14, with Cantor Fitzgerald & Co. as the initial purchaser and bookrunner — means it probably won’t be the last.
Although not evaluated by rating agencies, the deal was oversubscribed by a factor of more than two, Black said. If future securitizations of Knock’s bridge loans are “rated,” they’ll be easier and cheaper to bring to market — making the bond market a more efficient source of capital.
“We think we’ll do it [go to the bond market] again in February or March and, in that case, it will be rated because we’ll have enough of a track record on this facility to have it rated,” Black said. “We’ve already met with the rating agencies.”
Knock has offered bridge loans of up to $750,000 through its ties to thousands of lenders and real estate agents in 32 states and Washington, D.C. That limit is being increased to $1 million, to help more homebuyers in pricey markets like California and Washington, D.C. make non-contingent offers.
“We’re working with almost all of the large lenders in the country,” Black said. “This is a signal to them that we can handle as much [business] as they can give us. There’s no constraint for us. They don’t have to be concerned that they’re going to put a customer with us and we’re not going to be able to lend them the money that they need to close the deal.”
The Knock Bridge Loan, which is used in conjunction with a first mortgage, removes the homebuyer’s current mortgage payments from the debt-to-income calculation when qualifying for their next loan. It can also be used to cover expenses like down payments and repairs.
Homebuyers pay Knock a fixed fee equal to 2.25 percent of their existing home’s estimated list price, plus closing costs of about $1,850, depending on the loan amount. There are no interest charges on the bridge loan for 6 months, and Knock guarantees it will purchase borrowers’ homes if they haven’t sold by that time.
Although inventories and days on market are on the rise in many markets in the Southeast and West, Black said Knock can adjust its backup offers to account for risk — or avoid certain types of deals altogether.
“We think the biggest challenge in Florida right now is condos,” he said. “They’re both underfunded and a bit underinsured. California, they’re really underinsured after the fires. That makes them riskier, and it makes them potentially sit longer, so we tend to avoid them.”
With single family houses, “we just price accordingly, and we’re honest with the agent and the lender and the seller on where we think market value is.”
Knock’s fee is based on the list price that the seller and their agent agree to. But Knock’s backup offer if the house doesn’t sell “is usually like 85 cents on the dollar 6 months from now,” Black said. “Because if you haven’t sold it by then, then probably it’s worth even less than that —and we’re probably the ones taking the hit.”
But that “almost never” happens, Black said. “I think we’ve bought one house over the past 2 1/2 half, 3 years.”
While business is booming for Knock, it doesn’t have a monopoly on bridge loans.
Detroit-based Rocket Mortgage — which is licensed in all 50 states and Washington, D.C., sponsoring 3,774 mortgage loan originators working out of 67 branch locations nationwide — rolled out a bridge loan product in June.
Austin, Texas-based Calque partners with lenders in 48 states to offer its flagship product, “The Trade-In Mortgage,” which allows homebuyers to use a bridge loan or HELOC to tap their equity for a down payment on their next home.
Last year Calque introduced a “light” version of that product, the Contingency Buster, for homebuyers who have already saved up for a down payment and don’t need to tap their existing home’s equity. The Contingency Buster removes the buyer’s monthly mortgage payments on their current residence from their DTI calculation, making it easier to qualify for a bigger loan.
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