Sep. 6: Primer on financials of Agencies & GSE conservatorship; thoughts on ARMs & HELOCs; Saturday Spotlight: Kastle, for your AI needs
As the saying goes, “I don’t care who receives the credit, as long as it gets done.” Many groups took credit, and congratulations to them all, for President Trump signing, “Effective March 5, 2026 (six months out), trigger leads will be permissible under the Fair Credit Reporting Act only in limited circumstances during a real estate transaction and only to provide a firm offer of credit.” As another saying goes, “I don’t care if you believe in climate change, and you don’t care if I do either. But ask your insurance company if it does.” Or a mortgage servicer or investor. The average insured property loss from natural events is now an estimated $152 billion per year, but what’s especially interesting about that number is which events are fueling the growth. Over the past five years, insured non-crop losses averaged $132 billion per year, and over the previous five years, it was $104 billion. The thing is, the big, monster, eyeball-grabbing once-a-year meteorological catastrophes are not driving up the costs. Rather, it’s something the industry calls “frequency perils.” In other words, severe thunderstorms, winter storms, fire, and floods that affect smaller areas but add up big time, accounting for an estimated $98 billion out of that $152 billion, up 12 percent year over year. Note that $152 billion in annual losses is below, but approaching, the 2024 gross homeowners premium estimate of $170 billion. So fortunately for insurance companies, the annual loss/cost is still below right at the annual premium/revenue.
Saturday Spotlight: KASTLE
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“The most deployed AI agent in the mortgage industry”
Kastle is an AI platform built specifically for mortgage lenders and servicers to deploy AI agents across their operations. FDIC-insured banks and large IMBs use Kastle to automate customer interactions in sales, customer service, and collections with fully compliant AI agents.
Founded in 2024, Kastle is backed by leading Silicon Valley investors including Y Combinator and Emergence Capital. Since launch, Kastle’s AI agents have handled millions of borrower calls and processed more than $100M in cash transactions for mortgage lenders. The company has also earned top industry recognition, including winning the Digital Mortgage Conference Innovation Challenge and LendingTree’s Innovation Summit.
Lenders are building their AI workforce on Kastle using natural language. Today, Kastle AI agents are used for call summarization to reduce handle time, AI QA/QC to detect compliance issues, AI loan officer assistants to qualify leads and book appointments, AI customer service agents to resolve borrower inquiries across channels, and AI collections agents to reduce delinquency rates. Kastle helps lenders modernize operations, improve borrower experience, and adopt AI in a safe, compliant, and cost-effective way.
Tell us about your employee growth
Every Friday, the company sets aside a four-hour “Research Friday” block for the entire team to experiment with new AI tools and techniques. Many of Kastle’s best internal products have come out of this time, such as integrating AI notetaking into the CRM and testing AI code-review systems. Employees also take part in prompt-engineering classes run internally and externally, with unlimited access to AI tools to accelerate their work and learning. Mentorship comes directly from product and engineering leaders who are hands-on with customer deployments.
How do you contribute to culture?
Kastle is a fully in-person company based in San Francisco. Working side by side allows the team to collaborate quickly, learn from each other, and build strong relationships. Regular team events and happy hours reinforce that close-knit culture as the company scales.
What Kastle is most proud of is the depth of its customer partnerships.
The company sees itself as an extension of its customers’ AI teams, spending time onsite, working shoulder-to-shoulder, and aligning around outcomes. In its early days, Kastle even relocated the entire company to Tempe to help a top five mortgage lender go live, and that same ethos of commitment continues today.
If you want to improve efficiency and borrower experience in your contact center, connect with Kastle to design a one-year roadmap for deploying AI across your operations.
(For more information on having your firm’s extracurricular activities, employee growth, and your charitable side featured, contact Chrisman LLC’s Anjelica Nixt.)
Thoughts on an adjustable-rate market and the role of HELOCs
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Depositories (e.g., credit unions and banks) tend to have an advantage over independent mortgage banks in a “steep yield curve” environment. A big difference between short- and long-term rates favors ARM production, something with which IMBs and brokers have trouble. Certainly, no investor wants to pay 102 or 104 for a loan that has a relatively short shelf life.
Ron B. from Florida writes, “Rob, I find it very telling that a 1-year arm is nearly impossible to find these days. I sell a monthly adjustable, a proprietary loan from my company, called the All-in-One loan. But it never ceases to amaze me how people feel so strongly that fixed-rate mortgage products are the safer choice, even when faced with elevated rates like we have today.
“I believe there are two reasons for this. First, the lending industry wants to sell fixed rates because that practically guarantees a healthy refinance market every few years. Additionally, if it weren’t for Paul Volker’s Fed dramatic rate moves in the early 80’s, I don’t think the wariness of variables would even exist.
“I believe that the lending industry is at least partially responsible for the retirement problem in this country. Specifically, the over-promotion of 30-year fixed rates when a strong percentage of homeowners would greatly benefit from utilizing HELOCs and more specifically, 1st lien HELOCs.
“I have found that most homebuyers and owners have the financial ability to pay off their mortgages in less than 10 years. But the very nature of the mortgages we promote, like close-ended products meaning they provide no return or access to principal paid (or pre-paid), is an issue. It is this one characteristic alone that discourages homeowners from pre-paying. And when they do, they don’t pre-pay enough to really move the needle. The open nature of HELOCs allows this. But they aren’t promoted as a mortgage solution simply because loan officers aren’t compensated to the extent they are on conventional mortgages.
“Frankly, I find this to be tragic especially when seeing the success so many of my customers have and are experiencing. Many of my customers saw their interest rates double as the Fed aggressively pushed up rates after COVID. I’ve had conversations with many of them, and not a single one expressed any desire to revert back to an amortizing loan. Not one. Because even with higher interest rates, they recognize that they are on the path to paying off their mortgages in a fraction of the time had they held onto their former conventional mortgage.
“So, from your capital markets perspective, what is the real reason for the lack of a 1-year ARM in the market?”
First, thank you, Ron. Indeed, investors don’t like the duration or prepayment characteristics of these shorter adjustable-rate mortgages, and this is reflected in their pricing. In addition, banks and credit unions have enough volume coming through their branches, so aren’t inclined to “beef up” their volume through correspondent channels.
GSE changes are on the back burner… until they’re not
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Yesterday, 46 independent mortgage banks (IMBs) sent a letter to Treasury Secretary Bessent and FHFA Director Pulte identifying IMB priorities for a Fannie/Freddie Exit from Conservatorship, to protect smaller IMBs and consumers.
“The IMB sign-on letter, spearheaded by the Community Home Lenders of America (CHLA), comes one day before the 17th anniversary of Fannie Mae and Freddie Mac being taken into conservatorship. It also lands in the wake of reports of the Trump Administration taking initial steps towards a public offering of stock in Fannie and Freddie before year-end.
“Following are key policy recommendations for a conservatorship exit - to protect small mortgage lenders, maximize competition and consumer choice, and boost homeownership in a safe and sound manner: G Fee parity and a competitive cash window, no Wall Street bank charters for GSE loans, keep Fannie and Freddie separate under a utility model, GSEs should maintain critical mortgage loan products, and the GSEs should purchase MBS to lower mortgage rates.
“The IMB sign on letter cites the critical importance of IMBs in providing mortgage loans for first-time homebuyers, noting that IMBs now originate 83 percent of all mortgage loans and 75 percent of all Fannie/Freddie loans.”
You or I could easily buy stock in Freddie Mac or Fannie Mae, so it isn’t an IPO (initial public offering) in the true sense of the word. Ending the conservatorship can’t be done with a wave of a wand or a tweet. The capital structures of Fannie Mae and Freddie Mac are a little complicated, but here’s roughly the situation. (The exact numbers change every month and quarter, but this will give you a sense of things.)
Fannie and Freddie have total assets of $7.8 trillion ($4.4 trillion for Fannie, $3.4 trillion for Freddie) and liabilities of $7.6 trillion ($4.3 trillion, $3.3 trillion). This leaves them with total net worth (shareholders’ equity, assets minus liabilities) of $160.7 billion ($98.3 billion, $62.4 billion).
But the US government has a $348.4 billion senior preferred claim on that net worth ($216.2 billion, $132.2 billion). After the US government, there are regular preferred-stock holders with $33.2 billion of preferred claims ($19.1 billion, $14.1 billion).
After paying out the senior preferred and the regular preferred, whatever’s left over goes to the common shareholders. The biggest common shareholder is also the US government, which gets 79.9 percent of that. Various regular shareholders, of whom Bill Ackman’s Pershing Square Capital Management is perhaps the best-known, receive the other 20.1 percent.
The essential thing to notice there is that the US government’s $348.4 billion senior preferred claim is quite a bit larger than the total shareholders’ equity of $160.7 billion. If Fannie and Freddie liquidated today and returned all their money to shareholders, the U.S. government would get all of it. If Fannie and Freddie’s shareholders’ equity doubled, the US government would still get all of it. The common stockholders, and the holders of regular preferred stock, are underwater by many tens of billions of dollars.
Fannie and Freddie had total net income of $28.8 billion last year ($17 billion and $11.9 billion); at that rate, it would take about 12 years to earn enough to pay back the government’s $348.4 billion claim and have anything left over for regular preferred shareholders (and another year and change to pay off those preferreds and have anything left over for the common stock). Or it would if Fannie and Freddie worked like normal companies. But in fact, the way they work is that every time their net worth increases, the government’s senior preferred claim (that $348.4 billion) increases by the same amount. So, if they earn $30 billion this year, the government’s claim will increase to $378.4 billion, and the shareholders will be no closer to getting paid than they are now.
Bloomberg reminds us that “In the 2008 financial crisis, Fannie and Freddie ran into trouble, and the US government provided hundreds of billions of dollars of cash and credit lines to bail them out. From first principles, there are two plausible ways to do that. Lend them the money, charge them a high interest rate, and take a big equity kicker (say 79.9 percent of their stock). Then hope they get back on their feet, pay back the money with interest, and create a ton of value for shareholders, including the government.
“Just nationalize them entirely, zero the shareholders, zero the preferred shareholders, and have the government take all the upside and all the downside.
“Either of those approaches could have been fine, and ex ante, in 2008, they didn’t even look that different. But what the government actually did was first No. 1: bailout with high interest and 79.9 percent equity stake, and then, later, in 2012, shifting to No. 2, changing the terms of the deal so that the interest on the bailout went from 10 percent per year to ‘all of your net income for the foreseeable future.’ There is almost no way for the common and preferred shareholders to get anything; whatever money Fannie and Freddie make goes to the government. But the common and preferred still float around, and their holders have ideas. The ideas are mostly “this was unfair and will eventually change.
“And it does seem like something will change. The Trump administration is talking more and more about ending the government’s control and ownership of Fannie and Freddie. One extreme of that range would be for the government to stand on its rights: Fannie and Freddie, right now, owe the government more than twice their net worth, and to end government control they would need to pay that back. The arithmetically simple way to do that would be for Fannie and Freddie to go out to the market and raise new capital to (1) pay back the government and (2) be well capitalized as standalone companies. ‘Well capitalized,’ in these discussions, tends to mean shareholders’ equity of at least 2.5 percent of assets, which works out to about $194 billion of equity. So, if Fannie and Freddie went out and did initial public offerings to raise $542.5 billion of new capital ($325 billion for Fannie and $217.5 billion for Freddie) they would have enough to pay back the government and be well capitalized for the future.
“This is arithmetically simple but practically impossible, because you can’t raise $542.5 billion in an IPO (or two… particularly not just to repay the government and leave the companies with less book equity than the amount they raised.) That’s more than the total amount of money raised in all US initial public offerings over the last 10 years.
“If somehow you did do it, existing shareholders would be massively diluted: Pro forma for half a trillion dollars of new equity, the capital structure would be something like 99.99% new investors, 0.008% the US government (which owns 79.9% of the equity now) and 0.002% Bill Ackman and friends. Fannie’s common stock closed at $10.78 yesterday, Freddie’s at $7.975. Those shares would be… not literally zeroed, but pretty much zeroed, if Fannie and Freddie had to go out and raise new capital to pay back the full amount they owe the government.
“The other end of the range would be for the government to say, ‘you know what, never mind, this $348.4 billion number is kind of fake, that claim is unfair, and we are going to write it down to zero.’ If you do that, then Fannie and Freddie can just keep their existing shareholders’ equity ($160.7 billion). That is almost enough for them to be well capitalized, though they’d still have to do very large IPOs, perhaps $30 billion total, to get all the way to 2.5 percent.
“If you do that, then the existing shareholders will be in good shape. Ignoring a potential new equity raise, the existing shareholders would own 20.1 percent of the companies (the U.S. government would own the other 79.9 percent), with a book value per share of around $14 or $15. The existing common shareholders would get something like $25 billion of book value in the companies, the preferred shareholders would get about $33 billion (the face amount of their preferred), and the US government would have a 79.9 percent equity stake with something like $100 billion of book value.
“Notice that the $100 billion for the government here is less than the $348 billion in the other scenario. The other scenario is not realistic, though, because it relies on (1) making all of the existing shareholders really mad and then (2) doing a half-trillion-dollar IPO. The softer scenario, the one where the government gives up its $348 billion claim, seems more realistic, and would actually get the government $100 billion (or more) worth of stock.
“Still the point here is that there is a range, and the government can kind of do whatever it wants within that range. It can stand on its rights! It can demand the $348.4 billion, which would probably prevent the re-privatization of Fannie and Freddie, or it can give up the whole $348.4 billion, or it can do something in between. ‘Do a $60 billion IPO and give us half the money to cancel that senior preferred claim’ seems fine, for instance. ‘Cancel the senior preferred claim but give us 95 percent of the common equity instead of 79.9 percent,’ why not.
“One possibility here is for the government to cancel its entire $348.4 billion senior preferred claim for the benefit of existing common and preferred shareholders. That is obviously what those shareholders want! But the government doesn’t have to do that, and it can drive a harder bargain. Which it might do if … it … wants … money? For instance?”
Fannie and Freddie are giant companies that generate a lot of money. Right now, the U.S. government is entitled to essentially 100 percent of that money. To re-privatize them, it would have to give up some of that money. The expectation, which is not unreasonable, is that the government will give up some of that money to Bill Ackman. But that is not an absolute requirement of re-privatizing them, and if the government is looking to keep as much money as possible, that might not be great for the shareholders.
If only regional managers could control LOs like this.
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