Figure REIT: The first Mortgage REIT entirely on Blockchain
Author: Ben Borton | November 30, 2020
Figure REIT has begun accepting subscriptions for an initial close on January 1st. It is another blockchain first for Figure, the global leader in transforming financial services on the blockchain. Figure REIT provides exposure to an institutional quality portfolio of residential mortgage assets, allowing accredited investors to access attractive yield generating assets in a simple investment vehicle. Figure REIT invests in loans and securities originated, custodied, and serviced entirely on Provenance blockchain. In this introductory post we will cover the unique underlying assets, how blockchain powers the investment opportunity, and what makes Figure REIT different from other yield alternatives.
The HELOC Opportunity
Figure REIT invests exclusively in HELOCs originated by Figure Lending and securities from Figure HELOC securitizations. Figure Lending is one of the fastest growing originators of HELOC’s, having generated $1.2 billion of originations since 2018. The HELOC market is both large and relatively underserved since the Global Financial Crisis. At the same time, the personal loan market has exploded, as consumers have been happy to incur higher interest costs in exchange for the speed and ease of fintech enabled online personal loans.
Source: Bloomberg, Transunion
Home values have increased steadily since the Global Financial Crisis (a trend that has accelerated recently), making home equity an increasingly underutilized asset for consumers.
Loans collateralized by home equity carry significantly lower rates than unsecured personal loans, but the process of obtaining a loan has traditionally been slow, cumbersome, and full of paperwork. The market was ripe for a product offering a HELOC interest rate with a technology enabled user experience closer to that of personal loans. Enter Figure HELOC.
Utilizing the Provenance Blockchain, Figure Lending built a fully digital origination process that is the fastest HELOC in the market. Borrowers can get approval in as little as five minutes and funding in as little as five days and enjoy customer support 7 days a week. Traditional HELOC origination processes involve hidden fees, physical appraisal, excessive paperwork, long lag times, and in-person closing. Consumer preference for a fully digital process has accelerated during the Covid-19 period. The combination of speed and ease allows Figure Lending to garner higher interest rates than other HELOC originators for similar levels of underlying credit.
At the same time, Figure HELOC rates are below comparable unsecured rates, offering a significantly positive credit signal to investors. Figure HELOCs offer investors attractive risk adjusted returns from high quality borrowers with low default rates.
Source: Figure Lending
Performance During Covid-19
2020 has provided a real time stress test for all consumer credit. Figure HELOCs have outperformed all other major categories of consumer credit during the period.
Figure HELOC delinquencies and forbearance statistics have outperformed even GSE mortgages. Figure Lending utilizes blockchain based smart contracts for exception reporting in the origination process, effectively a real time loan audit. In addition, blockchain based servicing offers real time transparency into remittances, yielding a clear and timely picture of credit performance during periods of stress.
Figure REIT provides exposure to a diversified portfolio of Figure HELOCs with prudent use of leverage to enhance yield to investors. Assets are purchased in competition through the Figure HELOC marketplace to avoid conflicts of interest. With a target yield to investors of greater than 9%, Figure REIT compares favorably in a world starved for yield.
Figure REIT utilizes a multi-year warehouse facility with a 75% advance rate and no mark-to-market provisions to apply prudent leverage to safe, collateralized underlying assets.
Comparison versus other Mortgage REITS
Mortgage REIT’s performed terribly during the Covid-19 period, with most publicly traded mortgage REIT’s down 50-80% peak to trough. Through November 23rd, the FTSE Nareit Mortgage REIT Index remains down 23% year-to-date. So what happened to mortgage REIT’s and why is Figure REIT different?
The performance of mortgage REIT’s in 2020 has been driven by three factors: performance of underlying assets, leverage, and uncertainty. Many mortgage REIT’s held significant amounts of assets tied to commercial real estate that has been severely impacted by Covid-19. Those assets were highly leveraged, generally through warehouse facilities with mark-to-market provisions. When the Covid-19 crisis hit, many mortgage REIT’s received margin calls and were forced sellers of mortgage assets into a market with no buyers. In addition, most mortgage REIT’s provide little transparency into underlying holdings and receive remittance reports for underlying loans with time lags of 30+ days. This opacity made matters worse, as public markets investors assumed the worst. Figure REIT structurally addresses each of these issues.
|Traditional Mortgage REIT||Figure REIT|
|Remittance Reporting||30+ days||Real time|
|Leverage Facilities||Mark-to-market||No mark-to-market|
The Blockchain Advantage
Figure REIT will exclusively hold assets originated, custodied and administered on the Provenance blockchain. This allows investors in Figure REIT to have real-time visibility into underlying collateral and collateral performance. There are no hidden fees, with all fees and accruals transparent to investors. Figure REIT embodies the blockchain principle of replacing trust with truth.
Figure REIT is offered exclusively in the Figure Marketplace on Provenance, allowing for an end-to-end digital investor experience with the benefit of future secondary market liquidity.
All the information needed to evaluate an investment can be accessed on Marketplace.The fully digital subscription process allows investors to establish accreditation and invest in a few easy steps. Documentation is updated in real time in an easy access Investor Portal. Better yet, issuing REIT shares on Provenance allows for secondary market trading in the future.
Figure REIT Investor Webinar
Join Figure CEO Mike Cagney, President Asiff Hirji and Portfolio Manager Bill White for an in depth discussion of Figure REIT on December 9th at 12:00 pm PST / 3:00 pm EST. Register for the webinar here Opens a new window..