How do you take a boring investment class, fixed income and invigorate some life into it? You implement a technology enabled approach to investing in mortgage backed securities, you ask yourself how do I make investing in mortgages simple yet transparent, and you give the investor total control to toggle their investments at a granular level.
That is how Income& is changing the game of Fixed Income. This isn’t your Grandpa’s bond portfolio. This is a new age where fixed income doesn’t need to mean low returns in conjunction with low visibility. Income&’s fixed income product the PRIMO is about finding pockets of misunderstood risk and capitalizing on it with new forms of technology that put the investor in the driver’s seat.
Income& is one to watch, and I think Brad is the right guy to usher in this new age investment tool. Check out our discussion below.
CL: Brad, thanks so much for taking the time to speak with S.I.C. today. When gathering some background on your career progression it seems you spent several years with PENSCO Trust Company, which helps to deliver retirement funds with investments in real estate assets, private equity etc. Can you talk a bit about your time there and how it has helped shape Income&?
BW: I have always been in the financial services arena. While in college I worked at UBS, then after graduation I worked at Fisher Investments. After that I ended up at PENSCO working in the alternative investment space.
What led to the genesis of the idea at PENSCO was we had three asset classes, stocks, tangible real estate, and money lending. Those were the categories we were familiar with. What the VP of Finance at PENSCO and I realized was that P2P lending companies like Lending Club and Prosper had scaled unsecured hard money lending to fantastical heights and we couldn’t figure out why people weren’t doing it on the secured debt side of things because that’s frankly better debt.
We continued to try and figure out why no one was doing this, which led us on a year long journey of research where we expected to hit a wall, but we never did.
Along the way we built out the rest of the cofounding team. Keith Meyer our CMO was head of marketing at Prosper back in the early days. Vinny Phillips built Schwab’s first online trading platform so we have an experienced team. I am really proud of the team we have put together at Income&.
CL: For those who don’t know can you speak a bit about how you define Income&?
BW: What we are trying to do is create a very badly needed fixed income product. The baby boomers will be retiring over next 15 years leading to the largest retirement population the United States has seen.
At the same time that this is happening we are seeing historically low interest rates causing immense challenges for those nearing retirement age. Typically, they would invest in bonds but since the rates are so low you need to go up the risk curve to have money to live on. Unfortunately, higher risk doesn’t fit the risk profile of this group.
We have set out to build a product we would sell to our own parents. So the problem we are solving is how do we make a good risk adjusted return investment product with lower risk, but relatively higher yields?
This is where we came up with the idea of PRIMOs. PRIMOs are built on securitizing high credit non-conforming mortgages. It looks like a lending app, where investors pick and choose portions of mortgages to invest in based on their risk appetite. We have taken the mortgage market and tried to make it as transparent as possible. If you buy PRIMOs you can see what every borrower’s credit worthiness is.
CL: Can you talk about how you think about defining the word fixed income and what that means for people who want to invest in a product like this? How does Income& truly differentiate from the traditional product?
BW: Right now we are differentiating on the yield we can provide. This opportunity to provide a higher yield product, that also has a lower risk profile, arose out of the financial crisis. Before 2008, you had federal agencies buying the majority of mortgage debt. Then we experienced the financial crisis, leading to new regulations. These new regulations redefined which borrower segments were agency conforming. It made the pool of mortgages that Fannie and Freddie can buy smaller. We were able to identify a couple of borrower segments in the market that are now non-conforming and are underserved due to the new regulation. They are high credit quality borrowers who miss the new definition of conforming due to something other than credit. The biggest area we identified is self-employed borrowers.
As a self-employed individual, even if you have high credit on all statistics and put down more than a 20% down payment on your property, but you have no W-2 income you are considered to be non-conforming . These people end up paying more on their mortgage rates as a result, which presents a good opportunity for us to create a product that has higher yields but is still in a very strong credit worthy environment.
We think this market will continue to grow. If you believe in the notion that the gig economy continues to grow leading to larger swaths of US employees moving to nontraditional employment this group becomes even larger and will continue to be underserved. Hopefully products like this help these borrowers access the housing market while creating a stronger fixed income product for our clients.
CL: Can you explain how Income& drives loan origination?
BW: This is where we aren’t pure P2P. We don’t originate loans, instead we are the first platform that is 100% investor focused. What’s appealing about the mortgage market is there are a very large number of non-bank lenders already in the origination business. What these providers need is a window of liquidity, a place to sell the loans they originate. Since the agency window was closed by regulation, we are stepping into that window to provide efficient funding in the space.
CL: It’s interesting when you look at the model you are taking as well as many other players like Lending Club and Prosper in the P2P space -- you are all flipping this notion that the way to de-risk assets is to bundle many loans together rather than breaking them apart and allowing consumers to decide what parts of the pie they want? Is this new way of thinking about diversification a result of technology or do you think the result of the 08 mortgage crisis?
BW: I think it’s a bit of both. Mortgage backed investing was an institutional product for almost all of history. It’s never been a big product in the retail investor market. The mortgage space has historically provided really good stable fixed income when treated responsibly.
What we have done is said how do you take an inherently stable investment product and add transparency to the point that people are comfortable with it. When they hear about mortgage backed securities they think of the bundling of thousands of mortgages together like what occurred during the lead up to 2008. At that time you bought a share of the investment pool but you didn’t know what you owned.
With technology, we can allow people to customize their own portfolio and make each investment completely transparent. You can invest in just a regional market that you know or invest in the highest FICO scores so that’s the idea.
It’s really a mix of getting the consumer investment market comfortable with investing in mortgages as a form of fixed income, and utilizing technology to allow them to access the investments most appropriate for them.
CL: Would your eventual goal for Income& be to provide access to this improved investment vehicle for all non-accredited investors as well?
BW: That is the ultimate goal. Part of the reason we are doing this is accredited investors have always had access to a better investment product mix, that won’t work for the retirement population. We look at the fact that the majority of Americans aren’t accredited and we get very excited by that fact. We want to make this accessible to anyone who wants it very shortly.
CL: Do you look at this Fixed Income product as being focused on serving a retired or near retirement core of consumers or can you see this serving a younger demographic as well? 6% is relatively attractive, I could see others being interested?
BW: I think fixed income isn’t only applicable to retirees a lot of people own it. It’s just a question of how much is allocated to this portion of their portfolio. But this is a really big problem for our parents and grandparents but absolutely.
CL: So it says on the website that Income& doesn’t charge management fees. How are you monetizing the platform without fees?
BW: What we do is we sell PRIMOs like bonds. You buy it at a premium to par but we don’t charge ongoing management fees.
CL: What has adoption of Income& looked like amongst potential consumers and what is the consumer adoption strategy going forward?
BW: We really like the independent financial advisor channel. It’s a growing segment of the market in general. At the macro level, a lot of wealth managers are leaving broker dealer firms and starting their own firms.
We are finding that while we are out providing education on Fixed Income and talking to financial advisors they are starting to spread the word about PRIMOs to more of their clients so that’s been a nice growth driver.
CL: How does Income& specifically cut through the clutter of so many new online investment platforms?
BW: I think it’s an exciting time for consumers and investors. There are so many options that didn’t exist before. You can think of almost any niche and find it online. There is a lot of competition for ears and eyes on the internet right now.
We go to a lot of events to find people interested in the space. We talk to many advisory and financial service firms to get the message out there as broadly as possible. Right now we are in beta and focusing mostly on reaching our core accredited investor consumer.
We do things like PR and thought leadership pieces to put out editorial content as well.
CL: Where do you position Income&. In some ways this seems like a bit of a P2P play, but in other ways it’s a bit of a standalone fixed income product with P2P tendencies?
BW: At our core, we are not P2P, but rather a Fixed Income technology platform that provides the newest and most transparent mortgage backed security you can invest in.
CL: How do you manage downside protection in the event of a housing market downturn?
BW: A lot of it is done with standards. That’s one way the market got into trouble previously. You know the old adage when you buy a house you should put 20% cash down as a down payment. Well, we have moved away from that as a country. Now some people are putting down as little as 3-5% cash and using mortgage insurance to get them to the full 20% down payment.
This creates a situation where borrower have less skin in the game, which is why some loan types fared so poorly in the last housing crisis. We are building a platform of solid mortgages. The loans we provide require the borrower to provide all cash for the 20% down payment. That helps to align the borrowers and the investors because there is skin in the game. We find that’s really important and the credit underwriting has to be of high quality as well.
The Minute Rundown with Brad Walker
CL: If you could provide one piece of advice to someone considering starting up what would it be?
BW: I’d pay attention to regulation. When it comes to Fintech this is fundamentally a financial services business not just a technology business. Researching and navigating the regulatory waters is difficult and expensive, which is why it’s very important to find the right partners to help you work through these challenges.
CL: Utilizing multiple investment products in our individual profiles is so key to long term investment success, how do you go about getting people excited about something like Fixed Income?
BW: Well it’s funny I think the market is becoming more exciting than ever before because of the number of options out in the marketplace. I think that’s changing any number of new products out there attacking the market in different ways. I don’t think it’s the bond world of your grandparents.
CL: What other Fintech startup investment tools would you recommend people use to improve their portfolio performance?
BW: I think there are a lot out there. I am a big fan of the P2P market. There has been some great innovation on the unsecured and small business side of things. I think that is a great opportunity for some people. We need to make sure there are products for everybody. I really like a lot that is out there!
CL: If you could pick one founder to emulate yourself after who would it be and why?
BW: This may be a very common response, but I really like Elon Musk. Just from a vision standpoint he is going after things much broader than what we are willing to really tackle. He’s going after problems that seem too big to tackle, I find that to be rare and impressive.
As you can see, Brad and the team truly are finding a unique and innovative way to refresh fixed income for the better. I scour every corner of the internet looking for intriguing new investment tools. This is one I can’t help but get excited about.
Think about the fact that it’s flipping the mortgage investing space on its head by allowing investors to apportion their investments to very specific pieces of individual mortgages all with full transparency. And I would say that overall not acting as a P2P provider is actually benefiting them and allowing Income& to perform at a high level from day one, while serving investors a truly differentiated investment offering.
Exciting days are ahead for Brad and the Income& team. Stay tuned…