Figure Technology Solutions (“Figure”) announced Wednesday in a press release the launch of a first-of-its-kind, blockchain-based marketplace for the buying and selling of private credit loans. The platform, dubbed Figure Connect, is the first iteration of a to-be-announced (TBA) marketplace for non-agency originations, akin to that facilitated by Fannie Mae and Freddie Mac.
With Figure Connect, originators can receive forward commitments from buyers, lock active bids, control loan pricing to balance profitability and volume, and deliver pools of loans into those commitments. According to the press release, this functionality is facilitated with common, standardized sale terms and documentation.
Though Figure’s five-days-to-fund HELOCs are the only loans flowing through the platform right now, there will be “some fast following products,” said Todd Stevens, Figure’s chief capital officer, in an interview with NMP prior to the announcement.
“Our goal is really to create a private capital ecosystem to drive more origination," he explained. "We want to make the capital market access extremely easy, and that can play across all products.”
As of this launch, only Figure partners through their correspondent and wholesale channels have access to the multi-buyer, multi-seller marketplace, protecting the homogeneity of originations enabling loan pool standardization, documentation standardization, and bidding standardization. However, the platform could open to non-Figure partners in the future.
“We want to do it across multiple products, but to start we’re going to start with the Figure process, and then in time we’ll re-evaluate and we possibly could open it up,” said Stevens.
In an interview for last month’s cover story of Mortgage Banker Magazine, Jackie Frommer, head of lending at Figure, said she expected to roll out a Non-QM product with fully automated underwriting “in the back half of the year, at least on a pilot basis.” The company is developing DSCR and jumbo products as well. Ostensibly, the buying and selling of those loans would also occur through Figure Connect, easing liquidity constraints for non-conforming mortgages.
“HELOC is the hot-dot product where we’re market leading and it’s the obvious one to start with,” Stevens continued. “But, our nirvana situation here is a persistent and deep capital market that’s always open, similar to the agency mortgage market.” The process of negotiating “bespoke LPAs” with an “army of lawyers and capital markets people” for lenders who want to have diversity across their buyer bases is what Figure Connect promises to do away with.
Imagine the cost savings of not having to deal with capital markets execution for non-agency loans – that’s what’s at play.
In a simultaneous release on Wednesday, Figure's co-founder and Executive Chairman, Mike Cagney, published a letter to the industry laying out the stakes of Figure's innovation, the exigence of its disruptive technology, and how the company plans to continue to evolve, many points of which have been previously reported by NMP and Mortgage Banker Magazine.
He cited the shortcomings of private consumer credit markets, citing the Non-QM space in particular. "Non-QM mortgages came to the market with great fanfare – offering flexibility a conforming mortgage couldn’t – but represented just 2% of 2023 mortgage production," he wrote. "The lack of a persistent and deep capital market ultimately puts a limit on origination and results in restrictive terms and higher rates for consumers."
Building the infrastructure for a private-label, non-agency secondary marketplace has been underway for years at Figure. The company launched in 2018 with a singularly ambitious goal: use technology to change the way that loans are originated and traded. Playing in the sandbox of the post-Great Financial Crisis’s nascent home equity market afforded Figure the chance to build their technology – and prove their premise – from scratch.
With its automated rules engine, Figure has been able to originate HELOCs homogeneously, eliminating up-front origination risks. As with the GSEs, homogeneity is the fundamental assumption of any TBA market. It provides the certainty that one pool of mortgage-backed securities (MBS), or in this case, HELOCs, can be considered to be interchangeable with another pool.
Securitizing that homogeneity has driven investor liquidity to the private-label secondary for Figure’s HELOCs, leading to four rated transactions in 2023.
“We have a lot of under-capitalized originators who sell to slightly-more-capitalized aggregators who securitize into capital markets that are really only waking up to technological ways of driving credit creation,” Stevens explained of how the capital markets for mortgages still operate. “That’s what we’re doing – taking an outside in view of how the traditional market has worked and trying to bring some first principles to how we can build a better marketplace and market structure.”
Where Figure’s marketplace really departs from the agency side is in its use of blockchain technology to “displace trust with truth.” The new platform is backed by the Provenance Blockchain, on which all loan transaction and performance data is registered. Every process that Figure follows can be cryptographically verified through the digital notary, and can be since the company and blockchain were launched in 2018 by co-founders of the company and blockchain, June Ou and Mike Cagney.
“The blockchain displaces trust, which has been a 200-year-old tradition in financial services,” Stevens quipped. “I’m JPMorgan, trust me. With truth, I can prove that. We’re not saying trust is not worth anything. We’re saying that we think truth is just provable when people value that.”
As Cagney also addressed in his letter, employing blockchain reduces costs and friction for everyone in the process.
"Remit and loan performance can be shown real time," he wrote. "The certainty of data reduces the guarantor cost of credit support. And with loans, pass-through securities, remit data and the guarantor’s capital all recorded on public blockchain, we can swap the opaqueness that took down the mortgage guarantors in 2008 with real-time, shared transparency that should keep access to capital open, when needed."
Stevens says there’s a “tremendous amount” of both consumer demand for HELOCs and investor demand for Figure’s securities. The problem the company faces now is with supply – they have more investor demand than supply of loans to securitize. “We could originate three times our $500 million/month volume, and I could easily find homes for that,” says Stevens. “It’s just a food fight. Our hardest issue is saying ‘No’ to buyers.”
Driven by a standardized and scaled origination process, the Figure Connect marketplace facilitates a “virtuous circle” by establishing a guarantor structure for buying and selling HELOCs. That being said, as both a nonbank lender and technology developer, Figure’s optimal positioning is still one step back from the fray.
“We want to enable marketplaces and be that ecosystem operator,” Stevens explained. “This is the perfect kind of manifestation of that, where we can bring the sellers and buyers together on our infrastructure. We don’t have to use our balance sheet in the process and we can unlock tremendous amounts of value.”
Unlocking that value means encouraging originators to produce more Figure HELOCs to meet investor demand. Despite the entire ecosystem operating under Figure’s control, Stevens is not worried that an over-supply could create a false sense of security or looser underwriting.
“We’re not going to toggle between what’s right and wrong,” he said. “If buyers vote with their feet and do not want to bid into the marketplace, that’s something we need to listen to. If sellers don’t want to originate into the marketplace, that’s something we need to listen to. I think there’s an equilibrium there.”
Establishing Figure Connect’s guarantor structure – the permanent capital that will always bid into the marketplace – is akin to the GSEs’ cash windows. Figure has received proposals from strategic partners for raising that permanent capital. Because the gestation period for the HELOC product is very short, the pricing cycle as the market ebbs and flows is much quicker.
“If the market dislocates and the capital markets are saying, ‘I need a higher risk premium,’ the guarantor could bid a higher risk premium, and then the originators can absorb that, adjust their pricing, and then we can quickly get that market into alignment,” Stevens explained.
Originators ought to have greater confidence in originating HELOCs with an automatic buyer in position, the thinking goes. Financing Figure Connect’s ‘cash window’ doesn’t have to be with equity capital, though.
“We have seven different banks that warehouse finance our product, and we have about seven more in line that would want to warehouse finance us,” Stevens added. “I think it’s a very leverageable product to enable a finite amount of capital to drive some outsized-kinda results.”
