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Nov 2, 2021
Securitization platform Cadence surpasses $125M deal volume and raises $4M
Securitization is a critical function of the modern financial system. Banks “package” individual loans, say a mortgage or an auto loan, into a group with similar characteristics and sell them to other investors. That gets the debt off the originator’s balance sheet so that they can offer more loans, while also offering private investors alternative investment opportunities to buy up.
Despite the scale of the market — the trade association SIFMA’s research shows that the volume for asset-backed securities reached more than $300 billion in 2019 (excluding mortgages) — much of that structuring remains relatively ad hoc, with structuring agents and buyers constantly seeking each other out.
Much in the way that real estate and startup crowdsourcing platforms democratized access to those alternative investments, Cadence wants to expand access to securitized products while increasing the velocity of transactions for originators and lowering prices. Founder and CEO Nelson Chu said that “our job is to bring transparency and efficiency to this market and through all the various things that we do.” The company operates on top of the Ethereum blockchain network.
Founded in 2018 and launched publicly in 2019, the New York City-based capital markets startup has now structured $88 million in notes across 76 offerings and 12 originators according to the company. The firm’s public leaderboard shows that the largest originators were Sellers Funding with more than $23 million and Wall Street Funding with almost $26 million in transaction volume. Chu said that “I think we are the 21st largest structuring agent the United States in 2020 so far,” which is not a bad place to be for a young startup in a massive multi-trillion dollar market.
In addition to that $88 million volume processed on the company’s retail platform, Cadence also structured a $40 million whole business securitization with FAT Brands, the owner of restaurant chains like Fatburger and Yalla Mediterranean. The company notes that the structuring reduced the company’s interest costs by $2 million.
The company has hit a number of milestones over the past two years. It closed a seed round of $4 million in December led by Revel VC, with Revel’s Thomas Falk, Navtej S. Nandra, former President of E*Trade, and portfolio manager Oliver Wriedt joining the company’s board.
In addition, back in 2019, the company said that it also became the first digital asset company to launch a digital asset ticker on Bloomberg Terminal and also the first to join the Bloomberg App Portal. It also secured the first financial debt rating for a digital asset.
The company has a variety of revenue streams from different areas of its platform. It takes transaction fees on each deal, but also derives revenues from hosting data related to the performance of the underlying loans. Given the company’s technology stack, it has better and more verified data about how the underlying assets that back each security are performing, giving all investment holders a much more robust look at the health of their portfolio.
Longer term, Cadence’s goal is to move to a mostly SaaS model for originators and buyers. “We can be very, very beneficial to every single counterparty involved when we become that,” Chu said, adding “we essentially are Switzerland … because our incentives are all aligned.”
I asked about how the company is responding to the COVID-19 situation, and Chu said that as the world saw in the 2008 global financial crisis, “there are pockets of opportunity here that we continue to find, and we allow retail, accredited investors to get access to that.” Chu gave the example of game developers waiting on payments from Apple and Google who need short-term loans to cover costs.
In addition to Revel, other investors in the seed round included Morgan Creek Digital, Nimble Ventures, Argo, Tuesday Capital, Manatt, and Recharge Capital. R&R Venture Partners, a joint VC firm of former Citi chairman Richard D. Parsons and Clinique chairman Ronald S. Lauder, also participated.
Cadence Bancorporation, parent of Cadence Bank, reached separate settlements with the Departmentof Justice and the Treasury Department’sOffice of the Comptroller of the Currency totaling over $8.5 million for redlining practices, according to the federal government.
The DOJ alleged that between 2013 to 2017, the bank violated the Fair Housing Act and the Equal Credit Opportunity Act “by avoiding predominantly Black and Hispanic neighborhoods [in the Houston, metro area] because of the race, color and national origin of the people living in those neighborhoods.”
To address these grievances, Cadence has agreed to invest over $5.5 million to increase credit opportunities for residents of those neighborhoods.
Specifically, Cadence will provide $4.17 million to create a loan subsidy fund for residents of predominantly Black and Hispanic neighborhoods in the Houston area, $750,000 for development of community partnerships to provide services that increase access to residential mortgage credit in those neighborhoods. At least $625,000 will be allocated to advertising outreach, consumer financial education, and credit repair initiatives, the DOJ said Monday.
Additionally, the bank, with assets totaling over $18 billion, will parse out $3 million to the OCC to cover penalties related to the violations alleged in the department’s complaint. (The DOJ opened its investigation after the OCC referred the matter, the department noted.)
Why mortgage lenders should give back
HousingWire’s Clayton Collins joins On Q Financial President and Founder John Bergman to discuss how and why lenders should give back to their communities, and the unique opportunity On Q Financial had recently to help a family in need.
Presented by: On Q Financial
“When banks fail to provide equal access to credit in communities of color, they violate our civil rights laws and they deprive people in those communities of the opportunity to build wealth,” said Kristen Clarke, assistant attorney general at DOJ’s civil rights division.
The DOJ also claims that bank loan officers did not serve the credit needs of majority-Black and Hispanic neighborhoods, and that Cadence’s outreach and marketing avoided minority neighborhoods.
Per the agreement, the bank is also expected to dedicate at least four mortgage LOs to majority- Black and Hispanic neighborhoods in Houston and employ a director of community lending and development who will oversee these efforts, the DOJ said.
Paul Murphy, CEO of Cadence Bancorporation, issued a statement on Monday acknowledging that its mortgage program is not where the company “wanted it to be,” though he did not cite the term “redlining” in his statement.
“We subsequently developed and successfully implemented a coordinated set of efforts to sustainably increase our lending in majority-minority census tracts and minority neighborhoods in Houston,” he said. “For the last several years, the percentage of our Houston residential mortgage lending in minority neighborhoods has reached 50% or above, exceeding our peers. We are pleased with our results today.”
Murphy said that in response to the “Houston mortgage lending proportionality issues” the company “on its own initiative…established the Fair and Responsible Banking Working Group to study and create an action plan to increase mortgage lending in Houston majority-minority census tracts and Hispanic neighborhoods.”
The bank, based in Texas, also has branches in Alabama, Florida, Georgia and Tennessee. Mortgage lending in the Houston area accounts for approximately 40% of the company’s total home mortgage business, the DOJ said.
Cadence is in the midst of a merger with $28 billion asset regional bank BancorpSouth, based in Tupelo, Mississippi. BancorpSouth Bank expects the transaction to close in the fourth quarter of 2021 and anticipates full integration will take place in the second half of 2022.
In late June, the Consumer Financial Protection Bureau said that multiple lenders in America had recently engaged in deceptive business practices, including violations of the Truth in Lending Act and the Equal Credit Opportunity Act, and provided inaccurate data on mortgage loans. The agency did not name the lenders or servicers it examined, and did not levy any fines or penalties. Redlining was among the issues.
The CFPB said one lender — which raised red flags when it received fewer applications from minority neighborhoods — engaged in redlining. In the lender’s direct marketing and open house materials, the models were white. The lender’s offices were concentrated in white neighborhoods, and nearly all of its loan officers were white. The CFPB also found that loan officers sent internal emails “containing racist and derogatory content.”