Pacaso gets funding for non-QM co-borrower securitizations

Financial technology firm Pacaso has closed on a revolving credit facility it will use to enable sales of 30-year second-home mortgages with co-borrowers into the securitized market.

The $100 million facility from Texas Capital Bank will fund Pacaso's purchases of the mortgages, which have an initial five-year interest-only period. It also will accommodate inclusion of the loans in securitizations which will contain other types of loans originated outside the parameters of the ability-to-repay rule's qualified mortgage definition.

The 30-year fixed-rate structure allowing for securitization involved a lot of work on product design with a key challenge being addressing how a distressed co-borrower would affect a loan, Austin Allison, cofounder and CEO of Pacaso, told NMN.

"We've been working on this for three years. It took a long time to get to a model that could work because of the complexity around the co-ownership dynamic," he said.

Pacaso, which a large group of investors backed at the startup stage in 2021, has also sourced co-borrowers for two- to 10-year balloon loans that typically refinance at the end of their term for bank portfolios. 

How past co-borrower loans have performed

These loans have had a strong performance history, according to Allison.

"We've only had a single default on a single loan. We were able to foreclose on it quickly and made money on the default because of the downpayment," he said.

In that case, it was possible to find a new co-borrower to replace the one which was foreclosed upon. Pacaso's vacation homes are luxury properties that house a limited number of  people at a time, with different groups of borrowers rotating use.

"The big picture on why that market has been so interested in this is we've got such high quality borrowers and real estate," Allison said. Its clients typically have 780 credit scores and incomes well over $1 million. They also must have a minimum downpayment of 30%.

Pacaso handles home acquisition, design, formation of limited liability companies used to accommodate shared ownership, financing options, and ongoing management. It will only use the credit facility for loans made in partnership with Texas Capital but also will keep working with other lenders.

While securitizations of the 30-year loans will be mixed in with other non-QM products to start, potential exists for secondary market activity more dedicated to this loan type. 

"Partnership with Texas Capital on this unique product signals further institutional confidence and paves the way for access to the capital markets for co-ownership financing," said Sam Palazzolo, head of capital markets at Pacaso, in a press release.