We hope your 2022 is off to a great start!
2021 was a very busy year with record volumes and profitability for mortgage participants. 2022 has started off significantly different than 2021 with a big sell-off and a back-up in rates. We have a 40 year high in inflation and strong jobs reports leading into anticipated Fed tightening and tapering by the end of Q1. Refinance volume has gone away and overall production volume is down. Margins are tight and we are seeing a good number of originators implement resizing and lay-off plans. More job cuts and consolidation seem likely, especially if we trend to higher rates, and production volumes continue to slow as we shift to a purchase-oriented origination market. There is optimism we are nearing the end of the pandemic – so we do have some positive news!
It was already a challenging end to the year for publicly traded mortgage companies. All mortgage companies that went public in 2021 had lower stock prices than IPO prices.
Recent market sell-off –
| Date | FNCL 2 | G2SF 2 |
| Dec 1, 2021 | 100.148 | 101.273 |
| Jan 3, 2022 | 99.109 | 100.336 |
| Feb 1, 2022 | 97.367 | 98.688 |
| Today | 94.922 | 96.625 |
| Change | -5.226 | -4.648 |
Current mortgage rates:
30yr Conforming – 4.12%
30yr FHA – 3.68%
30yr Jumbo – 3.625%
30yr Non QM – 4% (@102)
In early 2022, GSE’s announced upfront fees for certain high balance and second home loans. The fees for these loans will increase between 0.25% and 0.75%, tiered by loan-to-value ratio. Upfront fees for second home loans will rise between 1.125 percent and 3.875 percent, also tiered by loan-to-value ratio. FHFA said the new fees will go into effect for deliveries and acquisitions beginning April 1, 2022. The long lead time is intended to minimize market and pipeline disruption.
Mortgage servicers are under fire from the DOJ, CFPB, and State AGs due to concerns related to implementation of modification plans and if loans to military veterans and families are being serviced in compliance with agency servicing guidelines. The good news for mortgage servicers is mortgage servicing rights (MSR) values and multiples for production originated and serviced are rising for the first time since the start of the pandemic and big drop in rates in March 2020.
We seem to be toward the tail end of the forbearance period. There are roughly 800,000 borrowers that will be exiting forbearance plans. We remain focused on whether foreclosures will increase dramatically or will we see another round of modifications, extensions, and deferrals.
There continues to be lots of cash and appetite for yield and assets, but prepayments are slowing, and lower coupon loans are getting hit very hard, especially in the Prime Jumbo and Non-QM sectors.
Non-QM
After the pandemic hit followed by the market liquidity crash of 2020, the Non-QM market charged to higher and higher price levels with most of 2021’s Non-QM production feeding what seemed like an insatiable Private Label Securities (PLS) appetite. Pricing peaked in Q3 2021 at around 106.50. We marketed 45 pools for roughly $2BB in 2021. Yearend positioning saw swaps widen and rates increase leading many sellers to hold off hoping for better times in 2022. Rate sheets with increases to coupons were not in lock step with secondary market pricing. Better times have failed to materialize so far in 2022. Most Non-QM buyers have seen their excess spread securitization execution deteriorate as AAA bonds have compressed due to an abundance of supply, rising rates, and wider spreads. We’ve seen a bifurcation of Non-QM pricing in the mid to upper 4 coupons. The lower coupons aren’t favorable to the levered structure PLS deals as the lack of coupon doesn’t adequately contribute enough excess spread to subordinate, or credit enhance, the securitization structure most firms were using in 2021. We are having success selling lower coupons at par to banks at high 3% to low 4% unlevered yields. We’ve already marketed 39 Non-QM pools for just over $2BB so far in 2022.
Price and execution have been impacted for both consumer and business purpose Non-QM loans. DSCR rental loans, with 3 or 5 year prepay penalties, have seen pricing go from a 106 handle in 2021 to 102 handle on an ~ $100MM sale in early February (and even lower for sub 4.5% coupons). Another affected Non-QM sector is Community Development Financial Institution, or CDFI, a federally chartered financial institution with certain ATR exemptions and safe harbors for mortgage loans due to their community development focus. These loans were also being sold into PLS until Q3 2021 when the rating agencies changed their view and decided to no longer rate as “AAA” the bonds backed by this collateral. This change altered pricing more than 2 points, from mid 106s to high 103s – 104 area. Given the high gross WACs, high FICOs, and low LTVs, coupled with strong performance, we have been selling large blocks of this paper to bank buyers.
After the liquidity crunch of early 2020 we continue to be surprised to hear how much Non-QM production was originated without being hedged. These price drops and market volatility have been especially painful for those market participants.
Below is a snapshot of the change in Non-QM rate sheets since Q3 2021:
Consumer Non-QM
| Date | Rate | Price |
| Nov-21 | 3.750 | 102 |
| Dec-21 | 3.875 | 102 |
| Jan-22 | 4.000 | 102 |
| Feb-22 | 5.250 | 102 |
Business Purpose Non-QM
| Date | Rate | Price |
| Nov-21 | 4.125 | 102 |
| Dec-21 | 4.125 | 102 |
| Jan-22 | 4.250 | 102 |
| Feb-22 | 5.400 | 102 |
Looking at PLS Issuers Rate Sheets, it’s worth noting 4.5% is the lowest coupon offered today as compared to 3% back in Q3 2021.
Prime Credit Jumbos
As we all know, most of 2021 was a vibrant, robust, market for prime credit jumbos and PLS issuance. Volumes reflected this exuberance with all-time highs not seen since the early 2000s. However, with an oversupply of PLS issuance in Prime Jumbo, Agency Second Homes & Investors and Non-QM spreads began to widen in the latter part of 2021. Many large mortgage originators are selling their origination “best-efforts” due to thinner margins and more challenging hedging techniques that come with non-bank jumbo loans. Bulk Jumbo execution has been hit hard as coupons and investment yields have increased. PLS execution is not currently attractive as the deal pass-through coupon has increased 1 to 1.5 points on AAA senior bonds. Investor appetite has also waned for the time being. In the bulk whole loan market, low 3% coupons are trading in the 97 area (high 3% bond equivalent yield) with new coupons being set in the upper 3 to 4% coupon range.
Ginnie Mae EBOs
Maybe it was the rise in interest rates from the first day of the year, or some combination of reasons, but we’ve marketed over $2BB in Ginnie Mae EBOs so far this year with several new deals under evaluation for potential sale. Through this process, we identified several interesting topics.
What is the “real cost” of servicing GNMA EBOs?
Most contract servicers apply a fee schedule with a fixed monthly fee based on delinquency status. In addition, there are fees if a loan is in bankruptcy, foreclosure, or REO. Finally, more fees are added when loans are modified or resolved. On Ginnie Mae EBOs, this monthly cost ranges from $115 per month to $220 per month depending on status. Then, for special servicers, in addition to the aforementioned monthly servicing fees, there can be success fees of 1% for completing a permanent modification, executing a short sale, or achieving certain settlement results. The base fees are applied on a per loan basis without regard to loan size. The smaller the loan balance the greater the impact of these servicing costs. In determining a “sale vs. hold” strategy, Investors need to understand and apply the correct cost.
With the rise in interest rates, can Ginnie Mae EBO Sellers still achieve prices of at least par plus refund of all advances, including net-interest advance?
There continues to be real demand for Ginnie Mae EBO pools, but Investor opinions on price can vary significantly from offering to offering. Almost always, but especially now, there is no substitute for a competitive auction. We have seen the same buyers offer a premium for one pool and on the next pool they are 3 points back of par.
In general, we are seeing prices of par or premiums for offerings. In some cases, sellers and buyers are agreeing on a trade of a subset of loans vs the entire offering where seller’s price goal is a premium to par. On top of the price, we are still seeing refund of all advances. We believe holders of Ginnie Mae EBOs have a window right now to sell and recover all of their advances with no cash outlay, but the window is not as wide today as it was 60 days ago.
What is the impact of a change in projected re-performance and re-pooling rate on a Ginnie Mae EBO Portfolio?
The re-performance and re-pooling assumption in conjunction with lower discount rates drove up pricing of EBOs in the last half of 2021. In a rising interest rate environment, re-performance and re-pooling assumptions have less impact on EBO value because the securitization price assumption is lower. There is less variance between a foreclosure and liquidation outcome and a re-performance and re-pooling outcome. Also, and this may be the result of year end analysis of actual results, we are seeing several buyers reducing their re-performance and re-pooling assumptions. We performed a sensitivity analysis of several EBO Portfolios and a drop in re-performance and re-pooling percentage from 90% to 50% can result in a drop in price between 3 and 4 points depending on WAC.
Scratch & Dent
Scratch & Dent remains a very active sector for us. In 2021, we marketed 1,418 portfolios with 12,495 loans for more than $3.8BB from 404 unique sellers. We settled a record 153 portfolios in December alone! We think this is a sector insurance companies and banks should consider because they can accumulate hundreds of millions of dollars in scratch & dent loans at attractive yields if they are willing to cobble their portfolio together from a large number of smaller trades. In 2021, we marketed 1,214 portfolios comprised of less than 10 loans and only 43 portfolios had a UPB greater than $20MM.
We don’t anticipate the volume of scratch & dent offerings to slow down in 2022. Inside Mortgage Finance highlighted that GSE repurchases out of Fannie Mae and Freddie Mac MBS in the Q3 2021 was up 16.8% over Q2 2021 and year-to-date Q3 2021 was up 80% from Q3 2020. We have marketed 292 scratch & dent pools for $872MM so far this year.
Like most sectors, pricing throughout 2021 remained strong. Of all scratch & dent pools marketed, 84% traded in the 90’s with 51% in the high 90’s. As rates edged higher, we have seen some softening in pricing, especially in lower coupons and higher LTVs. We expect this to be the case going forward if rates continue to edge up. So far in 2022, 88% of pools have traded in the 90’s, but only 14% have been in the high 90’s. Sub 3.5% GWAC made up 89% of the scratch & dent loans we’ve marketed so far this year with roughly 12% trading in the high 90’s.
NPLs
We start our overview of NPLs with this statement below from New York’s Attorney General, Lititia James:
In a December 13, 2021 letter to servicers, New York Attorney General Letitia James reminded servicers of their continuing obligations to assist New Yorkers amidst the pandemic and warned of enforcement actions against servicers that fail to do so. According to Attorney General James, “lack of preparedness is no excuse.” Instead, the Office of the Attorney General will take “that lack of diligence” into account in making enforcement decisions. The letter follows the October 28, 2021, statement on the Homeowner Assistance Fund (HAF) program from New York’s Department of Financial Services and, together, the statements present an aggressive tone from the Empire State.
Then we have this news and statement from California’s Consumer Services and Housing Agency Secretary Lourdes Castro Ramirez:
According to housing officials, hundreds of thousands of homeowners across California are facing housing instability. “Twelve percent of California homeowners are facing foreclosure and 6% percent are behind on mortgage payments due to the pandemic,” said Consumer Services and Housing Agency Secretary Lourdes Castro Ramirez. The California Mortgage Relief Program will cover past-due home bills in full as a one-time grant of up to $80,000 per household. The payments will be made directly to the servicer of a given homeowner’s mortgage and no repayment will be required.
And, finally, this ruling last year from the Texas Federal Court:
A federal court in Texas has ruled that the federal government has no constitutional power to prohibit real estate foreclosures and evictions pursuant to coronavirus legislation and regulation, calling into question whether banks, mortgage lenders and property owners must continue to abide by federal agency orders prohibiting them from reclaiming the property that secures their loans.
As we project the outlook for 2022, it is obvious foreclosure activity will continue to be state specific and foreclosure timelines will definitely extend in many states. Fannie Mae last posted its state-by-state foreclosure timelines effective January 1, 2019, and it would be helpful to see an update. The negative impact of extended timelines was mitigated by rising home prices in 2021 and forecasts for 2022 show a continued increase in home prices, albeit not as much as 2021.
It is difficult to project NPL volume for 2022. NPL buyers we work with had a good year in 2021, but to reach volume goals they had to get creative with a combination of co-bids, buying smaller pools, or purchase of NPLs within an otherwise performing loan pool.
Commercial
RAMS is expanding its commercial loan business in 2022. Below is a summary of our thoughts and insights.
Commercial Lending in Q1 2022 followed the trends of late 2021 with some relief to the hospitality and office sectors. Originators have maintained steady production of bridge, construction, and permanent financing for multifamily with increased interest in emerging asset classes like regional data centers and climate-controlled warehousing. The transition from LIBOR to SOFR is in full swing with approximately 50% of originators polled having made the switch with the remaining number planning on converting by Q3 2022.
The US housing shortage continues to provide significant demand for the full life cycle of multifamily lending (bridge, construction, rehab and permanent) by developers. All lender types from bank to private money lenders remain heavily active in this area. Banks continue production of construction loans and bridge loans at SOFR + 5 (6%) and permanent financing at SOFR + 3 (4%). Private Money Lenders are coupled with the banks at 1.5% rate premium for qualified borrowers based on creditworthy and experience. However private money lenders are offering non-recourse loans which are driving borrowers to private money.
Office remains a troubled sector with 60% of lenders polled limiting exposure or not lending currently in the sector. The bridge and construction financings are extremely limited with originator generating “mini-perm” loans for 5 years on existing properties. This said the mini-perm paper is generally more flexible with co-working leases being more widely accepted by underwriters. Rates reflect the increased risk with mini perm loans costing over SOFR + 3.5. Hospitality lending is beginning to thaw, but only rehab or permanent financings with major flag brands.
Similar to the office sector, retail remains a troubled sector with lender redescent to extend leverage. Mixed Use development with over 50% residential are receiving preferential treatment.
Industrial is one of the most promising areas for lending currently with major growth occurring in both Tier 1 and Sub-Tier 1 markets. Coastal California is seeing value increases in warehouse space as cannabis operations have drastically acquired warehouses for all stages of product production. This has increased loan amounts for both cannabis and Non-cannabis operations. Banks in Northern California are generating new permanent and rehab financing as developers are capturing this upswing in the warehouse space. Last Mile Shipping during the pandemic has also generated an increase in smaller warehouses across the nation.
The growing demand for computing power has generated an explosion in regional data centers with major consolidation of existing data centers by REITS over the last 24 months. Both banks and private money lenders are getting more comfortable with underwriting for smaller regional data centers.
We end with this quote from British Writer and Artist, Gertrude Jekyll, “There is always in February some one day, at least, when one smells the yet distant, but surely coming summer.”