Whole Loan Update 01/08/21

While most people are happy to have 2020 in the rearview mirror, the liquidity crunch in March did not last long, and it ended up being a very good year for mortgage bankers, who enjoyed record volumes (perhaps the most in history – $4 trillion), high margins, and profitability.  Not only was it a good year for origination companies, but also for their loan officers and operational staff. Compensation increased as the result of fierce competition to hire additional staff to absorb and process increased production. There continues to be a scramble to find third party due diligence resources to get production processed and bulk deals closed. Conversely, mortgage investors struggled to find product to invest their cash as the market rebounded from the wide spreads of the pandemic meltdown. With agency MBS yielding less than 1%, and non-agency product not being widely available, we saw yield hungry fixed income investors crossing over into other sectors for returns.

The CFPB gave the housing market and mortgage industry an early Christmas present by finalizing the “General Qualified Mortgage” definition and eliminating the “Non-QM Patch.” The 43% DTI threshold and Appendix Q are gone and replaced with a price-based standard. Some believe this will shrink the Non-QM universe making more loans QM eligible. The rule also does not prescribe any particular underwriting standards giving lenders more flexibility to determine ability-to-repay.  This action could ultimately result in an easing of lending standards and improve overall Non-Agency volume.

The U.S. housing market continues to climb and is the juggernaut leading the economy through this turbulent period. Sentiment for future home price appreciation is a bit mixed, though the consensus is for moderate future growth. In the past, the strong housing market has bailed many investors out of riskier mortgage investments and this could happen again despite a few regional speed bumps.

 Scratch & Dent – This was a very active year in scratch and dent. Record volumes, employees working remotely, and learning curves for new employees at new platforms, all contributed to loan manufacturing errors. In 2020, we marketed over 9,000 S&D loans for $3BB+.When the pandemic hit, the market was flooded with paper due to a combination of: Non-QM from the lock down in the securities market, margin calls from warehouse lenders, and pressure from warehouse banks to exit any seasoned loans on their lines or get curtailed with cash demands. It was a very challenging market as rates dropped to historic lows and originators were faced with a multitude of liquidity and cash issues. Many S&D buyers were forced to exit the market due to margin calls, losses, or cash constraints. Some S&D buyers made material changes to their purchase criteria. Liquidity came at a steep premium, and purchase yield requirements gapped wider bringing with it about an 8 to 10 point drop in prices as well as many failed and broken trades.

 As the market stabilized, and liquidity returned, the market corrected and began to rebound in an orderly fashion. What was once a low to mid 80s market, now improved to a high 80s to high 90s market with investor yields now <4% versus the low double digits yields seen during March and April 2020.

We’re expecting a very active 2021 for the S&D market. The GSEs will be deep into post purchase reviews and audits in early 2021, and loans with any manufacturing or underwriting flaws will be put-back to originators for repurchase. With strong earnings in 2020, many lenders have increased their loan loss reserves in anticipation of repurchases.

Non-QM – The Non-QM market remains strong and well bid. There continues to be a strong appetite for product with more buyers than there is new production available for sale. Aggregators and RMBS issuers remain hungry for product to issue new deals and meet investor demand for investment grade securities.  Some Non-QM originators have re-opened their Non-QM production channels although many remain cautious from the recent scares following the March market shutdown. Originators remain focused on the agency “low hanging fruit” as margins continue to remain attractive given the heavy refinance volume with interest rates at all-time lows. If interest rates increase in 2021, and there is any slowdown in the agency origination space, originators are likely to shift their focus to non-agency products such as Non-QM. New production Non-QM prices are in the mid 103s for core production with investor DSCR loans priced as high as mid 104s with strong credit and prepay penalties. Legacy seasoned production remains priced at par and below as buyers remain cautious with these loans due to outdated employment and income documentation needing to be refreshed to reflect a borrower’s current status. As mentioned earlier, let’s see what 2021 brings to this sector with the end of the Non-QM patch and new QM definition.

Jumbos – Non-agency jumbo demand is being out paced by new production supply available for sale. Production remains dominated by the money center and regional banks as they retain their proprietary production. A few new players such as Quicken have entered the private label market as new issuers. The “Street Firms” continue to have a strong appetite for high quality jumbos. On the investor side, demand remains robust for loans and RMBS as they are flush with cash, seeking returns/yields.  With the new GSE conforming limits increasing to $548,250 and $822,375 in most high-cost areas, we don’t see supply increasing in 2021.

NPLs – State and GSE moratoriums dampened the NPL volume this year, and like other sectors, we saw yields tighten. We marketed 115 NPL portfolios for more than $2BB. We have even traded some NPLs over par for the right combination of low LTV and high coupon or default coupon. In the past, many active NPL buyers had limited the amount of NPLs acquired in New York, New Jersey, and the Northeast due to concerns about foreclosure timelines and navigating difficult court systems.  In 2020, for the first time in perhaps – ever, we heard some buyers wanting to limit exposure in California, Oregon, and Washington State due to uncertainty regarding government positions on foreclosure moratoriums.  Even though foreclosure timelines remain hard to estimate, increases in property values have kept prices high and buyers are gearing up for larger volumes of NPLs in 2021.

Ginnie Mae Early Buy Outs (EBOs) – The government loan space is another market sector where the consensus is there will be a large supply of product coming to market in 2021. 2020 brought unemployment, missed payments, foreclosure moratoriums, and forbearance. The pandemic brought fear of massive advance obligations as borrowers were granted payment forbearance while the same payments were guaranteed to Ginnie Mae MBS investors. The government stepped in and provided financing lines to protect both the MBS holders and the lender/servicers.

As we can all acknowledge, the pandemic is a beast we don’t have control over and the impact on the economy and employment is still uncertain heading into 2021. The economics of these loans purchased out of their Ginnie Mae securities is more complicated than other “distressed” mortgage loans. Licensing, advances, escrows, claims reimbursement curtailments, negative carry, re-performance, re-securitization, debenture interest, and foreclosure timelines make for a murky picture. The current high refinance activity and return of prepayment interest has been an offset to some lenders, but present value cash-flow analysis can be very telling. Negative cash returns coupled with a big drop in the debenture interest rate (now at ~1%) has exacerbated the coupon mismatch in this product. There will continue to be more loans in forbearance that may turn delinquent and will need to be actively managed. Prices have improved substantially, and the bid / offer spread in this product has compressed enough to make these sales more bearable for sellers.

A number of EBO pools traded in late 2020. Last month we traded RAMS 107283 $120mm FHA EBO’s in the very high 90s. We are also currently marketing a large VA EBO pool with pricing in the low 90s.  We have also traded several smaller FHA and VA pools that are in forbearance or currently delinquent, ranging in price from the mid-80s to mid-90s. Ahead of the anticipated EBO supply this year, we have developed a flow program to help even out the cost lenders would take in a particular month or quarter.

Forbearance – As of the end of Q3 2020, there were roughly 3.6 million homeowners with an unpaid principal balance of $751 billion on pandemic related forbearance plans, or about 6.8% of all active mortgages.  Approximately 80% of borrowers requesting an initial 3-month forbearance asked for an additional 3-month extension.  The variance by loan type was significant:  4.7% was Fannie Mae and Freddie Mac, 11.2% was FHA and VA, and private label and bank portfolio was 7.3%. 

Most borrowers in forbearance are provided 3 repayment options: (1) reinstate at end of forbearance period (if the borrower has the wherewithal), (2) pay back the arrearage in 1/12th increments while making regular on time payments, or (3) defer to end of the loan. 

On 12/23/20 according to the CFPB, the FHA and VA deadline for requesting an additional 6-month forbearance extension is 02/28/21.  Fannie Mae and Freddie Mac do not have a specific deadline, although Fannie Mae and Freddie Mac foreclosures are on hold until 01/31/21.  FHA and VA loans cannot start or complete foreclosures until 02/28/21.

No one can be certain if the above deadlines will be extended again.  A large part of the population of the country remains in lock down.  We asked our Evaluations and Analytics Team to analyze the price impact of a 12-month forbearance plan with a payback under each of the 3 repayment programs.  Assuming a loan with a $400,000 UPB, 30-year term, 4% fixed rate coupon, and 7-year estimated life, we saw between a 5.67% and 12.47% price difference. Please see results of our analysis in the table below.

Repayment Plan / Discount Rate 1% over Coupon2% over Coupon
1/12th Per Month Repayment5.79%11.01%
Deferred to End of Loan7.06%12.47%
Variance Between Plans1.39%1.61%

It is important to note the above percentages reflect borrowers who repay following forbearance.  But what if they don’t pay?  When borrowers have not made payments in a year, some portion of them will require “motivation” to start paying again.  The possibility of foreclosure and losing the property is good motivation, but what if the courts or current law limit or prohibit foreclosure for some period of time?  Following the financial crisis of 2008, we saw the advent of new companies and law firms specializing in assisting borrowers HOW NOT TO PAY their mortgage.  Will some of these forbearance situations result in loans where borrowers don’t pay for a very long time?  This is the wild card and will happen on some portion of the loans – what percentage remains to be seen.

RPLs – This was the largest year-over-year growth area for RAMS in 2020. We were granted FINRA membership approval and now have the ability to assist clients with their securitizations. Other firms were given the easy work while RAMS was given the hard work of selling the loans that fell out of RPL securitizations. These RPLs include minor compliance issues, major compliance issues, delinquency, forbearance, property related issues, collateral related issues, and servicing related issues. It is rarely the case where one buyer pays the highest price for a RPL regardless of the issue. In fact, there are some compliance issues where certain buyers have no bid. RAMS specializes in identifying the right buyers for each type of RPL and assisting Sellers to achieve the highest price while limiting the friction related to selling to multiple counterparties. We believe two of our 4th quarter RPLs trades are a good reflection of the current market and RAMS’ approach to selling these “rougher” loans. RAMS 107250 and 107334 were RPL trades involving 5 buyers. The 2 trades included 130 loans, a total balance of approximately $26MM, and a WAC of 4.75%. Approximately 25% of the loans were delinquent and approximately 20% of the loans had compliance or other due diligence issues. There was no fallout from these trades priced in the low-90s. On the cleaner side both Fannie and Freddie sold RPLs in the 4thquarter into aggressive bids with the cleanest pools trading at yields less than 3%.

Evaluation & Analytics Group – In 2020, RAMS marketed 1,301 portfolios for more than $31BB.  This market trade data was utilized by our Evaluation & Analytics Group in the preparation of market evaluations for banks, mortgage companies, mortgage servicers, and fund investors.  We offer evaluation and analysis reports at the most competitive rates available in the market. Please contact us with your mark- to-market needs.

We welcome your feedback, thoughts, and predictions for 2021.  Let’s all hope the vaccines work and the world can return to something approximating normal as soon as possible. We appreciate your business and ask that you continue to send us your inquiries and loans. 

We wish all a safe and healthy Happy New Year and thank you from everyone at RAMS.