Whole Loan Update 04/05/21

A dynamic and changing landscape continues in mortgage land and the financial markets. What a difference a year makes! COVID vaccinations are out in widespread supply and there is light at the end of the tunnel. States that have been in shutdown mode are slowly opening up and lifting restrictions. The pandemic hit just over a year ago and the shuttered frozen markets are a mere nightmare memory. The market has come roaring back! Lenders had a record year of volume and profitability. As we know in the mortgage business things are always changing, often quickly, with little warning. The latest curve ball thrown at the residential mortgage market is the new FHFA capital requirements being imposed on the GSEs. These new capital and portfolio requirements have impacted the mortgage market by way of a 7% delivery cap for Non-Owner Occupied and 2nd home loans.  Many states, and political groups, are viewing this initiative positively as they’ve questioned why the government was in the business of subsidizing the investor market. Many would argue that supporting the investor market is not in alignment with the GSE’s affordable housing mandate. This new limitation has come with very little warning and has left originators scrambling to manage their current pipelines and closed loan inventory. With a June 1st deadline to be under the mandated 7% threshold, there is little time to set-up non-agency delivery options. With the GSEs new $1.5BB annual cap at the cash window and the conversion of more originator’s production back to MBS issuance, there is a lot of internal price and operational restructuring going on, as lenders continue to produce and process a record volume of mortgage loans.

Reflecting on the 1st quarter of 2021, RAMS Mortgage Capital’s trade desk marketed 363 portfolios for ~$6BB in UPB and officially launched its Evaluation and Analytics Services Group (see some of the Group’s work in the Ginnie Mae Early Buyouts & NPLs Section below).

Non-Owner Occupied (NOO) /2nd Homes.

As mentioned above, there is a wave of additional agency eligible NOO/2nd home paper currently hitting the market. Large, medium, and small originators are all in the same boat looking for new outlets for this product. Lenders are hitting their rate sheets from 50bps to 2.50 points, with some even halting production of this product until they get a handle on clearing levels. Some Private Label Securitizations (PLS) issuers have been including these loans in their transactions for some time.  Pricing is often higher than GSE delivery for certain attributes due to loan level price adjustments (LLPA’s). This may give some of the larger lenders with shelves, such as Quicken, Loan Depot, Flagstar, Chase, and Wells Fargo, a competitive advantage in this sector.

We’re seeing pricing for bulk size and future production at N+180 to N+200 to a 15CPR equating to just inside a 3% yield, or otherwise quoted as Flat to 75bps back of agency execution.

We expect a combination of PLS issuers and other portfolio investors will step in to absorb the current overhang and seek to establish flow relationships for ongoing future production.

While the immediate concern is pricing, this new injection of supply doesn’t bode well for any shortening of 3rd party due diligence timelines and the subsequent strain on already maxed to capacity warehouse lines. Originators and investors continue to struggle securing due diligence resources to handle the current volume, and untold billions of dollars in paper, which previously had gone directly to the agencies, will now need to go through due diligence for sale into these new non-agency outlets.  With diligence costs ranging from $350 to $500 per loan, we recommend, originators consider delivering the lowest balance loans first into their 7% cash window allotment.

Ginnie Mae Early Buyouts (EBOs) & NPLs

The first quarter of 2021 saw a resurgence in EBO sales.  The primary causes for this increase are: (1) fear of increasing delinquencies, (2) managing HUD Compare Ratios, (3) higher servicing costs as we get closer to the end of foreclosure moratoriums and forbearance agreements, and (4) the potential backup in prepayments due to rising interest rates.  Sellers know (especially sellers who have used payoff funds, and not corporate cash, to cover interest and servicing advances) a “day of reckoning” is on the horizon where all advances will become due, less amounts recovered through payoff, modification, and re-performance.  RAMS has seen re-performance percentages vary greatly by seller/servicer.  We have developed a transaction where the seller has not purchased the subject loans out of the GNMA MBS’ and the repurchase is completed concurrently with the subject sale using funds primarily provided by buyer.

RAMS assists sellers in analyzing FHA/VA/USDA/RHS loans eligible for buyout even if they are currently in forbearance.  We include 60 – 89 days past due loans in this analysis as they may be 90+ days past due as of the cut-off date for closing.   The evaluation is performed from both a market as well as an internal perspective (projected future cash flow if loans are repurchased and seller’s recovery is generated from a combination of foreclosure sale, REO sale, modification, re-performance, and payoffs).

From a market perspective, we assist in determining the percentage of the buyout cost to be borne by seller (seller’s cash drain).  We calculate the EBO Buyout Cost for each loan vs the current market price.  The difference between these amounts is described below in Illustration 1.  In Illustration 1, seller will need to fund 2.670% of FHA EBO Buyout Cost, 8.674% of VA EBO Buyout Cost, and 3.594% of USDA EBO Buyout Cost.   This percentage can vary depending on whether the seller has paid out of its own corporate cash, or used payoff funds, to cover its interest and servicing advances on defaulted loans. 

Illustration 1 EBO Buyout Costs

TypePricePx including AdvancesEBO Cost SellerEBO Cost Buyer
FHA 101.88%104.71%2.67%97.33%
VA 90.68%93.31%8.67%91.33%
USDA 99.51%101.34%3.59%96.41%

From an internal evaluation perspective, assuming property values do not materially decline, the biggest driver to loan value is the variance between projected percentage of re-performance vs. recovery following foreclosure sale (or REO liquidation, as applicable).  Some sellers have the ability to re-pool and re-sell the re-performing loans and will receive the full benefit of GNMA securities pricing.  Other sellers do not have this capability and will look to resell these re-performing loans.  We have found a market for re-performing loans at GNMA TBA minus 2 points. While every pool is different, Illustration 2 below shows FHA loans only have about a 3-point variance between zero re-performance and 75% re-performance.  VA loans have about a 17-point variance, and USDA loans have about a 7-point variance.

Illustration 2   Re-Performing % Sensitivity Analysis 

Type0% RePerform25% RePerform50% RePerform75% RePerform
FHA 99.66%100.68%101.69%102.71%
VA 74.82%80.48%86.15%91.81%
USDA 93.42%95.73%98.04%100.34%

Another analysis we provide to sellers compares the cost of completing the EBO Buyout now vs. holding the loans to resolution.  We have seen projected seller buyout costs for hold to resolution as high as 8 times what it costs to complete the EBO Buyout now.  Therefore, we encourage all owners of GNMA servicing rights to evaluate your EBO Buyout options and develop and implement a plan to avoid a major buyout cost down the road.  Contact RAMS for more details. 

Other 1st quarter non-performing color: RAMS marketed 22 non-performing portfolios for ~$1.5BB.  RAMS pool # 107737 was $88mm of Non-QM NPLs which had a 6.56% GWAC with a sub 70% LTV and traded around par. Another Non-QM NPL pool # 107549 similar coupon but >85% LTV traded in the low 80s.


Non-QM continues to demand high prices for production driven by bond investors seeking higher yielding assets. Production supply has not kept pace with this demand as originators continue to focus on agency production with wider profit margins. The coming months could shift that focus if rates continue their recent uptick. Refinance volume has slowed slightly with this modest back up and we’ll have to see if this is just a slight move up or a sustained move upward. Originators don’t currently have excess capacity to look at alternative products with the operation demands of today’s production volumes. Originators view a slowdown in refinance volume as the re-entry point for Non-QM product. Most notable trades were RAMS 107695, $117mm – 5.39% GWAC, 67% LTV, 35bps servicing retained, traded at 105-16.  RAMS 107459 $100mm small balance commercial loans in NY & NJ with 33% in forbearance traded >102.


In first quarter of 2021, we marketed 307 Scratch & Dent portfolios for nearly $700mm, trading more than half of them.  Pricing continues to remain strong with prices averaging in the mid to upper 90s.  If rates stay at current levels, we expect the next chunk of product to have lower interest rates and lower pricing, as many S&D buyers implement strategies other than just clipping coupons. We expect banks to return to this sector in the coming months. Current discount rates used by active S&D buyers are in the 4.0% to 5.0% range with little to no additional, or new, forbearance projected in the coming months.


Non-Agency Jumbo pricing remains tight and well bid with product trading just north of a 2% yield. As mentioned above, these deals will grow in size given the additional NOO/2nd and high balance conforming product that will be included in these PLS deals. This additional production will bring higher concentration levels than prior deals. It will be interesting to see how rating agency and subordination levels will be adjusted. Aggregating this product has proven to be challenging in the past and we all know there is no perfect hedge.

It was opening day of baseball this week.  So, from the late, great, Henry Aaron – “It took me seventeen years to get to three thousand hits in baseball.  It took one afternoon on the golf course.”