Whole Loan Update 05/27/20

Here is an inspirational quote we want to share: “The struggles we endure today will be the “good old days” we laugh about tomorrow.” Aaron Lauritsen.

A well-deserved, and needed, long weekend! Most of us didn’t hop on a plane to spend the long weekend at a beautiful beach, or a crowded resort, but, hopefully, you were able to get away from work and the constant onslaught of emails. Our barbecues were roaring and we enjoyed a another nice weekend with our families.

It feels like the mortgage market has stabilized with some positive trends for the industry. We continue to watch unemployment and forbearance numbers rise, but many market participants are starting to see light at the end of the tunnel as many counties and states loosen up shelter at home and business restrictions.

Many monoline Non-QM originators continue to hold on balance sheet the loan production generated prior to COVID-19 hit and its impact on financial markets. There is renewed optimism that this sector will come roaring back with new issuance coming to market. Last week we saw a number of new issue private label securitizations; Neuberger Berman, Angel Oak, Starwood, and Verus. The deals all went well, which is positive news for issuers, originators, and investors, but the implied whole loan execution of these deals was still less than 95. For the remaining, seasoned, Non-QM product, we don’t see prices rising above 95 as we’ve mentioned in prior market updates. Perhaps some of the highest quality loans improve into the low and mid 90s, but we continue to see pricing in the mid to high 80s for this paper.

A few originators have restarted production under tighter underwriting criteria and a cautious outlook. It will be interesting to see how these higher coupon mortgages (7 – 7.50% range) will be received by borrowers and will there be enough borrower demand to satisfy the volume required to bring Non-QM companies back to profitability. Big questions remain on how warehouse lenders will finance these loans with larger haircuts and fewer takeout investors.

Scratch & Dent
Our volume for the first five months in scratch & dent loans has already topped the amount we saw last year and we marketed a little over $1 billion in all of 2019. We currently have 40 deals for $222mm in the market.
As the pandemic hit, and the financial markets disruption began, we lost a number of investors and liquidity dried up in this sector. We had great concerns about prices and the capacity to clear this product, but new investors have entered the market and pricing has held in the low 80s to low 90s, depending on size and flaw, vs high 80s to high 90s before this all began.

There has been more talk of an increase in repurchase demands as underwriting guidelines tighten by the aggregators and agencies. With more loans going into forbearance, and an increase in delinquencies, these loans will be flagged for post-closing audits. With the agencies and investors taking a closer look at these loans, there will likely be a higher percentage of origination and documentation flaws triggering a repurchase claim.

Non-Performing and REOs
We traded a number of smaller non-performing pools and pricing has remained surprisingly strong given all the uncertainties in this market. When can you start foreclosure, how long will the process take, what will government do, and what will happen to home values? We don’t believe the value of homes will be worth more in the coming months.
We traded RAMS 106604, a 268 property pool of REOs. We had bids from 21 unique buyers with the pool trading to 10 of them. We have found geographically targeting investors enables you to haircut the bid offer spread while avoiding wholesale REO pricing and the time constraints associated with individual MLS sales.

In our view, loans only turn into REOs if they have been marked incorrectly, are in need of material repair, or have not been profitably resolved earlier in the process. We believe this period of time may allow asset managers a unique opportunity under the “cloud of the pandemic” to strategically unload some of these assets.

Enjoy the short week….It’s Wednesday again!