It’s great to be a mortgage originator and even better to be a loan officer!
Origination volumes and margins are at all time highs. Originators are working for 350bps PLUS the value of MSRs. Lenders are growing in order to absorb and manage the new volume. It’s the “pig through the python” conundrum as many lenders are managing capacity by widening margins as credit and capacity hit their caps. Warehouse lines and Broker Dealer hedge lines are capped and lenders are seeking more credit, but struggling to find it in alternate sources. With all the volume, managing turn times and staffing is very tight. Lenders are finding it difficult to hire additional underwriters, processors, and closers.
The largest aggregators and servicers have staggering volumes even though market pricing and liquidity for MSRs are significantly back of pre-COVID levels. Prepayment speeds and MSR write-downs are still big concerns. Co-issue and bulk deals are hard to find unless sellers are willing to sell at bottom feeder levels. To add insult to injury, concerns remain for how the GSEs will be updating their buy-up/buy-down grids through the end of year.
With all the news about increased origination volumes, we are also seeing a trend of increasing forbearance and delinquencies. Keeping track of the loans in forbearance has been hard as the number of new forbearance plans, and extensions of existing plans, are being granted. Several servicers are forecasting about 25% of loans in forbearance will become delinquent. We will elaborate on this topic below.
Scratch & Dent and RPLs
There is still plenty of product and supply on the market: single loans, small pools, as well as $10mm – $40mm sized pools from larger lenders. Many of the buyers that were lost in March’s market free fall and margin calls have come back, but more recently, new buyers have emerged in this market.
We marketed 108 S&D pools for $387mm over the last 30 days. Prices continue to remain fairly firm in the low to high 80s range. Low 90s and above pricing is there for the highest quality loans still driven by LTV, occupancy, FICO, and coupon. We have seen a marked increase in both loans in forbearance and delinquent loans. Pre-COVID, the vast majority of scratch and dent pools came with little to no delinquent loans. Today, we’re seeing scratch and dent pools comprised of as much as 30% delinquent and loans in forbearance.
We have a mix of opinions in the market. While some S&D buyers are buying these loans in forbearance, we are seeing an opportunity with more traditional NPL buyers picking up these delinquent and loans in forbearance. Early payment default (EPD) language is becoming more prevalent in these trades as buyers are looking to protect themselves from loans becoming delinquent. Based on loans we’ve traded, a loan in forbearance typically comes with a 4-5 point price hit. We start this week with 10 S&D pools bidding.
NPLs & GNMA EBO’s
With more states in shutdown mode, a struggling economy, and more unemployment, even more delinquent loans are projected as current delinquency levels increase. We foresee an increase in smaller pools on the market and a large increase in GNMA EBO product. We’ve traded 4 pools recently. ($23mm RAMS106765, $7mm RAMS106781, $10mm RAMS106820 and $5mm RAMS106879), all priced in the high 80s to low 90s.
GNMA MBS issuers need to manage their HUD compare ratio and need to buy 90+ day delinquent government loans out of pools. Government loans, with their higher risk profiles, are already experiencing higher delinquencies. The good news is these loans come with various forms of insurance, the bad news is there are fewer buyers with the requisite HUD seller/servicer approvals to handle all of the increased volume and/or have the servicing experience to navigate strict government claims processes to maximize recoveries. Traditionally, large GNMA MBS issuer banks have chosen to hold and service these loans given the positive interest carry. However, the higher costs associated with servicing these high touch loans, has made holding these loans less attractive for commercial banks even with their low cost of capital.
Ginnie Mae has also added some temporary pooling restrictions on re-pooling delinquent loans if they become current. These loans will be re-securitized into designated pools referred to by Ginnie Mae as “C RG” pools which will not trade as well as when they were commingled into GNMA multi-issuer pools.
Scheduled to bid this week in this sector we have: $37mm RPL/NPL RAMS 106902, NPL 2nd’s RAMS 106903, $1.4mm NPL RAMS 106923, $2.7mm NPL RAMS 106924, $16mm GNMA EBOs RAMS 106927, and 322 REOs for $95mm in property value RAMS 106917.
Non-QM & Jumbo
Non-QM is back in business. New issue private label securities (“PLS”) continue their march forward and are being gobbled up by institutional investors hungry for yield. Given the return of liquidity to the markets, Jumbo production is also ramping up. There have been a number of new issue PLS in this sector and we traded about $100mm of RAMS106800 slightly back of par. Non-QM production volume is way down from pre-COVID levels as coupons are high and not generating an abundance of borrower demand. Moreover, many lenders are currently more focused on wide margin GSE production. Some originators we talked to are gun shy to really push production as they are wary of being left “holding the bag” if aggregators/issuers walk from trade commitments. We’re currently working with a large regional bank to provide a one-stop shop solution to a select group of lenders. The program is warehouse financing coupled with a whole loan take-out. This is a powerful solution providing diversification and protection against the volatility of the PLS securities market. Please contact us if you’re interested in learning more about this program.
We’re expecting sellers to bring more product to market in mid-late August in order to facilitate sales for end of Q3. We think it makes sense to start planning any bulk or distressed sales needed by year-end. Any late 4th quarter sales could be costly as liquidity will likely come at a steep premium.
We leave you with this quote from Thomas Edison, “The three great essentials to achieve anything worthwhile are: hard work, stick-to-itiveness, and common sense.”