Another busy quarter comes to an end. Who can believe we are approaching year end already? As the saying goes, “The only constant is change,” as FHFA reversed their imposed risk restrictions on the NOO Investor cap, Cash Window vs MBS delivery requirements, and risk parameters.
- Most foreclosure in history started last month
- Potential Tax increases impacting M&A and MSR sales
- Duration and extension concerns
Homeowner affordability, and first-time home buyers, continue to be a focus for the GSE’s and the current administration as evidenced by the introduction of rental income payments being allowed for agency loan qualifications. Ginnie Mae announced two borrower relief programs: (1) FHA National Emergency Standalone Partial Claim and (2) USDA Mortgage Recovery Advance. The VA also announced it will extend deferred payments until July 1, 2023.
The general consensus for GSE lending limits has single-family units going to $625,000 in 2022 from $453,100 in 2018. This takes us to a 5yr increase of 37.94%. Please see table below reflecting loan limits from 2017 to present.
|Year / # of Units||One||Two||Three||Four|
|5-Year % Change||37.94%||37.94%||37.93%||21.01%|
With mixed news on economic factors pushing the markets one way or another, we are seeing interest rates above 3% on agency conforming product. Originations remain brisk with margins tightening. More stable servicing values, anticipated tax increases, and differing views on rates have resulted in an abundance of large MSR deals out for bid. Smaller and mid-size mortgage bankers, who built servicing portfolios when MSRs were trading below fair value (in the sub 2 multiple range during the pandemic), are also selling to raise cash to maintain market share.
Investor yields and cash continue to keep mortgage spreads tight and asset demand remains strong. Fannie Mae $2.2BB RPL Pools all traded to a large west coast money manager at yields below 3% (mid 104s, low LTV). Fannie Mae just recently announced the results of their Non-Performing Community Impact Pool. The pool was $44.6mm, 100% NY, with ~52% BPO LTV. The cover bid was 96.18% of UPB, or 39.87% of BPO value.
Last week, Zillow paused home purchases made under Zillow Offers because the prices paid to buy homes were well through the applicable markets. We will see how Zillow decides to approach this situation – sell at market, rent, or some combination of both.
This recently published by National Mortgage News, “Mortgage servicers started 10,289 foreclosures in September……. In the third quarter , 25,209 foreclosures were started, shooting up 32% from second quarter and 67% from the year before. It represented the first quarterly increase over 10% since 2014 and the highest since Attom [Data Solutions] started tracking in 2005, besting 28% in 1Q 2009.”
Ginnie Mae EBOs
RAMS continues to evaluate and market about $2 billion in Ginnie Mae EBOs per month. One of the most common questions is, “What are the primary drivers of price in an EBO Pool?”
Let’s first review pricing from Q3 2021. Pricing across eight (8) separate trades has been a range of par to 103% of UPB, plus refund of all advances, including escrow, recoverable corporate, and net interest advance. Discount rates used in evaluating EBOs have hovered around 3% for FHA and around 4% for VA, USDA, and RHS.
So, what is driving price? There are many factors, including supply and demand, interest rate, loan type, past and existing forbearance, past and existing payment performance, and foreclosure status.
- Supply and Demand. Perhaps no factor impacts price of EBOs right now more than the supply and demand imbalance. There is simply much more demand than supply.
- Interest Rate. With the run up in the 10-year Treasury Rate (1.63% as of October 26, 2021), interest rates between 2% and 2.99% are not receiving the premium pricing assumptions we saw over the summer months.
- Loan Type. Some Purchasers do not buy USDA or RHS loans. Some Purchasers have a cap on the percentage of VA loans they can acquire in a given pool. The variance in price between FHA and VA loans decreased significantly in Q3 2021 due to the application by Purchasers of very high (80% to 90%) re-performance assumptions. However, on EBO Pools where the re-performance assumptions are less than 80%, we have seen FHA pricing exceed VA pricing by 3 to 5 points.
- Past and Existing Forbearance. If a borrower has been in forbearance or is in active forbearance, the assumption is at least 90% of these loans will re-perform. Borrowers who have not elected forbearance, COVID or otherwise, are considered less likely to re-perform.
- Past and Existing Payment Performance. We are starting to see Purchaser’s consider post-forbearance payment performance as an attribute impacting re-performance. This is definitely something to watch as more information becomes available on post-forbearance payment performance.
- Foreclosure Status. EBO Seller’s, especially those who have been selling more recent defaults (90 to 150 days past due), are finding loans in foreclosure to be a larger percentage of their overall existing EBO Portfolio and these loans have lower re-performance assumptions.
A few more points to consider on EBOs. For EBOs not yet repurchased out of securities, December 1, 2021, is the last day in 2021 to execute a sale. If you are considering an EBO Sale before the end of 2021 you need to get moving on it. If you are still in the evaluation stage, please take advantage of the RAMS EBO Analysis. At a loan level, we can help you select the best mix of loans to maximize execution.
We have been wondering about the hundreds of millions in face amount of non-interest bearing second liens being generated as a result of FHA and VA partial claims. What will become of these second liens if we see a large percentage of defaults on the first liens? Will FHA and/or VA implement a new program to “save their second liens” by slowing down foreclosures on first liens? Will these second liens come to market at some point in the future? If yes, how will the market price zero interest rate second liens? As a reminder, in 2010 we saw an “inversion of lienholder rights” as second lien holders were able to hold up foreclosures and short sales in order to generate greater recoveries on their loans. We look forward to monitoring this in 2022 and beyond.
As we think about NPL loss mitigation in the coming months and years, we recall, after the mortgage crisis, borrowers with 6% interest rate loans could be modified into 2% (HAMP) and 3% loans. While this should have made homes more affordable, borrowers still re-defaulted at an alarming rate. Currently, borrowers have 3% interest rate loans, so will we see 1.5% interest rate modifications? If there is no material way to make a loan more affordable through interest rate reduction, will we see a material increase in principal reductions and short sales? Please see tables below which illustrate why modifications may have limited impact this time around.
|Loan Balance||Rate||WAM||P&I Payment||P&I Change in $||P&I Change %|
|Loan Balance||Rate||WAM||P&I Payment||P&I Change in $||P&I Change %|
Scratch & Dent
Not much changed in this sector from our previous writing in early July 2021. Continued supply, strong investor demand, and prices slightly higher.
Updating the tables from our last update, we’ve marketed more than 1,000 S&D portfolios in 2021 from 312 unique sellers. This remains one of the highest yielding sectors, with most of the product having minor defects and trading in the mid to high 90s. We see average discount rates for this product in the range of 4% to 4.5%, unlevered.
The table below shows percentage of S&D loans sold by price range during the first 9 months of 2021.
If you’re on our distribution list, we don’t need to tell you, but the table below shows there are deal sizes to fit every Purchaser from one and two loan trades up to trades comprised of $50MM UPB or more.
|# Loans||# Pools||UPB||UPB/pool||% Of Offerings|
|3 to 10||280||$458,005,546||$1,635,734||26%|
|11 to 25||77||$389,238,808||$5,055,049||7%|
|26 to 49||20||$217,507,932||$10,875,397||2%|
|50 to 100||22||$496,767,422||$22,580,337||3%|
We’ve noticed delinquent FHA and VA loans trade about 10 points back of the larger EBO pools mentioned above. On top of that, these smaller FHA and VA pools trade without reimbursement of advances. We believe it is a good idea for Purchasers to consider these smaller pools as part of building your FHA and VA assets under management.
Prime Credit Jumbo & Non-Owner Occupied (NOO) Investor Loans
There continues to be strong market for Prime Credit Jumbos with Q3 2021 volume at ~$32.26BB. This compares to ~$45.6BB for all of 2020. Historic low rates during the pandemic have brought high volume and a strong appetite for Non-Agency RMBS from investors seeking strong credit and yield. The Non-Agency RMBS market has seen an increase in issuance with new issuers registering new shelves and the short- term supply pop from the introduction, and subsequent termination, of the 7% Agency Investor Delivery Cap.
Jumbos have been trading consistently in the 2 – 3 points back of interpolated agencies range over the last several months. The big wave of NOO investor loans has been absorbed by the Wall Street Broker Dealers with more, new, issuance coming in the next few months. There continues to be a bid and appetite for NOO Investor product with high quality pools trading 50 – 70bps through comparable agency pricing.
Supply and credit quality are concerns for 2022. With refinance volume slowing, and the aforementioned GSE conforming loan limit increase to $625,000, the question will be if guidelines widen in an effort to create volume to satisfy investor demand. We have seen some increase in acceptable LTV guidelines, but FICO and credit seems to be holding firm. Higher LTV limits in a strong housing market may not be a good sign in the event home price appreciation stalls out. Prepay speeds continue to be surprisingly high. We’ve observed lower coupon paper at higher prepayment rates as borrowers seek to tap the equity in their homes with cash-out refinances.
The Non-QM sector remains strong and appears to be attracting more interest as the “low hanging fruit” in the agency conforming space has run its course. The slowdown in agency refinances, coupled with tighter margins, has originators looking at “alternative products” such as Non-QM. It was certainly the topic of conversation at the MBA National in San Diego earlier in the month.
With record issuance of new deals, and fear of a backup in rates, we’ve seen some spread widening on recent deals. AAA bonds off new issue deals trading ~25 to 30bps wider than prior months should equate to roughly a 1 to 1.5 point lower in loan pricing. Non-QM loans have hung in pretty well with pricing back about a point. Earlier this week $22MM RAMS 108819 traded in high 102’s vs a similar pool, RAMS 108652, from a month earlier trading in the high 103s
Specialty Loan Programs We Help Originators to Start
ITIN (Individual Taxpayer Identification Number) loans are originated to borrowers who do not have, and are not eligible to obtain, a valid U.S. Social Security Number, but who are required by law to file a U.S. Individual income tax return.
We’ve traded ITIN loans and they are gaining interest in the secondary market with 8% coupons and <80% LTVs trading with a 103 handle, compared to 5.75% coupon Non-QM loans trading with 105 handles and above. We have several new investor entrants to the market and are establishing purchase programs at attractive prices and terms. Please contact us if you have interest in this program.
Halloween is one of our favorite holidays and it is coming up this Sunday. We close this newsletter with a Halloween quote from Oscar Wilde – “A mask tells us more than a face.”