Whole Loan Update 05/05/20

Another week behind us and there is good news and bad news to report. Another rough week for the job market.  We hit 14.7% unemployment, the highest level since the Great Depression, with more job losses expected in the coming months. Consumer spending and sentiment have dropped commensurate with the increase in unemployment.  Black Knight reported 4.1 million loans in forbearance and Fannie Mae is forecasting their 1 million loans in forbearance will double to 2 million. April month-end brought a spike in forbearance requests and May’s numbers are expected to be large as well. Big question on everyone’s mind is how this will ultimately affect mortgage defaults and the housing market. There is talk of the agencies increasing guarantee fees and LLPAs, bringing back the 25 basis point adverse market fee. The Obama 10 basis point payroll fee, set to expire in 2021, is expected to be extended. In addition, there continues to be talk of FHA increasing their premiums as well as the FHFA directing the
GSEs to limit certain loans and volumes. All of the aforementioned actions have resulted in aggregators adding overlays to their guidelines. On the good news side, agency originators are experiencing record volumes and margins. Agency TBA and MBS Spec pool markets have stabilized with the government pumping in cash and liquidity through various programs. There have been discussions of RMBS being eligible for inclusion in the TALF program, which has created some optimism for the jumbo and Non-QM markets. Scratch & Dent In the last 2 weeks, 26 new S&D pools were marketed for over $200mm and we have 13 S&D pools currently in the market.  We traded 28 pools during this same period. Buyer’s pricing of loans with a borrower forbearance request has been a major issue.  The most common outcome currently is a price reduction in line with the agency adjustments and/or a look back period following the forbearance
period. Fannie and Freddie have stopped purchasing loans greater than 6 months seasoned. For Fannie, 6 months from the first payment date and Freddie 6 months from the note date (the prior seasoning limit was 12 months). We anticipate seeing more adjustments from the Agencies in the coming months.

Not much new activity in this space due to uncertain future property values and post pandemic (and forbearance) delinquency rates.  There are plenty of articles predicting a slowing housing market, as much as 20% in New York.  Fewer homes are being shown and market supply of available homes
remains low.  It seems early to be making too many predictions here as the story will unfold in the coming months.  Although it’s a small sample size, non-performing New York loans have been hit hardest – from what we see by as much as 30+%.  We marketed 6 NPL pools and a 268 REO pool, RAMS
106604, with an aggregate property value of $50mm. We received REO bids from 18 firms.  It is interesting to see how differently different institutional buyers view this sector.  We traded 4 NPL pools and a 22 REO pool. 

Non QM 
There is hope in this sector as Sprout and Angel Oak have announced they are inching back into the market with Non-QM 2.0. This new production will carry higher coupons, 700 minimum FICOs, maximum 70-75% LTVs, and updated employment, reserve documentation, and appraisals. One would think Non-QM 2.0 will put a price cap on the orphaned, seasoned, Non-QM production with their lower coupons, aged employment and appraisals, and increasing forbearance requests.  We hear of trades in
the 70s, but haven’t seen any that low. Sellers continue to hold on in hopes for 95 bids, with new funds and investors waiting for low 80’s.  Select product continues to trade in an approximate 2 point range ofYes, we’ve traded some loans at 86, and fewer at 94, but this price range hasn’t really changed since the first REIT liquidation cleared the market at 85 over a month ago.  We have traded a lot of Non-QM paper in the 88 to 92 price context.  The 1 billion pool we mentioned in our last commentary traded in low 90s. RAMS 106483, $113mm traded in the high 80s with a wide range of triggers for repricing related to forbearance and delinquency.  Originators with a more diversified platform seem content to sell whatever Non-QM product they have on their books, taking their lumps now, and moving on to enjoy the Non-QM like margins on the agency side of their business. We’ve seen some lenders use the government backed SBA programs to raise cash for payroll and payment to their warehouse lenders for extensions. As the orphaned Non-QM production continues to dwindle, we think new investors to the market waiting for low 80’s pricing may get shut out.  Two
sectors currently being overlooked are  business purpose loans and rental loans. We have marketed a couple hundred million of loans in these sectors with very limited interest. 

Some positive news on the Jumbo front. The RMBS credit stack continues to grind a little tighter, but we are still well back of pre-crisis levels. There continues to be a risk premium in the market given the uncertainty of the job and housing markets and lack of any leverage. We received an ~97.50 bid for RAMS 106603, and have seen even higher bids for higher credit quality, full doc, low LTV, loans. It seems the larger pools have been absorbed by the market with smaller pools and loans representing the majority of what remains to be sold.  On the brighter side, from a friend in Texas – Phase 2 implemented this past weekend and we are off to a
roaring start! We went out to eat both nights, golfed with friends, and got a haircut!  But the eye opener for me was the spending frenzy witnessed in a crowded Nebraska Furniture Mart.  Taking part of a quote from Mark Twain, “the rumours of retail’s death may have been greatly exaggerated”