Whole Loan Update 03/10/20

What a week! We started off with what felt like the end of mortgage REITs, massive overhang of product, margin calls, spec pool pay ups, and MSR values vaporized. Quarter end balance sheet and liquidity constraints didn’t help either. Shelter at home for all and California closed hiking trails and
beaches!  We ended the week with REITs bouncing off their lows, muni bonds spiking, stocks rebounding and clearing of some Non QM overhang. 

Non QM
We estimate there was $3BB+ in unallocated Non QM product in the beginning of the week with most of the focus on an $800mm+ forced sale pool with draconian stips.  It traded on Thursday, and will settle
Monday (at $85 and T+3)!  An absolute floor was set.  With that dark cloud no longer hanging over the market, on Friday, hundreds of millions traded between high 80s to low 90s. We traded some and expect the bulk of the remainder to trade next week in the low 90s, or even slightly above for selected pools. 

It may be a while before we see more of this product, as we were notified by more than one Non QM originator that they had laid off as much as 90% of their employees on Friday.  Scratch & Dent  We have a couple hundred million in loans here spread across many sellers. We traded a fair number of these pools last week at various prices. Pool 106413 ($103mm) was locked in a 95 X 92 market. Prices are lower, and several buyers backed away from the market for the time being. There is opportunity to select/cherry pick attractive assets at wider yields.  Most of this sector is newly originated loans with no, or only minor, flaws. Newly originated is important
to highlight because these borrowers have just qualified for a mortgage loan, and locked the rate prior to the Fed’s most recent easing. In an attempt to ease hedging pains and control volumes, Agency originators are drastically widening margins, and not taking rate locks, until loans are closer to closing. 

Originators are currently battling massive cash demands from margin calls, increased haircuts from warehouse lenders, MSR haircuts, and servicing advances. Pipelines have ballooned beyond capacity, forcing originators to sell loans at discounts to basis. Due to current market conditions, we project there will be a significant slow down in home purchases and loan officers will focus on refi’s. One thought here is government could help by supporting or boosting refinances in an attempt to lower mortgage
payments and put more cash in the pockets of homeowners. 

From a modeling standpoint, a pool with a weighted average coupon of 4.625% has a yield north of 6%. at a purchase price of $92 and almost 7.5% at a price of $85, if loan refinanced in 8 years. If the loan refinanced in 6 years, the aforementioned prices would yield nearly 6.5% and over 8%, respectively.  Seems safer than the stock market. 

We have several buyers looking for performing FHA and VA loans due to their government guaranty. Jumbo & Orphaned Loans These are loans stuck in pipelines with no where to go, solely due to closing of several investor lock desks. One large originator had close to $100mm of jumbo prime loans for sale. Adding insult to injury, many got walloped on their hedges as well. These are all QM, full doc, jumbo, loans with excellent credit. These pools will all trade at discounts even with a high probability of refinance. Price talk in the N+500 area . 

We’ve seen some bank demand for large bulk jumbo pools.  We also have bank inquiry for seasoned loans.  2 nd  Liens  Currently have one small pool of newly originated loans. Expecting a large, seasoned, performing, bank,
HELOC portfolio to be coming to market soon. We traded Pool 106373 ($20.5mm) near 70.    

NPLs & RPLs & REOs
We expect to have a few NPL pools out this week. We have buyers of delinquent insured FHA & VA loans, and a number buyers looking for geographically specific REOs, including Baltimore Rental Properties. 

Rental Loans
We have a nearly $100mm in this sector for sale. 60 to 70% LTVs, 6% to 7+% coupons, with double digit default rates and prepay penalties.  Pricing in mid 90s. 

Bridge & Rehab Loans
We have a number of pools here. Due to relatively short duration, high coupon, and relatively low ltvs, Sellers have been passing on the 10+% yield bids we’ve been seeing.  We hope you find this helpful and thank all who shared color. Please share any insights, thoughts, and color; and please send us your pools of loans and/or specification regarding what you are looking to buy; and …  More than anything, please take care of yourselves and your loved ones. We are all in this together.