Whole Loan Update 04/06/20

Happy Monday all, in case you forgot what day it is………. We work where we sleep, and we eat where we work. Every day is bring your kid to work day and everyday has become Wednesday. High stress and
long hours.  Over the last two weeks we have seen the de-levering of REITS, collapse of the agency specs and non- agency MBS markets. Non-QM got clobbered as did servicing values. Jumbo market investors are fleeing
and massive margin calls have been exercised on TBAs and MSR lines. 
Servicing has its own unique issues – funding of servicing advances and how to communicate with the thousands of borrowers requesting forbearance when the entire servicing team is working from home.
The bulk of servicing involves collection and processing of payments. How do you hire and train the amount of additional staff needed to handle this increase in borrower forbearance requests, when you’re required to stay home? 

Some GNMA MSRs are currently priced at negative values (you have to pay someone to take it). Fannie is trying to slow down volume by reducing price at its cash window.  Agency high balance product pricing is over 3 points back. 

Sell now or wait for higher prices?
We don’t see things getting better any time soon and do not believe sellers should rely on the hope of higher prices in the near term.  We will lose more jobs and more loans will go delinquent. A loan with a
missed payment, regardless of the reason, has never priced as high as a loan that has never been late. With conduits halting locks, and Fannie and Freddie declining loans where borrowers have requested forbearance, there could be much more supply hitting the market.  Buy now or wait for lower prices? If you think 100% of mortgages are going to become seriously delinquent, then you should wait. I made my mortgage payment, you’re probably making yours, and we can’t imagine serious delinquencies going
over 10%, which is almost double the percentage of Fannie Mae seriously delinquent loans at their peak following the last financial crisis (February 2010 – 5.59%).  We expect most of this sector will be current with interest rates well in the money and ripe for refinance.  Modeling these current loans with a reasonable prepayment speed at a purchase price of 90 yields ~7.50% (N+705), and at 85 yields ~9.45% (N+900).  If you’re reading this, you’re somewhere along the mortgage management chain. If you’re a
buyer, why wait? The current loans look a lot better than the next wave of longer duration mortgage loans with much lower coupons. Many of these loans look much more appealing than the stock market. 

 The Non-QM market is bifurcated – pools of $75 – 100mm+ and everything else. At last writing, we called the $800mm+, 3 day settle, $85 print, as the floor, and it felt like we were headed to mid-90s. Now we view the mid to high 80s as the market for all but $75 -$100mm+ pools, where we have settled into the low 90s. Many sellers have been holding out for mid- 90s or higher due to their basis and financing haircuts. We see the near term not as a revitalization of the Non-QM securitization market, but rather the forced liquidation by warehouse banks of Non-QM product held by smaller
originators. Although we’ve seen some tightening of credit spreads, mortgages continue to battle the competition of more attractive yields available in other asset classes. We’ve traded some of these larger
pools, as well as many small pools and single loans to banks and funds seeking outsized returns with low

LTVs, in targeted geographic areas.  
S&D and Orphaned Loans We had 60 S&D pools with 1,563 loans for $765mm available for bid as of last Thursday with more on
the way. We saw bid prices ranging from 62% to 98%. We traded numerous high quality loans in the 90s, but the broader market, with a deeper pool of buyers, traded in the mid to low 80s.  This sector includes above market rates, underwritten to agency standards with recent full doc files and current appraisals.  Moreover, this sector is the most likely area to receive government support and qualify for agency refinance in the future. Jumbo loans are the orphans of this market. The large loan sizes, with the uncertainty of the housing market and near term HPI, have these loans mostly ignored and modeled with high severity rates. Even one of the largest U.S. banks, and arguably the largest buyer in the
market, has suspended jumbo lending. Low LTVs have some, but limited,

Fix & Flip and Bridge
A handful of pools were offered with pricing in the high 70s to high 80s. Pool 106444 traded in the mid- 80s.  NPLs and RPLs We traded a few, one-off, currently delinquent, loans. This sector seems to be waiting for what’s going to happen next.  Rentals We have a handful of pools on the market. No color to report. Please share your thoughts.

Many of us are suffering from some form of cabin fever and anxiety as we listen to the news and the never ending chain of headlines. Challenging and difficult times for everyone. Keep the faith and be kindto your neighbor.