Whole Loan Update 04/20/20

In this week’s update, we address some of the questions asked over the past few weeks.  Here we go……..

I see so many pools from RAMS, does any of it trade?
Over the last 45 days, we’ve marketed 262 pools with an aggregate UPB of approximately $4.7BB. We have traded ~23% of these pools.  We estimate that ~43% of these pools for ~71% of the UPB did not trade.  Sellers electing not to sell are hoping for brighter days and better pricing in the near future.  This is most prevalent in the Non-QM space where many sellers have
held out for pricing in the mid 90s. For reasons discussed below, we don’t see prices climbing back to these levels. Some sellers are seeking hospital lines, typically with 65% advance rates (35% equity), as they wait for markets to improve.

Have these traded pools actually been closing?
A number of trades that were put on prior to the crisis have failed; however, no trades put on since the start of the pandemic have failed.
What are you anticipating for near term supply and where is pricing going?
We start this week with another forced sale of $500mm and believe we will see more pressure from warehouse lenders and other financing lenders. With 22 million American workers currently unemployed, the number of loans in forbearance (currently nearly 3 million borrower requests reported), anticipated delinquencies coupled with the potential of billions of dollars in loans being rejected by Fannie and Freddie (both from forbearance requests and loans no longer eligible due to the tightening of underwriting guides), we expect more downward pressure on pricing. The yield requirements for institutional investors are much higher than those of the government sponsored agencies. A flood of additional supply of troubled assets doesn’t bode well for the hope of pricing to improve in the near term.

What’s going to happen to the high LTV and investment property loans if buyers are cherry picking the low LTV, high FICO, owner occupied, loans?
Loans with these attributes are going to trade lower than higher quality loans in the Non-QM and Scratch & Dent markets.  Many originators, struggling with their cash constraints, are accepting bids on the sale of higher quality loans and passing on lower bids on higher risk loans.  We expect warehouse lenders will soon press these originators to liquidate these loans from their lines as they continue to age or curtail them. At some point in the near future the grid lock for this product will break.

When is the non-agency securitization market coming back? For the Non-Agency MBS market to function again, many things need to happen, including:  absorption of excess supply, tightening of spreads, some form of leverage to return to the market, and rating agencies to adjust their views given the new world of pandemic risk.

AAA spreads on non-QM product, when prices were $106 or higher, were in the +75/80 area.  Currently those  spreads are in the +300 area. AA spreads were low +100’s and are now hovering around +400. We see the entire stack yielding somewhere in the mid 7’s%. The average GWAC on all Non QM
product we’ve seen is 5.714%. Clearly, we have a long way to go.   We all know the Rating Agencies don’t move quickly and wouldn’t expect them to
finalize their views and levels till long after we are all back to work and have experienced the fallout from the COVID period on mortgages and the broader economy. What is happening when borrowers request forbearance? The numbers are staggering, Wells said they have received more than 1 million requests for forbearance and Mr. Cooper announced 82,000 requests. It will take some time for this to play out. We’ve seen one letter from a lender where a borrower qualified for forbearance and is allowed to skip May, June and July’s payments with no penalty nor notification to the credit bureaus. But, all deferred principal and interest payments are due in August. That results in four mortgage payments due at once! How can any borrower, let alone one that has been impacted, make that payment? Something will need to be done or we will see substantial delinquencies, modifications, foreclosures, and lower home values.  FNMA and FHLMC have not changed their decision and are not buying loans where the borrower has been granted a forbearance. This means aggregation firms won’t be buying these loans, and may even be requesting repurchase by the originator. Current estimates are  5 to 10% of borrowers have requested forbearance.  With monthly production at $200BB, this equates to another $10 to $20BB in loans potentially hitting an already saturated market.  We’d like to know what percent of forbearance request and percent of forbearance approval you are seeing.  Are you handling agency and non-agency loans differently?  We appreciate you sharing with us any information you are experiencing on this critical element of the market.  $651 Billion  https://www.housingwire.com/articles/nearly-3-million-borrowers-are-already-in- forbearance/ Is there a market for loans where a borrower has been granted a forbearance? We have buyers for these loans. The market is still evolving regarding price and contract language as it pertains to loans in forbearance and EPD. We expect these to trade at discounted prices in the context of Scratch and Dent, bad pays, or TDRs (troubled debt restructuring). Stay safe, stay healthy, and let us know what we can do to help.