The revival of non-QM securitizations is helping to start a chain reaction of whole loan sales and the return of more originators.
Recent deals from Angel Oak, Invictus Capital Partners, and Starwood Property Trust showed that investors are backing off the worst-case scenarios for the non-agency loans as the nation struggles with the COVID-19 pandemic, said two investors. Yield spread premiums are still more than double what they were in February, but the attraction of low benchmark rates and term funding has likely pushed the issuers off the fence, they said.
The improved financing for loans is helping Athas Capital Group to clear the inventory slated for investors and RMBS when the markets seized in March, said Brian O’Shaughnessy, co-CEO.
“We are seeing a tremendous uptick in interest in our pre-COVID non-prime loans, and we feel it’s for two reasons,” O’Shaughnessy said. Those are that the securitization market is up and running, and the strong payment history on Athas loans, even during this crisis, he said.
The new deals which priced with senior spreads between S+ 190bps and S+ 220bps went well but might need to do even better, according to broker-dealer RAMS Mortgage Capital. The implied whole loan execution of the deals was less than 95, which is the upper end of the market, and for the highest quality loans only, RAMS said in a note to clients yesterday.
RAMS still sees most of the pricing in the mid-to-high 80s, it said. It has noted that the originators were reticent to let loans go at those levels, and its sentiment was echoed on Thursday by Daniel Goodwin, founder of Cleveland Park Advisors, on an IMN webcast contemplating the future of non-QM.
It comes down to whether “originators sitting on loans and not willing to entertain 80 are going to capitulate or is some liquidity going to return to the market so that they don’t have to capitulate,” Goodwin said.
Investors are buying Athas’ loans because they’ve had few forbearances and delinquencies since the pandemic worsened in March, O’Shaughnessy said. Once the full USD 160m in loans it held are cleared, Athas will roll out new non-QM products, he said.
Reliant Bank, which launched a non-QM platform a year ago, will resume its lending in the space next month, Rudy Orman, a director of correspondent sales and product development at the bank, said during the IMN webinar. Reliant’s prime jumbo product will be out next week, he said.
The possibility of securitization exits is a draw for investors. Still, it may not all be about the profitability of the deals, which is questionable given spread levels, one analyst said.
Some of the securitizations maybe investors preferring the long term financing they can get for the loans over the repo lenders, which in March and April put aggregators in precarious positions with margin calls, analysts at Keefe, Bruyette & Woods wrote in a report today.
Ravenous non-QM loan buyer MFA Financial might finally bring its debut deal to market to ease the repo pressure on its USD 7bn–USD 7.5bn loan portfolio, the KBW analysts wrote. Forbearances granted to MFA by its lending counterparties are set to expire in early June, adding pressure to the REIT, the analysts wrote.
DBRS Morningstar last week withdrew its provisional ratings on MFA’s planned MFA 2020-NQM1 deal because it didn’t see the issue closing in the immediate future, however.
Despite the lingering stress in funding, originators are moving forward. LoanStream Mortgage, Angel Oak, and Sprout Mortgage have been rolling out new non-QM products, albeit at more conservative terms than they were a few months ago. Angel Oak’s lending guidelines will probably return to something close to those it had before the pandemic as markets recover because the pause in lending was never “credit-driven,” but “virus-driven,” Tom Hutchens, Angel Oak’s EVP of production said on the IMN webinar.
Jon Daurio, CEO of Profitco, on the IMN webinar, said liquidity would find the non-QM market because the number of potential borrowers is growing.
“I think that pond will become full of fish, and that’s what will attract capital,” Daurio said.