August 25, 2020
Non-QM lenders have been dropping interest rates rapidly this month as they seek an edge in meeting the demands of aggregators and bond investors, according to four lenders.
The flow of Non-QM RMBS deals have slowed in August, reflecting the slowdown or stoppage of originations in March and April, as well as the summer slowdown, according to a syndicate source. There are some still trickling in, such as MFA Financial’s debut MFA 2020 NQM1 and Angel Oak’s aomt 2020-5 this week. The Goldman Sachs GSMBS 2020-NQM1 is its first deal of this type, but draws mostly from collapsed Versus deals.
With demand for such bonds near the highs of February, lenders are being encouraged to make changes that will help them pump up their volumes and win market shares, the lenders said.
“It’s just the market bouncing back,”one lender said. “As more securities go, pricing and products start to improve,” from the borrower’s perspective, the lender said.
Underwriting changes have been occurring all along as the re-entry of lenders favored by RMBS issuers – including Athas Capital Group, Arc Home and Excelerate Capital – in July has forced others to reset guidelines, one of the lenders said. Athas is on track to shortly restore its pre-March monthly wholesale production volumes of USD 160m, CEO Brian O’Shaughnessy said on Debtwire ABS’s podcast, ABS in Mind, on August 6.
Lately, lenders have focused on rate competition, three of the lenders said. Interest rates on Non-QM loans with standard income documentation, have recently dropped as low as 4.25%, about two percentage points lower than when lenders were restarting programs, one lender said. For loans approved based on a borrower’s bank statements, rates start around 4.5% compared with more than 7%, he said.
A week ago, LoanStream Mortgage reduced its rates by as much as 150bps, and on social media is teasing a significant expansion of its Non-QM products in September, according to social media posts and a source familiar with the matter.
One lender said the industry has been cutting rates because volumes have been disappointing relative to expectations. One reason for that is capacity issues at lenders who have to vie for the attention of brokers busy with faster-closing agency loans, two of the lenders said. Signs of fierce competition are also seen in hiring practices of Non-QM lenders. Arc Home, which re-launched its bank statement, asset utilization and DSCR loan products in July, this month announced up to USD 20,000 in signing bonuses for underwriters, according to a social media posting by the company. Fueling the bid for volume is that the demand from end investors – the bond buyers- has remained steady despite some eye-popping delinquency rates above 20%. At least early-stage delinquencies have have ebbed as forbearance plans have expired, leading investors to ease up on worries that losses could creep up capital structures, even with relatively high levels of credit enhancement.
“May and June delinquency numbers did see a pickup, but we’ve seen a pretty dramatic retracement lower, said Jason Callan, head of structured products at Columbia Threadneedle. “There are some that trickled into the 60-to-90 day delinquency (bucket) but the reality is that the job backdrop continues to progressively improve.”
Non-QM seniors last week were quoted around S+ 115bps, in from more than S+ 200bps three months ago and levels around S+ 500bps at the worst of the financial markets upheaval, according to Wells Fargo Securities. The credit curve has flattened, as reported. Even as Non-QM spreads have retraced much of their widening, “we’re still very constructive on the space,” Callan said. In particular, BBB spreads around 300bps are attractive based on the quality of underwriting and the structure, he said. One concern for Non-QM bond investors is that issuers may be more keen on calling outstanding deals, which caps price appreciation above par, he said.
by Al Yoon