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June 16, 2017  

NPL Offerings to Dwindle as RPLs Take Off

A long-awaited transition appears to be taking place in the market for bonds backed by dented mortgages.

Offerings backed by nonperforming loans are forecast to dry up in the next year or two as banks and housing agencies deplete their portfolios of such accounts. But the opposite is taking place for reperforming-loan deals.

Indeed, sources are describing 2017 as an inflection point at which nonperforming-mortgage securitizations will become less common than offerings underpinned by reperformers. With that shift, issuers of nonperforming-loan bonds including Bayview Financial and Lone Star Funds are refocusing on reperforming-loan deals — where they find themselves accompanied by MFA Financial and other newcomers.

Some $6.5 billion of nonperforming-mortgage bonds have come to market so far this year, with sources projecting a yearend tally of $11 billion to $12 billion. That would mark the sector’s first recorded contraction, following totals of $9.5 billion in 2016, $10.9 billion in 2015, $9.4 billion in 2014 and $3.7 billion in 2013, according to Wells Fargo.

Issuance of reperforming-mortgage paper stands at $7.6 billion this year, with a full-year forecast of $15 billion to $16 billion. That would be up from $11.1 billion in 2016, but down from $17.1 billion in 2015. The asset class also saw $13.9 billion of deals in 2014 and $8.4 billion in 2013.

Issuers of nonperforming-mortgage securitizations typically have bought their deals’ underlying receivables from Fannie Mae, Freddie Mac, HUD and banks including Citigroup, J.P. Morgan and Wells, with a focus on accounts written before the market collapse.

They always have known the supply of such loans was finite. But with the crash 10 years in the past, it at last is becoming clear when and how quickly the sellers’ nonperfoming-loan inventories will run dry. “It’s the NPL bond market’s swan song,” one issuer said.

By contrast, the expectation is that portfolios of reperforming mortgages will continue to become available as banks and housing agencies rehabilitate and sell newer accounts that have fallen behind, as opposed to unrecoverable accounts from before the crisis.

Consider Fannie and Freddie, which to date have been the most active sellers of nonperforming mortgages but recently have been pulling back on those efforts. Fannie’s inventory of nonperforming accounts stood at $36 billion on March 31, down from $60 billion at yearend 2014. Freddie’s holdings declined to $13 billion from $29 billion over the same period.

The reductions reflect efforts by both agencies to meet a yearend 2018 deadline to bring their total holdings of mortgage assets below $250 million apiece — a threshold that, once met, likely would be accompanied by a near-absence of nonperforming-mortgage sales. Fannie was $44 billion over the cap on March 31, with Freddie $66 billion in excess.

Meanwhile, Fannie’s March 31 holdings of reperforming mortgages totaled $110 billion. Freddie reported a $58 billion tally. While both agencies started selling those accounts last year, the holdings have been buoyed as they replenish the pools with newer loans.

In some cases, the loans represent former securitization collateral that Fannie and Freddie pulled from their own deals’ asset portfolios, and then modified, when they fell more than 120 days past due. Both agencies also have been securitizing some reperforming mortgages on their own.

HUD, once a major nonperforming-mortgage seller, already has reduced its annual offerings steeply. After selling $10 billion of such accounts in 2013, it cut the total to $7.6 billion in 2014 and then $2.2 billion in both 2015 and 2016. This year, a $1.5 billion figure is seen as likely.

HUD hasn’t been a major seller of reperforming mortgages. However, sources have pointed to Ginnie Mae as a likely source of such loans.

As for banks, major institutions including Citi, J.P. Morgan and Wells combined to sell about $8 billion of nonperforming mortgages in 2016, according to a June 9 report from Bank of America. That was down from a high of roughly $12 billion in 2013. The figure is expected to dwindle to less than $2 billion in 2019.

BofA researcher Chris Flanagan wrote in the report that the decline has corresponded with reductions in banks’ nonperforming-mortgage holdings, from a high of $133 billion in 2010 to a projected $20 billion at yearend 2018.

For bond buyers, the shift toward reperforming-mortgage securitizations will bring changes beyond the deals’ asset types. Nonperforming-loan securities typically have been unrated, with short terms and higher yields. They mostly are backed by proceeds from foreclosure sales. Reperforming-loan paper almost always is rated, with longer terms and lower yields. Those notes are backed by borrowers’ monthly payments.

CORRECTION (6/23/17): This article has been revised. The original version contained incorrect issuance totals for nonperforming-mortgage securities. The asset class saw $9.5 billion of deals completed in 2016 and $10.9 billion in 2015, according to Wells Fargo.