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December 01, 2017  

Reperforming-Loan Buyers Eye "Dirty' Deals

Issuers of bonds backed by reperforming mortgages are planning deals backed by riskier collateral.

Sources are pointing to Bayview Financial, Chimera Investment and FirstKey Financial as part of a growing group of candidates to offer the securities. Among the characteristics of the asset pools they are envisioning: higher delinquencies; shorter “clean” payment histories; lower borrower credit scores; and higher loan-to-value ratios.

The “dirtier” transactions are expected to start hitting the market in early 2018, and at least initially would take place separately from the issuers’ other deals. By yearend, they could represent a majority of reperforming-mortgage securitizations.

The reason: The issuers have been buying their collateral mainly from banks, Fannie Mae and Freddie Mac — whose reperforming-mortgage inventories are beginning to run low on the stronger accounts the loan buyers have favored to date. “This is the evolution of RPL bonds,” one banker said.

Some 10-15% of the loans in the upcoming deals’ asset pools would be past due on day one. That would mark a major shift from today’s offerings, in which all of the receivables are current. Among accounts that are up-to-date, the typical period in which payments have been flowing with regularity would drop to 6-12 months from 24-36 months.

Average credit scores could be 630 or lower, down from more than 700. Loan-to-value ratios might average 90%, up from 75% or less.

The pools additionally would include more modified loans, with more than half of them carrying interest rates that step up over time — and thus presenting a higher risk of so-called payment shock for borrowers. There also would be an increase in the number of accounts that received principal reductions, some under the Federal Housing Finance Agency’s Home Affordable Mortgage Program.

Securitizing such accounts would bring an increase in funding costs. Rating agencies are expected to demand more subordination and over-collateralization before granting top grades to the bonds. And investors are expected to insist on higher yields — say, 3-4% for triple-A-rated notes with three-year lives, versus a little more than 2.5% for comparable paper sold today.

Demand is expected to be strong, however, and bankers contend that the costs will be offset by higher returns on the underlying reperformers.

Counting only rated deals, Bayview has issued $4.5 billion of bonds backed by reperforming or nonperforming mortgages via 20 offerings since 2010, according to Asset-Backed Alert’s ABS Database. Chimera was behind one transaction, selling $264.2 million of bonds this April. FirstKey has completed 17 deals totaling $16.7 billion in the asset class since 2015.