2022 – Non-QM players still make PLS deals despite price volatility

“Bond prices are worse this morning as Treasury yields rose in early trade,” Trading in real estate property rights (MCT) reported in the morning market closing report on June 13. The 10-year US Treasury yield currently stands at 3.244%. Friday’s inflation data has reignited fears that central banks will need to tighten monetary policy aggressively.”

The rapidly increasing interest rate environment has made profit and loss sharing deals more difficult for lenders such as Angel Oak and others. It also causes a burnout in another liquidity channel for lenders – the entire loan trading market. This leaves mortgage originators between a rock and a hard place when it comes to keeping the liquidity channels running smoothly.

“no doubt [loans] “It’s being sold at a discount,” said John Twhigg, managing director of Whole Loan Trading.Raymond Jamesin Memphis.

Part of the problem with rising mortgage rates is that mortgage prepayment speeds (usually via refinancing) for lower-rate loans drop rapidly, leading to credit supply problems in the market, along with diminishing demand for mortgages—with much of this made up Downward pressure from the current Federal Reserve monetary policy.

The Fed has destroyed demand by raising interest rates, and there is an argument that it has also destroyed supply [for the PLS and loan-trading markets] Robbie Cressman, Head of Content at MCT, explains, In a recent mArcheet analysis report. At current lending rates, 99% of American homeowners have no incentive to refinance their mortgages. … a year ago about 66% of the universe was incentivized to refinance.”

KBRA expects 2022 to remain a record year for PLS issuance in the wake of the global financial crisis, with the total expected securitization volume for major and non-quality offerings (including non-quality management related) and credit risk transfers totaling $131 billion. However, much of this volume is preloaded.

“KBRA expects Q2 2022 to close at around $38 billion and Q3 to $29 billion due to higher interest rates and an unfavorable diffusion environment for issuers in the credit, non-primary and credit risk transfer sectors — the dollar will decline,” KBRA explains in a recent outlook report. “…So far, emissions are spreading [have] It expanded rapidly for all sectors as supply and demand volatility reached near all-time highs.”

However, even in this volatile market, there is a demand for mortgages, albeit at a low level. And as the numbers from the KBRA show, about half of that demand — for loans that have been securitized in the PLS market so far this year — is now processed by non-QM lenders.

It’s important to note that non-QM rates are typically about 1.5 percentage points higher than agency loan rates, according to executive vice president of production Tom Hutchins.Angel Oak Mortgage SolutionsPart of Angel Oak Cos that is not under the control of Quality Management.

“So you have agency loans where performance is guaranteed by the government but with our loans [non-QM]“There are no collateral, so private capital is looking for a spread to finance and securitize these loans,” Hutchins explained in an interview. “If you look at where agency rates are, it’s a very safe bet that non-QM rates are 150 basis points higher.”

However, with interest rates now rising almost week after week, securitization of low-interest loans obtained early in the cycle at desirable margins is becoming more difficult for most issuers as the targeted jobs have shifted fundamentally.

“No one really knows where that is [rate volatility] It will stop because there are so many factors that make up the rates,” Hutchins said. “So it’s hard to predict origin levels, but I still think we’re in a really good place. [in non-QM lending].

Interest in securitization and investments in this area is still very high. The hiccups we’ve seen are not a credit problem. Nobody worries about the quality of the non-QM loans – just because the interest rate environment has been so crazy.”

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