Don’t Wait to Sell S&D:
Should you wait to sell your Scratch and Dent Mortgage Loans in this market? Mortgage providers can have different strategies on how to liquidate scratch and dent loans. Some mortgage companies try to hold them until they get a good quantity and market a pool of loans in order to receive better pricing due to the volume size. This strategy can work if the mortgage provider has the capacity to sit on that type of volume. However, with the current market conditions, it might be wise to shelf that strategy and liquidate one loan at a time as they are received. There are three factors in play within the scratch and dent industry that would support quick liquidation.
Volatility:
The first is market volatility. The economy is suffering from inflation that we have not seen in decades. This is causing a drastic increase in mortgage rates. The loans that were closed three, six and twelve months ago have much lower coupons that newly originated loans. Scratch and Dent buyers are going to discount those lower rates heavily as they would much rather buy newly originated loans at higher coupons. To make matters worse, some buyers are now passing on loans with lower coupons all together, so it is not just a lower price but in some cases no bid at all.
Premium Buyers:
Secondly, many premium buyers have seasoning requirements of six months. So, if a mortgage provider thinks their company can mitigate scratch and dent losses by pooling loans, they very well might lose their volume lift by missing out on a premium bid as pooling loans can sometimes take six months or longer.
Economics:
Last of all, a mortgage company can only receive leverage from pooling loans if the buyer can buy all the loans in the pool. With the recent economical downturn, almost all buyers have restricted their buying appetite. Right House Capital is not receiving pool bids due to the current market conditions. Buyers are being more conservative and only bidding a portion compared to what they used to buy. So, this buyer appetite change basically eliminates the value add for pooling scratch and dent loans.
Summary:
Therefore, don’t wait to sell your Scratch and Dent Mortgage Loans in this market.. RHC is recommending quick liquidation one loan at a time with the current state of the scratch and dent market. The benefit of pooling loans will come back but it might take some time.
If you need pricing on any scratch and dent loan, agency fall-out loan, sub-performing loan, non-performing loan, Non-QM loan or jumbo loan, please contact Andrew Zale at andrewzale@righthousecapital.com or 502-365-5632.
