The following are excerpts from the May edition of Mortgage Technology magazine. To read the full story and much more,
When Redwood Trust began structuring a private-label mortgage-backed security in the spring of 2010, the mortgage real estate investment trust was creating the first private-label MBS deal in the 18 months following the collapse of the housing finance industry.
A year later, and only one other private-label MBS has come to market—another jumbo mortgage MBS, again issued by Redwood.
But the lack of new securitizations does not mean that private and institutional investors are no longer participating in the mortgage secondary. While volume is still slow, these investors are coming back.
Like the cowboys of the Old West, the investors exploring the market are charting new territory and their activity is not without risk. The skilled cattleman relies on his lariat and trusty steed. The private market investors have technology, data and analytics to lasso the profit potential from this new frontier.
An emerging trend in the private secondary market is a new interest in whole loan trading. The buying and selling of mortgages not packaged in MBS deals is nothing new and is many times referred to as the hard-money market.
The hard-money market has evolved with the times, explained Brian O’Shaughnessy, the CEO of Athas Capital Group and president of Rama Capital Partners, both based in Calabasas, Calif. O’Shaughnessy’s career in hard-money lending spans 25 years at a variety of firms.
“Hard-money lenders in 2007 typically funded deals with sub-500 FICO scores, the deals Wall Street wouldn’t take,” O’Shaughnessy explained. “Our average LTV was 50%. Our average loan was a foreclosure bailout; the worst of the worst and they paid a higher interest rate and got a second chance at a fresh start.”
“Now days it’s much different. Banks aren’t lending, they’re turning down everybody,” O’Shaughnessy continued, noting that in 2007, the average Fair Isaac credit score of loans in his servicing portfolio was 492. Now, that score is up to 698.
“We are funding bank fallout. There’s a huge chasm between the bank’s program and ours, but there’s nothing in between because there’s no secondary market,” he said.
O’Shaughnessy believes as more institutional types begin exploring alternative investments like hard-money deals, they’ll like what they see. But it’ll take changing some perceptions about the ways private players can participate in mortgage investing.
“Institutional investors haven’t figured it out yet; they don’t get our space. Institutional investors are used to getting a loan at 80% to 90% LTV with a perfect credit score and great income and accepting a yield of 3% or 4% on their bond,” he said.
“That’s what they feel comfortable with when really, those are tragic loans and the most unsafe loans on the planet.”
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