These multiple market pressures have fueled rate volatility and accompanying pricing-execution pressures that have led to a difficult beginning of the year for the private-label securities (PLS) market, according to market experts, and, as a side effect, sparked a more robust market for whole-loan sales — with loans often being sold at a discount.

Additional pressure on the PLS market has been created by the increase in agency conforming loan limits for 2022, a change that has pushed more high-balance loans toward Fannie Mae and Freddie Mac and away from the private label securitization market. Similarly, the Federal Housing Finance Agency’s [FHFA’s] suspension of the cap on agency purchases of investment properties and second homes this past September has continued to create a drag on those deals flowing into the PLS market.

Atlanta-based MAXEX, a major aggregator of loans for secondary market offerings, in its March market report describes a challenging scene for the nonagency securitization market.

“Rapidly rising rates and widening spreads limited securitization volume in February for both investor [investment property] and prime jumbo issuance,” the report states. “… And, as we noted in last month’s report, the price for loans traded through the exchange has fallen again as well.”

The MAXEX report notes that residential mortgage-backed securities (RMBS) deals backed by investment properties decreased “significantly in February,” in large part due to the removal of the agency limit on purchasing those loans.

“The removal of the FHFA cap in September allowed many originators to sell these loans directly to the agencies at a better execution than the nonagency RMBS market,” the report states.

David Pelka, head of RMBS business and a principal at Minneapolis-based CarVal Investors, said his firm is active in both the residential whole loan and RMBS markets, with 30 years of experience buying, managing and trading nonperforming, sub-performing and reperforming loans. CarVal has acquired some $10 billion in whole loans over the past decade and a half, he added, and securitized $5 billion in residential mortgages across some 14 offerings.

Pelka agrees that the PLS market is under pressure.

“In terms of prime jumbo residential mortgage-backed securities, I expect volume to be challenged due to interest rates and bank portfolio bids,” Pelka said. “Credit, such as non-QM [nonprime mortgages], is under pressure from rates, spreads, and extension risk.

“While there is increased interest from originators to access the non-QM market, this short-term period is very challenging.”

Pelka also points out that the rate volatility plaguing the market predates the war in Ukraine — unleashed late last year by the emergence in the U.S. of the Omicron variant of COVID-19.

“The conflict [in Ukraine] is escalating the problem in RMBS, with continued weak execution on new deals, uncertainty around the path of interest rates and probably some concern with new-origination credit performance due to inflation,” Pelka said.

John Toohig, managing director of whole loan trading at Raymond James in Memphis, said his firm had a record month in February trading mortgages, adding that “it’s exceedingly rare that we get to see a lot of loans trade at discounts, and there was a pretty wide range of discounts, from 95 to par.”

“The loans that are coming online right now [in the PLS market] are the loans that were originated back in November and December [2021], as they’ve worked their way through the pipeline,” Toohig added. “So, the coupons back then were quite a bit lower than market coupons [now].”

He explained that part of the backlog in the securitization market is attributable to the ongoing underwriter shortage in the due-diligence review sector, resulting in many loans “waiting to get diligence and also underwater.”

“That’s not a good combination,” Toohig added.

Another industry executive, who asked not to be named, said some clients have commented on the underwriter shortage, but “it has not significantly slowed the deal steamrollers I’m seeing.”

The executive added, however, that “some folks are taking back more bonds than they expected to, and pricing on some deals has not met expectations.”

“I worked one deal last month [February] that basically broke even,” the executive added.

Echoing the market woes, Justin Grant, director of investor services at Mortgage Capital Trading in San Diego, said at the start of this year, high-balance (HB) loan production was off by 25%.

“I believe it is mainly due to the new conforming loan-limit increases, [which are] allowing some of that market to now fall into a regular-balance [agency] product,” he explained. “That being said, rates from the nonagency lenders on HB loans were already right there with the agencies, so the new price adjustments from the agencies will only help to make a nonagency product more attractive for borrowers.”

That’s the larger takeaway here: the resiliency of the PLS market and its ability to ride out rough patches in the rate environment. Even with the challenges facing it, PLS securitization volume is far ahead of last year’s mark — which was a record year for the re-emerging PLS market. 

According to RMBS deals tracked by Kroll Bond Rating Agency, a total of 47 prime and nonprime private-label securitization deals valued in total at $24.6 billion closed through March 25 of this year. That’s more than double the volume over the same period in 2021, the KBRA data shows, when 30 deals closed with a total value of $11.5 billion. 

The agency loan-level pricing bumps taking effect April 1 — and already appearing on originators’ rate sheets — are expected to provide a boost to the PLS market at the very time that newer mortgages at more competitive market rates are finally starting to replace the lower-rate collateral that has dominated the first two and a half months of the PLS securitization market. 

“I think we’re probably in the later innings of this,” said one expert on the securitization market who also asked not to be named. “We are starting to see securitizations with more of a current coupon. 

“I think that will help reset the market because it has largely been digesting paper backed by the lower-coupon stuff. If we can get to a spot where rates are a bit more range bound [less volatile], then I think we’re optimistic that PLS will pick up where it left off last year.”

The expert added that there is demand out there: “People have money to put to work, and you have investors who want the product.”

The Fed’s plan to increase its key interest rate multiple times in the months ahead also will fuel further upward pressure on mortgage rates. That will likely compound volume challenges in the origination market in the year ahead, mainly by further decreasing demand for refinancing. Still, the fact that there is a road map for rates and stemming inflation now drawn out by the Fed also helps to foster more certainty in the market. 

“Anytime they [the Fed] can just map it out to the market, it can price it in, but anytime they just talk qualitatively about something, the market is going to run the worst outcome,” the securitization-market expert stressed.

Toohig of Raymond James agrees that the challenging execution environment the PLS market has faced so far this year is likely not a permanent feature, adding that we “will eventually revert back to a normal market as new production comes on and gets through.” 

The fact that the PLS market is already well ahead of where it was last year at the same time, despite the rough launch into 2022, should bode well for securitization volume for the full year — absent another major market disruption like Russia’s invasion of Ukraine or the sudden emergence of a new, troublesome COVID variant.

“The market has to work through that old inventory first, and that’s kind of what’s been choking the system,” Toohig added. “I think the real question for those people who are carrying loans during this period is, ‘Did they hedge?’

“Those that hedged are probably in a better spot than those that were carrying loans unhedged. Those are the ones that probably get hurt.”

Knock did not say exactly how many employees will be laid off. But a source close to the company said that Knock had approximately 250 employees prior to the pink slips workers learned of this week.  

The layoffs are throughout various company divisions, Knock said.

Inman News first reported on the layoffs, which were initially referenced in a colorful and revealing 1,700-word blog post complete with photos, tables, charts, and graphs on Black’s personal website. The founder of the eight-year-old company and Trulia co-founder devotes an intro and eight sections to other subjects before a penultimate section titled, “People first.”

“While substantial, the capital we raised is much less than what we set out to raise in our IPO, requiring us to rightsize the business, including the difficult decision to part ways with many of our beloved Knockstars,” Black writes. “This is why today’s announcement weighs heavily on us and me, in particular.”

The capital raise refers to the company announcing it has secured $70 million in equity and $150 million in new debt to “power its payment platform that helps customers finance their dream homes,” according to a news release.

Knock said that the Foundry Group, a Boulder, Colorado-based venture capital firm that specializes in early-stage technology companies, led the founding round. Other participants included the investment arm of the National Association of Realtors, and Mauricio Umansky, a Beverly Hills real estate broker who is CEO of The Agency.

Black’s blog post says that in March 2021 Knock hired Goldman Sachs to take the company public through a special purpose acquisition company, or SPAC.

“We were on top of the world and our mission was being fulfilled, or so we thought,” the CEO writes, adding that Knock had identified a “reputable” SPAC to shepherd it to public company status.

But, Black said, Knock was felled by dampening Wall Street enthusiasm for investing in SPACs, a method that has brought Opendoor, Finance of America, Porch, United Wholesale Mortgage and Offerpad, among other companies, public in the last two years.

Then, “the Delta variant started raging” sending “the stock market into a tailspin.”

Black said Knock rebounded a bit in October. But Zillow’s November announcement that it was winding down iBuying, “Knocked us and the entire real estate tech sector on our collective asses.”

Yet another setback, Black writes, was the Omicron variant of COVID-19. It was in December that Knock floated a pay cut for its loan officers, before rolling back the plan. Around this time, Knock was exploring being acquired.

“It was love at first sight, but like many love stories, timing is everything,” Black wrote about the possible acquisition. “Unfortunately, no agreement could be reached in part because the would-be acquirer’s stock, and therefore buying power, had been cut nearly in half from recent highs like most other tech stocks.”

Black then writes about the death of his father. His next section, titled “World War III?”, described the Russian invasion of Ukraine as “the straw that broke the camel’s back” for investment in a possible public company.

Layoffs section aside, the CEO concludes the post hopefully, stating that the investments will propel Knock on the path to profitability.

“For the first time in decades there is a ton of momentum behind fixing the very broken home buying process and we at Knock have been and will continue to be at the forefront of that revolution,” Black concluded. “We are just getting started.  Onward and upward!”

GK: We’ve now heard from the CFPB, the Department of Housing and Urban Development as well as the FHFA on special purpose credit programs. What questions remain before there is widespread adoption among lenders? Who should answer those questions?

GA: Lenders are going to be concerned with two primary things. One is reps and warrants: Do these loans create more risks in terms of repurchase risk in itself? I think the GSEs could do a lot by being very explicit, in terms of where those bright lines are, where those lenders are at risk of repurchase scenarios, and the lenders have said all they need is definition.

Second is profitability and profit margins. And so I think one of the good things CFPB did is really get a handle on compensation for mortgages for loan originators. I think all that is good. But again, one of the unintended consequences of the compensation caps [is that it is sometimes] unrealistic to originate loans that have enough profit in them to substantiate that. So you’ve got to pay loan officers the same on any loans they originate. If there are loans that are just more expensive to manufacture, or the margins just aren’t there, the lenders are going to say, ‘We want to do fewer of those loans.’

GK: One survey showed that Latinos are more likely than non-Hispanic whites to own an investment property. How does that inform your thinking on the new fees from FHFA on second-home loans?

GA: Sometimes, what we call mom and pop investors get lumped in with institutional investors. Therefore, the perception is that we don’t need to help those guys. They’re the ones with all the capital, they don’t need the GSEs, or any government support to help facilitate that further. I think that’s incorrect. There’s a big opportunity to create wealth, especially amongst diverse communities, and communities of color, by investing in small one-to-four unit real estate properties as investments. And to the extent that Fannie Mae and Freddie Mac can be helpful in that area, I think they should be, and they shouldn’t be discouraged from investing in those types of products, the way you would be led to believe based on some of these policies.”

GK: Some give FHA Principal Deputy Assistant Secretary Lopa Kolluri credit for the decision to keep mortgage insurance premiums at their current levels. Others argue it’s past time to lower the premiums, given the stellar performance of the Mutual Mortgage Insurance fund. Where do you fall on that issue?

The levers available to [FHA] are limited without a confirmed FHA Commissioner. And I do think that people obviously are going to be much more measured in any of the moves they make, without that position covered and fully confirmed by the Senate.

I haven’t been one of the advocates that say, you know, hey, we’ve got to, ratchet [the mortgage insurance premiums] down as soon as we get on the other side of the minimum reserve requirement. I don’t think there’s anything wrong with building up a little bit of a cushion there to preserve the viability of the FHA fund for the long run. I’m a big supporter of that. Eventually we’re going to have to really look closely at whether or not we can reduce those fees and therefore improve affordability. But I’m not one who thinks that we have to do that instantaneously.

GK: What do you think Julia Gordon’s top priorities should be if/when she does get confirmed as FHA commissioner?

GA: I know Julia really well, and I think she was an excellent choice for that position. She brings a wealth of knowledge and experience to that position as somebody who was more of a practitioner than mortgage banker. But she’s been basically in the industry and understands it more than a lot of other political appointees have.

I think she has to look very closely at FHA’s commitment to diverse markets, particularly the Latino market. I used to kid that FHA used to stand for ‘For Hispanic Applicants,’ because it was such a viable product for Latino homebuyers in particular. But we’ve seen those numbers decrease over the last few years in terms of the proportion of the market and market share that they have. There are technology issues over there that are limiting access to that program, and to the extent she can bring some solutions around that, that would be great.

It was really great to see that DACA recipients were formally approved for FHA programs. There’s still a lot of lenders who are reluctant to go after those products more aggressively. I think Julia could be helpful in creating comfort around that, and creating very clear bright lines as to where the red letters exposure might be in a loan like that.

GK: Some have said that under the leadership of Rohit Chopra, the CFPB is returning to a policy of “regulation by enforcement,” and have likened him to former CFPB Director Richard Cordray. What do you think of the renewed focus on enforcement?

GA: A Democratic administration is going to have the perception that it is much more focused on enforcement. But at the agency, for the most part, I look at outcomes and not necessarily tactics. And I think the outcome of the agency has been very positive for the industry. In the long run, we have more competition. The competition, the playing field in the mortgage banking space, in particular, is much more level than it was prior to the creation of the CFPB. I think all of that has played out well, for consumers and for mortgage bankers, frankly.