“Bond pricing is worse this morning as Treasury yields moved higher in early trading,” Mortgage Capital Trading (MCT) reported in its June 13 morning market wrap-up report. “The U.S. 10 -year Treasury yield is currently at 3.244%. Friday’s inflation data reignited fears that central banks will have to use aggressive monetary policy tightening.”

The fast-rising rate environment has made it far more difficult for lenders like Angel Oak and others to execute PLS deals. It also is causing heartburn in another liquidity channel for lenders — the whole-loan trading market. That leaves mortgage originators between a rock and hard place when it comes to keeping liquidity channels flowing smoothly.

“There’s no question [loans] are being sold at discounts,” said John Toohig, managing director of whole loan trading at Raymond James in Memphis.

Part of the problem with the spike in mortgage rates is that mortgage prepayment speeds (normally via refinancing] for lower-rate loans decrease rapidly, creating loan-supply issues in the market along with shrinking demand for mortgages — with much of that downward pressure being sparked by current Federal Reserve monetary policy.

“The Fed has created demand destruction by increasing rates, and there is an argument it has also created supply destruction [for the PLS and loan-trading markets] because there are millions of people locked into low rates,” explains Robbie Chrisman, head of content at MCT, in a recent market analysis report. “At current lending rates, 99% of American homeowners have no incentive to refinance their mortgages. … One year ago, about 66% of the universe had incentive to refinance.”

KBRA projects that 2022 will still be a record year for post-global financial crisis PLS issuance, with expected securitization volume of prime, nonprime (including non-QM) and credit-risk transfer offerings totaling $131 billion. Much of that volume, however, is front-loaded.

“KBRA expects Q2 2022 to close at approximately $38 billion, and Q3 to decrease further to $29 billion across the prime, non-prime, and credit-risk transfer segments because of rising interest rates and an unfavorable spread environment for issuers,” KBRA states in a recent forecast report. “… To date, issuance spreads [have] widened rapidly for all sectors as supply and demand volatility hit nearly all-time highs.”

Still, even in this volatile market, mortgage demand exists, even if at a diminished level. And, as the numbers from KBRA indicate, about half of that demand — for loans securitized in the PLS market so far this year — is now being addressed by non-QM lenders.

It’s important to note that rates in the non-QM space are typically set about 1.5 percentage points above agency loan rates, according to Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutions, part of non-QM-driven Angel Oak Cos.

“So, you’ve got agency loans where the performance is guaranteed by the government, but with our loans [non-QM], there is no guarantee, so private capital is looking for a spread in order to finance these loans and securitize them,” Hutchens explained in an interview. “If you look at where agency rates have gone, it’s very safe assumption to say non-QM rates are 150 basis points higher than that.”

As rates rise nearly week-over-week now, however, the securitization of lower-rate loans made earlier in the cycle becomes harder to execute at desired margins for most issuers because the goalposts have essentially been moved. 

“Nobody really knows where this [rate volatility] is going to stop because there’s so many factors that that make up rates,” Hutchens said. “So, it’s hard to predict levels of origination, but I still think we’re at a really good space [in non-QM lending]. 

“The interest in securitization and investing in this space is still very strong. The hiccup that we’ve seen isn’t a credit issue. No one’s concerned about the quality of non-QM loans — it’s just that the rate environment has been so crazy.”