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The latest non-QM player to feel the pain of the interest rate volatility afflicting the nation\u2019s housing market this year is a Pasadena, California-based real estate investment trust called\u00a0Western Asset Mortgage Capital Corp<\/strong>.<\/p>\n The REIT, which is managed by investment advisor Western Asset Management Co. LLC<\/strong>, recently announced that it is exploring a potential company sale or merger in the wake of posting a $22.4 million net loss for the second quarter ended June 30, \u2014 on the heels of posting a $22.2 million loss in the first quarter. WMC, with some $2.8 billion in assets, has a diverse portfolio of residential and commercial real estate assets.<\/p>\n A closer look at WMC\u2019s books, however, shows that as of June 30 its residential whole loan portfolio, nearly all of which is comprised of non-QM loans, was underwater by some $44 million. That\u2019s based on a comparison of the principal balance of the loans on the books and their fair market value as reported by the REIT as of that date.<\/p>\n The principal balance of WMC\u2019s residential whole loan portfolio at June 30 stood at $1.24 billion, representing nearly half of the company\u2019s consolidated total assets, according to WMC\u2019s balance sheet.<\/a> The REIT lists the fair value of those loans, however, at about $1.19 billion \u2014 which means the portfolio is underwater to the tune of $44 million.<\/p>\n In addition, more than 60% of the 3,097 non-QM mortgages by count and volume in the REIT\u2019s whole loan portfolio \u2014 totaling 3,102 loans \u2014 bear interest rates at 5% or less. <\/p>\n Because non-QM (or non-prime) mortgages are deemed riskier than prime loans, in a normal market they typically command an interest rate about 150 basis points above conforming rates, according to Thomas Yoon, president and CEO of non-QM lender Excelerate Capital<\/strong>. As of last week, according to Freddie Mac<\/a><\/strong>, the interest rate for a 30-year fixed conforming purchase mortgage stood at 4.99%, down from 5.3% a week earlier.<\/p>\n \u201cThe legacy non-QM coupons are like 4.5%, so we have 4.5% coupons floating around out there from earlier in the year that haven’t moved and are starting to age on warehouse lines,\u201d said John Toohig, managing director of whole loan trading at Raymond James<\/strong> in Memphis. \u201cAnd they have to sell them now [in the whole loan market or via securitization when we are seeing] 6%, 6.5% or 7% deals.<\/p>\n \u201cIt\u2019ll be a very different buyer that comes to the rescue \u2026 and it will be at a pretty significant discount [in the whole-loan trading market]. I\u2019m swagging it without being at my screen, but maybe in the 90s [100 is par], but certainly underwater.\u201d<\/p>\n So far this year, WMC has undertaken two securitization deals through its Arroyo Mortgage Trust<\/strong> conduit (ARRW 2022-1 in February and ARRW 2022-2 in July). Both deals involved non-QM loans, according to bond-rating reports form S&P Global Ratings. <\/strong><\/p>\n Combined, the closing loan-pool balance for the two securitization deals was $834.2 million, with the weighted average interest rate for the loan pools at 4.4% for the February offering and 5.5% for the most recent deal. Keith Lind, CEO of non-QM lender Acra Lending<\/strong>, said rates for non-QM loans through his company were \u201cin the high 7% [range]\u201d for July\u201d up from 4.5% early in the year \u2014 with Acra moving rates 18 times, mostly up, over that period.<\/p>\n \u201cThere\u2019s good liquidity at that [higher] rate,\u201d Lind added. \u201cI don\u2019t think investors are jumping to buy bonds backed by coupons [rates on loans] that can’t even cover the coupon on the bonds \u2026 and securitization [costs].\u201d<\/p>\n In other words, lower-rate loans are at a competitive disadvantage in terms of pricing in securitization and loan-trading liquidity channels because they are worth less than the newer crop of higher-rate mortgages. Lind put it this way: \u201cThese aren\u2019t bad loans, just bad prices.\u201d<\/p>\n Non-QM mortgages include loans that cannot command a government, or \u201cagency,\u201d stamp through\u00a0Fannie<\/strong> Mae<\/strong>\u00a0or Freddie Mac. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners, gig workers and the self-employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies.<\/p>\n WMC\u2019s struggles with the impact of red ink in recent quarters are forcing it to consider \u201cstrategic alternatives\u201d going forward, including a possible \u201csale, merger or other transaction,\u201d CEO Bonnie Wongtrakool said in the company\u2019s Q2 earnings announcement.<\/p>\n Wongtrakool added that the REIT\u2019s recent quarterly results are reflective of \u201cthe ongoing challenges of interest rate volatility and fluctuating asset values.\u201d She noted that WMC has made \u201csignificant progress in the last two years toward strengthening our balance sheet and improving our liquidity and the earnings power of the portfolio.\u201d <\/p>\n Still, that has not been enough for the market, and the company\u2019s stock price. \u201cWe do not believe that these actions are being reflected in our stock price,\u201d Wongtrakool said.<\/p>\n At press time, shares of WMC<\/a> were trading at $15.50, compared to a 52-week high of $29.20 and a low of $11.00.The stock-value pressure is prompting the WMC to explore alternatives going forward, including a possible sale of the company.<\/p>\n \u201cToday the company \u2026 announced that its board of directors has authorized a review of strategic alternatives for the company aimed at enhancing shareholder value, which may include a sale or merger of the company,\u201d Wongtrakool said. \u201cJMP Securities<\/strong> \u2026 has been retained as exclusive financial advisor to the company.<\/p>\n \u201cNo assurance can be given that the review being undertaken will result in a sale, merger, or other transaction involving the company, and the company has not set a timetable for completion of the review process.\u201d<\/p>\n WMC isn\u2019t alone in dealing with the pain sparked by volatile rates. <\/p>\n Non-QM lender First Guaranty Mortgage Corp.<\/strong> filed for Chapter 11 bankruptcy protection at the end of June \u2014 leaving four warehouse lenders on the hook for more than $415 million. Then, in early July, another non-QM lender, Sprout Mortgage<\/strong>, shuttered its doors suddenly, leaving employees out in the cold. <\/p>\n Just weeks later, a text message leaked to the media revealed that Flagstar Bank<\/strong> is ramping up scrutiny of non-QM lenders prior to advancing warehouse funding. Flagstar will now require advance approval for funding advances. <\/p>\n The bank also indicated it may adjust \u201chaircuts\u201d \u2014 the percentage of the loan the originator must fund itself to ensure it has skin in the game. The leaked message included a list of 16 non-QM lenders<\/a> that would be affected by the changes.<\/p>\n Tom Piercy, managing director of Incenter Mortgage Advisors<\/strong>, points to yet another facet of the liquidity squeeze facing originators across the housing industry \u2014 in this case both prime and non-prime lenders. And that variable is the current compression of the yield curve as short-term interest rates rise faster than long-term rates \u2014 such as those for mortgages.<\/p>\n \u201cOur short-term rates have increased substantially,\u201d Piercy explained. \u201cIf you look at the mortgage industry right now, with this [short-term\/long-term rate] inversion, it’s going to create even more heartburn because everyone’s going to be upside down on their warehouse lines [which, he said, are based on short-term rates]. <\/p>\n \u201cSo, the cost of your warehouse facilities is increasing while the long side [mortgage rates] is staying low. If you originate mortgages at 5%, and you may have a cost at a warehouse line of 5.25% or 5.5%, then you\u2019re losing money if you keep loans in the pipeline.<\/p>\n And, for some lenders, particularly non-QM loan originators, they also face the prospect of losing money when they seek to move loans out of their pipelines via whole-loan sales or securitizations because of the higher returns demanded by investors \u2014 who also want to stay ahead of interest-rate risks.<\/p>\n \u201cIt\u2019s going to be interesting to see how this all plays out,\u201d Piercy added.<\/p>\n The post There’s more blood on the tracks in the non-QM market<\/a> appeared first on HousingWire<\/a>.<\/p>\nThe dreaded discount<\/h3>\n
It’s volatile out there<\/h3>\n
Coping with a liquidity squeeze<\/h3>\n