Rising home prices have led to an accelerated decline in homeowners in negative equity, creating a positive for investors in distressed assets and consumers alike.
A few private mortgage real estate investment trusts have entered into the distressed whole loan market, but it’s still not a core part of their strategy, according to Compass Point Research & Trading.
"Clearly there is a defined pool of distressed assets with lower defaults on the margin and that pool is not growing very rapidly," explained Compass Point analyst Jason Stewart.
However, PennyMac Mortgage Investment Trust (PMT) is a major investor in the distressed whole loan sector, and stands to benefit from ownership of distressed whole loans.
"PennyMac works with nonperforming residential whole loans and works out those loans to make them performing via modifications or they foreclose on a property and sell it," stated Compass Point analyst Kevin Barker.
He added, "They are purchasing them at fair value and it reflects the cost to foreclose on that property. If they are able to sell those properties at a higher rate, then they’re going to have a higher gain on the investment."
Going forward, it’s expected that nonagency mREITs will continue to benefit from home equity improvement.
For this sector, rising home prices and a reduction in negative equity remain important drivers of value if sustained.
"Since almost all nonagency mREITs purchased bonds at a discount to par an acceleration of repayments will increase the recognition of that discount," Stewart pointed out.
He added, "All investors in this sector have established credit reserves, or a portion of that discount that they don’t expect to recover, and improving home prices as well as credit metrics should allow for a reduction in that reserve."
However, the amount of mREIT companies diving into distressed assets will be pocketed because of the capability of their servicing operations and their ability to work through distressed assets, Barker noted.
Nonetheless, consumers are benefiting from investors scooping up distressed assets across the country because it gives homeowners another option for housing.
"I think in a way it helps them repair their credit and gets them back into the housing market in a way that makes sense," explained Hope Now executive director Eric Selk.
He added, "It’s not about dusting yourself off and throwing yourself back into the ring, it’s about getting your life together and then stepping back into housing."
Going forward, investors will target distressed assets in certain states because there’s a large amount of inventory still out there.
"You’re not only looking at negative equity, but also the mediation program, where most are looking at more than 700 days until a foreclosure is complete," Selk pointed out.
He concluded, "That’s a long time for a property to sit empty or mismanaged, so there’s a lot of work to be done in those markets and that gives investors more opportunities."