Global lender Citigroup is capitalizing on a vibrant U.S. market for mortgages that have been dinged up by the pandemic.
The bank, through its residential mortgage-backed securities conduit, Citigroup Mortgage Loan Trust, has securitized some 45,000 reperforming loans valued in aggregate at $6.8 billion through five private-label offerings year to date as of the end of October, Fitch Ratings reports show. And they are truly scratch-and-dent loans.
The Fitch reports show that between 76% and 98% of the mortgages in the loan pools being securitized have been modified. In addition, between 1% to 12% of the loans across the five deals were 30 days delinquent as of the cutoff date in late October. And another 25% to 55% of the loans in the pools across the five deals — though current as of the end of October — have experienced one or more delinquencies within the last 24 months.
Yet, there is a huge demand for these reperforming loans and the securities issued against them.
“There’s always an appetite for distressed packages on the secondary market,” said Rick Sharga, executive vice president of marketing for real-estate research firm RealtyTrac. “People are looking for securities where they believe the risk-reward ratio is appropriate for their taste. And there’s very little available in the way of nonperforming loans, so the reperforming packages have, more or less, replaced nonperforming loans.”
A reperforming loan is a mortgage for which a borrower payment has been missed but is then resumed for a period of time. Government-mandated forbearances during the pandemic, however, have made it possible for homeowners missing payments to avoid the urgency of the normal foreclosure pipeline, which typically kicks into a higher gear once nonperforming status is reached after 90 days of nonpayment.
The market for reperforming loans is hot now due, in part, to a plethora of mortgages coming out of pandemic-era forbearance plans, according to Tom Piercy, managing director of Incenter Mortgage Advisors. Piercy explained that many homeowners who fell behind on their mortgage payments because of the pandemic are now recovering, either due to government assistance or because they are now re-employed.
“As the economy begins to show improvement and moratoriums are lifted on foreclosures,” he added, “the forecast is for the reperforming market to maintain this high volume for many months to come.”
The Mortgage Bankers Association reports that the total number of mortgages in forbearance dropped by six basis points as of October 24, the latest figures available — to 2.15% of mortgages servicers’ portfolio volume, down from 2.21% the prior week. MBA estimates that 1.1 million homeowners are currently in forbearance plans — the existing pipeline for future reperforming loans.
“Forbearance exits slowed at the end of October to the slowest pace since late August,” said Mike Fratantoni, MBA’s senior vice president and chief economist. “With so many borrowers having reached the end of their 18-month forbearance term, we expect a steady pace of exits in November.”
Citigroup spokesperson Scott Helfman declined to comment on the lender’s five private-label offerings backed by reperforming loans or whether additional securitizations were in the works yet this year. Still, it seems there’s plenty of opportunity ahead in the market in the near-term.
“Our fiscal year just ended in September, and it was easily our best year in trading volumes ever by deal count and by par balance,” said John Toohig, managing director of whole loan trading at Raymond James. “[Lenders] right now just have an avalanche of cash coming in the door through deposits and loan demand is relatively weak.”
“… So, there’s plenty of cash out there for [lenders] who just want to buy loans,” he added. “That’s a good spot to be if you’re a trading desk.”
And the private label market is not the only sector benefiting from the wind down of pandemic forbearance plans. Fannie Mae year to date through October has put on the market some 100,000 reperforming loans across five offerings with an aggregate unpaid principal balance of $14.5 billion, according to an analysis of the government-sponsored enterprise’s records.
Freddie Mac has pursued a securitization path for its reperforming loan pools as opposed to selling them as whole loans. Year to date through October, Freddie has packaged five offerings backed by reperforming loan pools that have a combined value of some $4.3 billion.
“In normal times, if you’re 12 months delinquent on a loan, you’re not delinquent anymore — you’ve already been foreclosed on,” Sharga said. “But in today’s market, if you’re in forbearance, and you haven’t paid for 12 months, you’re called at most delinquent.
“But if you enter an agreement with your servicer, the next day your current. And so, as people are rolling out of the forbearance rolls, those delinquency numbers continue to fall.”
Even though the market now for reperforming loans is strong, and experts expect it to remain frothy deep into next year, there are some potential headwinds ahead that could impact the value of mortgage collateral over the long-term, according to Fitch Ratings. It includes the following forecast on the sustainability of home prices in its presale ratings report for Citigroup’s most recent reperforming-loan securitization, which was published at the end of October.
“Fitch views the home price values of this [Citigroup loan] pool as 11.6% above a long-term sustainable level (vs. 11.7% on a national level),” the Fitch report states. “Underlying fundamentals are not keeping pace with the growth in prices, which is a result of a supply/demand imbalance driven by low inventory, low mortgage rates and new buyers entering the market… These trends have led to significant home price increases over the past year, with home prices rising 18.6% year over year nationally as of June 2021.”