How the PLS market is making money on delinquent loans 

Lakeview Loan Servicing so far this year has unveiled three private-label deals backed by thousands of nonperforming loans

Lakeview Loan Servicing unveiled a rare private-label securities offering this past March involving a pool of mostly delinquent mortgages serviced by the company.

The loans in the offering were all originated through the Federal Housing Administration (FHA) and later securitized through Ginnie Mae. At the time, it was only the fourth such private label securities (PLS) offering of its kind in more than a decade, according to a bond-rating report by Kroll Bond Rating Agency (KBRA). 

Since then, Lakeview has unveiled two additional PLS offerings involving pools of delinquent FHA loans also securitized via Ginnie Mae. 

The delinquent FHA-insured mortgages backing Lakeview’s initial private-label securities (PLS) offering earlier this year, Lakeview Trust 2022-EBO1, all were purchased out of Ginnie Mae loan pools via the agency’s so-called early buy-out, or EBO, program. 

The more recent offerings — Lakeview Trust 2022-EBO2, which closed in late April; and Lakeview Trust 2022-EBO3, set to close in early June — also involve EBO loans, according to KBRA ratings reports. In those offering, 100% of the FHA loans involved are delinquent — with about a quarter of the mortgages in each deal in active foreclosure.

So why is this rare bird in the PLS world suddenly getting air under its wings, and how can you make money securitizing delinquent loans, even when they are in active foreclosure? 

The major market dynamic making EBO deals attractive now, according to KBRA, is a changing of seasons in the mortgage industry, marked by fast-rising rates, high housing prices and a turn toward a competitive purchase-mortgage market.

“Reverse mortgage, mortgage servicing rights (MSR)-backed issuance, home equity line of credit-backed deals … Ginnie Mae early buyout (EBO), and other esoteric RMBS [residential mortgage-backed securities] transactions are … poised to increase in the remainder of 2022 and 2023 as interest rates rise further,” states a recent KBRA report on the private-label securities market. 

To understand how these “esoteric” EBO PLS deals can offer an attractive return for bondholders, we need to examine the details of the recent EBO offerings.

Lakeview Trust 2022-EBO 2 involves a pool of 2,063 FHA-backed loans with an unpaid principal balance (UPB) of $405.2 million, with all the loans deemed delinquent. In total, 99.3% of the loans in the collateral pool for the offering are 90 days or more past due and 26.5% are in active foreclosure. 

Lakeview Trust 2022-EBO 3, involving a pool of 1,713 FHA loans with a UPB balance of $302.9 million, has similarly grim loan-performance markers, with 100% of the pooled loans delinquent — 97.6% are 90 days or more past due and 24.8% are in active foreclosure.

Lakeview’s initial EBO offering this year, Lakeview Trust 2022-EBO1, involved a pool of 2,192 FHA-guaranteed mortgages with a UPB value of $423.6 million. The PLS offering was backed by a loan pool in which 96.6% of the mortgages were 90 days or more past due and 16.3% in active foreclosure.

Key to EBO offerings is the fact that the FHA guarantees 100% of the principal balance on the loans it insures. The FHA loans in all three of Lakeview’s EBO offerings also were securitized via Ginnie Mae and are backed by the agency, which guarantees only the principal and interest payments to purchasers of its bonds, which are sold worldwide.

Once a loan is 90 days past due, however, under Ginnie Mae’s EBO program, the servicer can buy the loan out of the Ginnie Mae loan pool, which means it can stop advancing principal and interest each month. After the mortgages acquired by a servicer become current for six consecutive months, often through modifications, they are eligible to be re-securitized through Ginnie Mae and “re-pooled” with other loan collateral.

Getting the loans to reperform represents “highest income-generating” potential for the EBO offerings, KBRA bond-rating reports indicate, given it provides six months of uninterrupted payments on the reperforming mortgage and the option, in most cases, for a cash-out of the loan at the end of that period via the Ginnie Mae re-securitization.

Current loans have the highest likelihood of redelivery to a Ginnie Mae pool, and re-pooling is the path that is “the most beneficial to the [PLS] transaction as it is generally the shortest resolution path,” the KBRA bond-rating reports each state.

For all three of Lakeview’s EBO offerings so far this year, however, at least 97% the loans in the pools being securitized via the PLS market are already delinquent by 90 days or more, making a high rate of redelivery to Ginnie pools an unlikely outcome. Principal recovery on the loans is guaranteed through FHA in the event of a default, but there often is a bureaucratic time lag in obtaining interest due, KBRA noted. 

In addition, interest rate recoveries are at the HUD debenture rate, “which is typically substantially below the loan note rate,” according to KBRA. All three Lakeview’s EBO private-label offerings include an interest-rate reserve account, with starting balances ranging from $9.8 million to $13.2 million, to cover potential bond-interest shortfalls.

Two past EBO PLS offerings prior to initial Lakeview Trust 2022-EBO1 transaction earlier this year, according to a US Bank trust investor report, also were sponsored by Lakeview — one in 2015 and another in 2021. Another such transaction, a $370.7 million offering of nonperforming FHA loans, closed in July 2021 and was sponsored by Waterfall Victoria Master Fund, with Carrington Mortgage Services acting as the loan servicer, according to a separate KBRA ratings report.

That makes a total of six private-label EBO offerings over the past decade or so, according to KBRA’s accounting. Those transactions are not likely to be the end of the story, however.

“EBO strategies are expected to become more prevalent as a function of the size of the overall GNMA [Ginnie Mae] market, with GNMA outstanding [mortgage-backed securities] at approximately $2.1 trillion in 2021 vs. approximately $400 billion in 2007,” KBRA’s ratings report on Lakeview’s latest EBO offering states.

Lakeview, based in Coral Gables, Florida, is part of the Bayview Companies and a subsidiary of Bayview MSR Opportunity Master Fund LP. It also is an affiliate of Bayview Asset Management, a certified minority-owned and private equity firm with hedge fund holdings.

As of May, Lakeview ranked as the third-largest servicer of loans backed by a Ginnie Mae guarantee, controlling 10.4% of the agency’s servicing book of business — with a $211.2 billion portfolio comprised of both new-issuance securitizations and net purchases, according to a recent report from mortgage-data analytics firm Recursion. Ahead of Lakeview at the No. 1 position is Freedom Mortgage, with a 12.7% market share and volume of $257.5 billion; followed by Pennymac, 11.5% market share and volume of $232 billion.

As of the same date, Lakeview ranked as the fifth-largest overall servicer of agency-backed loans, controlling 4.6% of the combined servicing book of business for Fannie Mae, Freddie Mac and Ginnie Mae loans. Its servicing portfolio for all-agency loans based on unpaid principal balance stood at $374.8 billion, according to Recursion’s May report. Wells Fargo ranked first, with a 7.7% market share and an all-agency servicing portfolio totaling $623.9 billion as of the same date.

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