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Reperforming, nonperforming mortgage bonds may fill investor appetite

Some investors may find nonperforming and reperforming loan securitizations as an attractive alternative to private-label residential mortgage-backed securitization deals. 

The attractive fundamental of these bonds is the returns given to investors, which will ultimately be driven by recovery values on distressed properties throughout this rest of this year and next year due to overwhelming investor interest, according Bank of America Merrill Lynch in its latest report.

“We think yields on this type of paper will further compress from current levels which range from 3.5% to 5.5% depending on placement in the capital stack and the quality of the collateral,” said analysts for BofAML (BAC).

Reperforming and nonperforming transactions are backed by seasoned collateral, which had become delinquent loans prior to securitization. 

Reperforming loans are delinquent loans that have been modified in an attempt to get the borrower current again, while non-performing loans are seriously delinquent at issuance and are not expected to cure. 

In general, the deals are privately placed, unrated transactions, which narrows the potential investor base for the securities.

“NPL/RPL securitizations are generally structured with substantial credit enhancement in the form of subordination and overcollateralization in order to absorb losses from liquidations. In some instances, only overcollateralization is used,” BofAML analysts explained. 

One notable, recent development is Cerberus Capital Management’s entry into the lending space. 

The firm intends to target investors who cannot access institutional funding and do not qualify for government sponsored loans – a major segment of the market which has limited access to credit since the financial crisis, the report stated. 

For instance, Cerberus will focus on financing investors in $5 million to $100 million increments. 

With bidding wars already happening on foreclosed homes, expanded credit to investors may drive home prices up faster than the market anticipates.

“We suspect that NPL and RPL securitization volumes will continue to accelerate throughout the year as the investor base broadens with increased comfort and understanding of the assets,” the analysts explained.

They added, “On the other hand, the deteriorated economics of prime jumbo deals has slowed issuance considerably from what was being done in the first quarter of the year.  We believe the market will pick up if spreads begin to tighten.”

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