Citadel, bond raters, predict breakout year for non-prime

Citadel, bond raters, predict breakout year for non-prime mortgages

25 January 2017 | 15:38 EST

Non-prime and non-QM lending will go from niche sector to mainstream this year as lenders boost originations and investors grow comfortable with the risks, according to a Citadel Servicing Corp. executive and two credit rating companies.

For Citadel Servicing, a pioneer of non-prime loans since the financial crisis, the proof is showing up in the numbers, said CEO Dan Perl.

Applications for Citadel loans have jumped more than 20% since the US presidential election, Perl said. Based on the increase, the company’s closed loan production should rise to a USD 75m monthly run rate by April from about USD 51m today, he said. Citadel is sitting on a USD 180m 45-day horizon pipeline, its biggest ever, he said.

“This year, the non-QM markets bust open,” Perl said.

Citadel and other early players such as Angel Oak Home Loans, Caliber Home Loans and Deephaven Mortgage will likely play an “active role” in the budding asset class of non-prime RMBS this year, Fitch said in a report today. Because of the momentum, Fitch is anticipating at least USD 2bn of non-prime RMBS this year, up from the USD 1bn issued in the past 18 months, it said in the report.

As many as nine issuers are expected to bring non-prime RMBS to market this year, expanding the field from five, Fitch said. Others participants on the non-prime issuance map include investors such as Invictus Capital Partners, SG Capital Partners and Ellington Management Group, it said.

Investment managers Pimco and Western Asset Mortgage are also gearing up for their own securitizations, as reported (see article, 11 November).

More than a dozen non-prime origination programs intend to use securitization as a funding source, according to Kroll Bond Rating Agency in a 16 September report. The tide in non-prime is “turning quickly,” it said.

The number of borrowers with dinged credit has kept lenders engaged, even as origination volumes are low so far. About 41.5m adult consumers went through a foreclosure or some negative housing event between 2004 and 2015, according to Urban Institute data. Just 7% of the 7.1m consumers with foreclosures had obtained a new mortgage as of 2015, it showed.

Despite the lesser credit quality, non-prime lending benefits from some key improvements since the mid-2000s, according to Fitch and Kroll. Notable is the requirement for loans to meet the Ability-to-Repay rule, they agreed.

Many economists and analysts believe the mortgage markets are ripe for some expansion in credit guidelines as interest rates rise and refinancings dry up. The question is how much a lender will accept potential liabilities associated with riskier mortgages, since some feel inadequately protected within QM, as reported (see article, 24 January).

“Originators have to be asking themselves ‘what can we do to get more volume?’” said Laurie Goodman, co-director of the Urban Institute’s Housing Policy Center, on a 24 January conference call. Non-QM products should benefit from that thinking, she said.

Those expectations are playing out at Citadel. Perl said he’s been fielding increased call volume from would-be participants looking to get involved with non-prime originations. More job seekers are applying to become a broker or banker with Citadel, he said.

To be sure, the non-prime segment is a tiny fraction of US mortgage markets and it will likely stay that way, according to Fitch. Even assuming rapid growth, 2017 RMBS volume will remain less than 1% of the private-label volume between 2005 and 2007 when issuers sold approximately USD 2trn, the rater said.

Non-prime loans are more labor intensive, raising costs and slowing the process, Perl said. Automated underwriting used for the lion’s share of all US mortgages won’t work in non-prime, where loans vary too much from one another. That is especially true for lenders that allow the use of bank statements instead of W-2s and tax returns as proof of income, he said.

One positive sign for housing is resilience of the purchase mortgages, versus refinancings, said John Herrmann, a strategist at MUFG Securities Americas. Purchase mortgage volumes have held steady in the face of rising interest rates, reflecting job growth and rising household confidence, he said.

Purchase loans are the primary focus for non-prime and non-QM lenders. For example, Caliber Home Loan’s most recent RMBS included 474 loans, 410 of which were used to purchase a home, according to a source familiar with the deal.

by Al Yoon