When these packages came to the market last year, many of the sellers were unhappy with the prices being offered, said Michael Lima, managing director, correspondent lending at Click n’ Close, an Addison, Texas-based mortgage banker.
“It’s even worse now,” Lima said. “Because scratch and loans trade like a bond; when interest rates go up, the yield requirements from the buyers’ goes up.” As a result, the prices they can fetch declined.
“A lot of these sellers just refused to take their medicine last year and so they held these loans hoping that something would change or the market would change,” Lima said. “And it’s actually gotten worse.”
Meanwhile, scratch-and-dent buyers are opportunistic. “They’re not here with a mission to provide liquidity,” said Lima. “They’re on a mission to provide returns to their owners or to their investors.”
Lima was recently at the Lenders One conference and the feeling among originator attendees was that if the GSEs were going to do quality control, it should be done quicker so if a buyback is required, they are not holding paper that is now out of the money for a refinance to resolve the error.
“Don’t make me buy back 4% loans now, where the market is 7%, as well as loans that have already gone through foreclosure, where I didn’t have a chance to remediate my loss,” Lima said.
Click n’ Close bought whole loans from First Guaranty when the now-defunct mortgage lender ran into its liquidity issues.
“We went through all those loans,” Lima said. “We found actually they had a very good manufacturing process.” But these loans, like some other scratch and dent in the market, still have a problem for the buyer.
“The only thing for us: the risk is that we don’t have a counterparty if something is wrong after the fact,” he said.
The people that purchase these from the originator also don’t want these assets for the long-term.
“Most buyers do not want to buy and hold 30 year mortgages,” said Lima. “People want to buy and liquidate and make money in the short term, they don’t want to have a duration of 10 years.”
