Rob Hirt, whose RPM Mortgage just made its first $10 million in nonqualified mortgages, is armed with the largest known contract to sell such loans to a private buyer.
A large asset manager is committed to buy $2.5 billion of RPM's loans, and it may increase that commitment as much as three times using leveraged financing, he said.
"It just goes to show how badly people are chasing yield," said Hirt, the chief executive of RPM, which began making the loans in August.
RPM's mortgages will offer rates in the mid 4s to high 5s. "It's not the 8% yield some of these guys think they can get. We are just off prime."
The hunt for yield across fixed income and the shrinking returns on nonagency bonds may be creating a bottleneck, with too much capital chasing lenders who are still waiting for home borrowing to pick up.
RPM, for example, had no problem finding interested investors to back its slightly dented credits. A big Wall Street bank first approached the firm in January, at the same time the Consumer Financial Protection Bureau's tough qualified-mortgage rules took effect. The bank had brought along an investor, and it was trying to arrange a fee for making the referral to RPM. It also wanted a guarantee of more business in the future. It would extend the investor a credit line and leverage the $2.5 billion cash fund. It wanted to secure securitization and sale privileges for mortgage bonds once a market for them could mature, Hirt said.
The bank did not get the deal it wanted with the investor. RPM, which said it was courted by two suitors, finalized its paperwork with the asset manager in July. Hirt declined to name the asset manager or the bank.
The timeline of discussions is important. It shows that sophisticated banks and private money were willing to bet early and bet big on nonqualified mortgages from the beginning, even as other lenders lamented the rules. Now, the risk-takers are doing all they can to make that market actually happen.
Large investors include private-equity firm Lone Star Funds, which has committed $1 billion to purchase nonqualified mortgages from Caliber Home Loans. Bond manager Western Asset Management Co. planned up to eight commitments with lenders across the country, its chief operating officer told Bloomberg News in June. Others rumored to have interest include Pimco, and even large insurance companies.
The next stage is wait and see. Securitization is the ultimate goal if originations get up and running, but it would be an understatement to say that private-label issuance has seen better days, even as issuers test the waters.
Sellers issued $2.28 billion of private-label residential securitizations in seven deals in the past two months. The mini-surge signals the possibility of a healthier market next year.
Redwood Trust last week sold its third deal of the year that included non-QM collateral, which made up 1.5% of the pool. Those loans increased the expected loss on the most senior ranked bonds by 90 basis points, to 5.7% , according to Wells Fargo Securities and Kroll Bond Rating Agency.
Many lenders, especially commercial banks, are still hesitant to make the mortgages that investors and investment banks want to see produced. Lenders are privately admitting progress is still slow, and a steadier flow of originations may be half a year away at best.
Legal risk is part of the reason for lenders' hesitancy. They fear a flood of lawsuits in the event of default, with borrowers trying to escape their debt by citing violations of the new CFPB rules. Deutsche Bank researchers, whose analysis is in support of their bankers' mission to warehouse non-QM loans, believe the actual exposure to legal claims is less costly than what most lenders fear. They are telling clients that lenders can price the risk into their loans without prohibitively cutting into returns. (See related chart)
There are degrees to which the largest banks have a risk appetite. Regulations outlined by Dodd-Frank and risk-based capital requirements under Basel III have discouraged Wall Street's largest banks, if not prohibited them, from originating loans that are not pristine. Private money is now pouring in to take advantage of a market that, even under a small loan-limit reduction, may double in volume to about $100 billion per year.
JPMorgan Chase at the moment appears to have no plans to warehouse such loans. Its management, for example, has not received any requests to warehouse non-QM, a person at the bank confirmed.
Bank of America, one of RPM's three bank financers, had no problem with RPM leaning on it to fund non-QM, but there is no agreement for the bank to buy those loans, according to a person with knowledge, but who was not authorized to speak on the matter.
Deutsche Bank, as American Banker has reported previously, is moving against the grain. It is actively seeking out nonqualified mortgages to warehouse. Its progress has proven slow, officials there said.