The Mortgage Note Landscape In 2017

What does the mortgage note landscape look like in 2017?

What trends are emerging in the mortgage note marketplace this year? How have deals changed? Where are the opportunities for note investors now? What could shake things up over the next few months?

Performing First Mortgage Liens

The re-performing first mortgage market is one of the strongest in this sector. Tens of billions of dollars in UPB (Unpaid Principal Balance) are being traded annually - most of which represents re-performing, modified loans, with 12 to 24 months of new, good payment history.

Loan modifications and workouts appear to be working well, with default rates and repeat defaults falling substantially. This is resulting in investor confidence growing, and continually chasing better yields.

However, with improved performance and confidence, yields and discount rates are falling. This is especially true on larger trades and pools in excess of $50M. Many pools are now trading at as high as 70-90% of UPB; some are even trading at over 100%, especially where there are good credit scores and low LTVs.

Non-Performing First Mortgage Liens

This has been one of the most active sectors for note trades in 2017, and the pace of sales is expected to continue into next year. There is strong demand, and more incentive for investors to buy these notes for their yields.

This has resulted in trades around 70% of BPO (Broker Price Opinion). The best deals are being found on smaller pools of these notes, with far better discounts available in judicial foreclosure states.

Performing Second Mortgage Liens

There has been an increasing supply of performing second mortgage loans, through the beginning of 2017. This trend is expected to continue as more second mortgages are originated as others mature.

There is high demand for these notes, especially those with mid-range yields, exceeding 6%. This includes a growing appetite for loans with up to 125% CLTVs, and credit scores in the mid-600 range. This activity has also created dramatic price changes in the re-performing second mortgage market. Notes which were trading at as low as 50% of UPB, are now going in the 80% of UPB range.

Non-Performing Second Mortgage Liens

The above trends and compressed returns have pushed more investors over into the second mortgage NPL space. Demand for these assets is very high. The performance outlook is great, especially with more performing firsts in the market, and the economy looking up.

However, this also means a very limited supply of these notes for sale, and a very limited desire for holders of these notes to sell. In fact, there now appear to be fewer sellers and fewer sources of these notes, especially for smaller investors. Second mortgage NPLs represent the very best yields, with those that are unsecured offering the best of the best opportunities.

Summary

The data shows a very strong mortgage note market. Overall the health of US mortgage loans has increased significantly, as has their performance outlook. There may be a higher volume of first mortgage liens available into next year, yet, those seeking the best returns are looking for non-performing seconds - it is just a matter of being able to find them!. Looking ahead, it is wise for investors to keep an eye on macro changes, such as the repealing of the Dodd-Frank Act and slowly turning real estate market cycles, for where the next opportunities are coming from.

Investment Opportunities

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