PERSON OF THE WEEK: Mark Hughes is president of the due diligence division at LenderLive, offering outsourcing, correspondent lending, loan servicing, document, settlement and due diligence services to the mortgage industry. MortgageOrb recently interviewed Hughes to learn more about what it will take for the private-label residential mortgage-backed securities (RMBS) market to make a comeback, when we can expect to see the first major non-qualified mortgage (non-QM) deals come to market, and whether we will continue to see consolidation in the third-party review (TPR) market in 2015.
Q: Is this the year that the private-label RMBS market comes back?
Hughes: I wish I could say, ‘Yes, this is the year that it will finally happen,’ but I don't think we're there yet. Last year, the RMBS market produced 28 private-label deals, valued at $8.8 billion – only a sliver of what the market was at its peak in 2005. Most observers expect RMBS issuance this year to be in the range of $10 billion-$15 billion.
Before the private-label market can gain traction again, it will have to overcome both structural and economic headwinds. Based on our discussions, investors want to see more standardization of the deal structures, reps and warrants, documents, and data transparency.
There is also a growing interest in inserting a fiduciary within the deal whose role would be to protect the interests of the bondholders. That's the structural piece. Then, you layer the economics on top of that. Given the cost of securitization and where interest rates and subordination levels are, it makes more sense for banks and investors to buy and hold loans rather than to issue securities. Banks are comfortable with the quality and the yield of these assets and are willing to hold them on their balance sheets.
Q: Only a handful of non-QM loans have been included in recent private-label securities. Is this the year that the first non-QM deal will come to market? And what do you think it will look like?
Hughes: Most of the non-QM production that we're seeing today tends to fall into two categories: the super jumbo and non-QM based on product type (interest-only loans) and a smattering of slightly higher debt-to-income loans for prime-credit borrowers. But there's just not enough coupon in these products for securitization to make sense economically. So although that's where most non-QM production seems to be at the moment, I'm not sure that these loans will be the basis for non-QM securitization, at least initially. At the ABS Vegas conference in February, officials from one of the largest producers of these products, Fenway Summer, specifically said they weren't planning to securitize.
On the flip side, there will be more coupon in the non-prime QM space. Shellpoint, for example, has a non-prime credit repair product aimed at borrowers who have gone through some sort of life event – job loss, illness, divorce – and are now rehabilitating their credit. I think it's called a recovering credit, non-QM. At ABS Vegas, Shellpoint said it expects to do a non-QM private-label deal this year.
In terms of what the rating agencies will be looking for, the criteria are generally out there, though still being refined. Their main focus for non-QM is on confirming the ability to repay (ATR). The agencies and third-party reviewers will be scrutinizing the eight factors that determine ATR. I expect that you'll see 100% reviews, not sampling, of non-QM deals.
Q: What are firms like LenderLive doing to help potential issuers acquire loans for future deals?
Hughes: At LenderLive, we've built a rate-lock platform that allows our investor clients to have their origination customers lock loans with them online before closing. This helps originators understand what the pricing is going to be so that they can close those loans with certainty of execution and then deliver the loans back to us to complete the loan review against the client's underwriting criteria, providing greater confidence that these loans can be purchased.
Today, most of what we see in this channel is either prime jumbo QM or non-prime non-QM product.
Apart from our due diligence division, we also have an outsource services unit that can perform pre-close reviews for originators to non-QM guidelines to improve certainty of execution. So basically, what we have is a front-end group that will – separate from our due diligence team – work directly for the originators and give them a second look at guideline eligibility so they have increased certainty once they make the loan that they'll be able to turn around and resell it into the secondary market.
Q: A number of players have left the TPR market. Is a consolidation taking place – and if so, why?
Hughes: I think consolidation is taking place. Two trends are driving it: overcapacity in the TPR market and increased compliance requirements and responsibilities of TPR firms brought on by QM designation and other regulatory changes. There's simply not enough pure due diligence work to go around at the moment. So, firms that are not diversified in other parts of the mortgage market or that are exclusively focused on new origination non-agency securitization are struggling. A firm like ours, which has a diversified array of mortgage business lines – including fulfillment, subservicing, document and settlement services – has the capability of being able to ride out the slow periods and be there when the private-label market returns.