Forbearance recoveries continue to climb
admin | February 22, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
For the first time since we have been tracking forbearance in the legacy market, recoveries on re-performing loans have been 70% or more of the forborne balance in consecutive months. December was a record month for NPL recoveries where liquidated NPLs recovered 67% of their forborne balances.
The level of forbearance recoveries continues to climb, albeit with some noticeable seasonal volatility. Observed recovery rates peaked for non- performing loans in December and January for modified re-performing loans at 67% and 72% respectively. These record recovery rates mark a rebound off seasonally low recovery rates. Over the past three years October or November has marked the lowest monthly recovery rate across both NPLs and RPLs. While this may be attributable to seasonality of home prices, recovery rates do not remain depressed and have historically rebounded significantly in the following month. (Exhibit 1)
Exhibit 1: Forbearance recoveries reach all-time highs after seasonal lows
Source: Amherst Insight Labs, Amherst Pierpont Securities
Comparing the profiles of loans that abated in a low recovery month versus a high recovery month shows little difference at least on an average basis. Looking at NPLs that liquidated to a 31% recovery in September of last year to a 31% average recovery versus those that yielded a 67% recovery in December shows that the loans had nearly identical mark-to-market CLTVs at 54 and 55 respectively, comparable loan sizes and percentages of judicial state loans that usually take longer to liquidate with higher severities. One notable difference is that forbearance on the September abatements totaled 42% of the investor balance while it was only 30% of the December loans. Historically, we have observed the lower the amount of forbearance relative to the investor balance, the higher the recovery. (Exhibit 2)
Exhibit 2: Comparing collateral across low and high recovery months
Source: Amherst Insight Labs, Amherst Pierpont Securities
The bigger driver of the disparity is the fact that forbearance recoveries tend to be binary in nature where either all the forbearance is recovered or none of it is. In the October abatements, 37% of the loans recovered at least 90% of their forborne balances at liquidation. In December that number rose to roughly 60%. These types of binary outcomes do not appear to be driven by difference s in risk layering. Comparing the mark-to-market CLTV on the two pools shows that they are nearly identical in terms of the population of higher CLTV loans. Loan that were greater than 80 CLTV made up 5.8% of September liquidations – those loans made up 5.8% of the December NPLs. These types of disparate outcomes despite similar collateral profiles certainly raise questions about whether forgiveness is being misreported as forbearance in some cases. Despite this potential concern, forbearance recoveries continue to increase suggesting that if there is misreported forgiveness it may be a relatively minor issue.
On a forward looking basis, it appears that the opportunity remains sizable and recovery rates should remain relatively elevated. We estimate that there is roughly $42 billion of loans with forbearance totaling nearly $15 billion still outstanding in the legacy market across re-performing and non-performing loans. We project that 82% of those loans will either prepay or pay off in full at maturity, yielding a potential recovery on nearly $12 billion of outstanding forbearance. Outstanding loans with forbearance have an average mark-to-market CLTV of 63 and outstanding forbearance is equivalent to 34% of the investor balance. These numbers are slightly greater than past abatements, which had an average mark-to-market CLTV of 58 and forbearance was equivalent to 28% of the investor balance. Higher forborne amounts and CLTVs on outstanding loans may suggest slightly lower future recovery rates. If home prices continue to rise, recovery rates may remain steady or march higher.
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