Forebearance pays off in seasoned RPLs
admin | October 4, 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.
Investors in seasoned RPL transactions are subject to somewhat of a unique risk in that non-performing loan balances commonly account for some of the securitized principal. The good news to date is that investors have received nearly 90% of this forborne principal on loans that have left the trust. But recoveries have been far from uniform, and some trusts have recovered significantly more principal than others.
Tracking forbearance recoveries
Seasoned re-performing securitizations differ from most traditional private deals in that not all of the principal balance is performing at deal time. The non-performing balances will vary deal to deal, ranging anywhere from zero to almost 15% of some deals. Depending on the amount of forbearance securitized, some or all of the deep subordinate certificates will be levered plays on forbearance recoveries. While these tranches are by and large retained by the issuer, any shortfall in forbearance recoveries will erode credit enhancement, potentially hurting prices on more senior bonds. Trusts with larger amounts of securitized forbearance have by and large prepaid much slower than those with small amounts. As a result, these deals de-leverage slower and losses associated with forbearance recovery shortfalls may have an outsized impact on overall credit enhancement.
Exhibit 1: Forbearance exposure across RPL trusts
To date over 3,200 loans with forbearance have left RPL trusts either through prepayment or liquidation across two shelves analyzed, CarVal’s Mill City (MCMLT) and Towd Point’s (TPMT) shelf. Loans with forbearance that have left RPL trusts have totaled over $700 million with roughly $90 million of that being forborne principal. Over $80 million of that non-performing principal has been recovered. Elevated forbearance recoveries appear to primarily be a function of relatively small amounts of forbearance relative to the total principal balance and low mark-to-market LTVs, similar to what we observe in legacy deals.
Loans with forbearance that have left RPL trusts have had an average of 14% in non-performing balance and a mark-to-market LTV of 64. Low LTVs have likely driven prepayments on loans that prepay as borrowers turn over and capture pent up equity or refinance as their credit cures post-modification. On loans that that have ultimately defaulted and liquidated low mark-to-market LTVs have provided adequate cushion to recover both performing and non-performing principal balances. One additional tailwind to higher forbearance recoveries in RPL transactions relative to legacy deals is that while servicers are required to advance applicable taxes and insurance on delinquent and defaulted loans, they do not advance principal and interest that would be recouped at point of liquidation, leaving more liquidated principal to be recovered by the trust and investors.
While average amounts of forbearance and LTVs on loans that abated were low, they varied somewhat significantly. Across trusts analyzed, average trust level forbearance amounts ranged from 2% to 26% of abated balances. And trust level LTVs on abated loans with forbearance ranged from as low as 36 to upwards of 85. Given this variance, trust level forbearance recoveries have ranged from zero to 100% with an obvious skew towards higher recoveries.
The majority of loans with forbearance that have abated from RPL trusts have come from the Towd Point shelf totaling $581 million compared to more than $120 million coming from Mill City deals. Towd Point recoveries have on average been 30 points higher than those experienced in the Mill City shelf to date, totaling 93% and 63% respectively. Somewhat surprisingly, Towd Point recoveries have been higher despite, albeit modestly, larger amounts of forborne principal and higher mark-to-market LTVs. On average, loans with forbearance that have left Towd Point trusts have had 16% in forborne principal and a mark-to-market LTV of roughly 65, while loans in the Mill City shelf have had 10% forbearance and a 63 LTV. (Exhibit 2) Additionally, Towd Point trusts with the largest amounts of securitized forbearance have some of the highest recovery rates. TPMT 2018-3 and 2019-3 which both have upwards of 14% non-performing principal balances have had 99% forbearance recoveries to date. A similar phenomenon is occurring in the Mill City program. The MCMLT 2018-3 and 2018-4 deals have 9.1% and 10.5% forbearance respectively. The 2018-3 deal has recovered 94% of forborne principal while the 2018-4 trust has recovered 100%.
Exhibit 2: Forbearance recoveries by trust
One potential risk when observing these recoveries is that the servicer may not report a loss even in the event forbearance is not recovered. In an effort to mitigate any servicer reporting discrepancies, it is important to cross-reference abatements on loans with large amounts of forborne principal relative to the performing balance to see if the forbearance was being recovered. One example of this is a loan from the Towd Point 2017-3 trust that paid off in July of this year. The loan had a balance of $114,169 prior to termination, with $67,228 or roughly 59% of the balance non-performing. Per the August remittance, the trust recovered the entirety of the performing and non-performing balances, a nod towards the veracity of these elevated recoveries being realized.