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RPL prepayments, delinquencies and deleveraging

| May 7, 2021

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.

Delinquencies have dropped steeply across many parts of mortgage credit lately. Seasoned RPLs have seen some of the largest declines as well as a rise in prepayments. The combined effect of falling delinquencies and faster prepayments could broadly put the sector back on a path to deleveraging. And as these structures deleverage, bonds should tighten and potentially get upgraded, providing potentially attractive total returns. Deals backed by faster paying, cleaner, hybrid ARM collateral look to have more upside from deleveraging while deals backed by lower WAC, more highly modified pools with large amounts of securitized forbearance have less upside, especially in bonds further down the capital structure.

April’s remittance cycle showed deals backed by seasoned RPLs showed month-over-month delinquency rates down by more than two and a half percentage points, representing a 14% decline in delinquencies, while prepayments jumped by nearly 7 CRR. The April cycle signaled strong fundamental tailwinds for the sector, as it appears a substantial number of borrowers cured as presumably as payment forbearance plans reached their 1-year term. Performance across the sector was not uniform, and the recovery was more pronounced in certain cohorts. If the differences continue, investors in certain RPL deals should get outsized returns as those bonds deleverage and roll down the spread curve faster than others.

A previous analysis suggested that cleaner RPL pools backed by hybrid ARM loans in both sequential and shifting interest structures may have greater upside to faster speeds and deleveraging than those backed by more highly modified fixed-rate pools. The April remittance cycle has served to bolster that view. Month-over-month speeds on ARM loans securitized in seasoned RPLs rose from roughly 21 CRR to 28 CRR. Speeds on fixed rate loans saw a pronounced pick-up as well with speeds spiking from roughly 13 CRR to 19 CRR. Both fixed-rate and ARM loans saw a pronounced drop in delinquency rates between March and April as cohort-level delinquencies fell on ARM loans by roughly 200 bp while delinquency rates on fixed-rate loans fell by more than 350 bp. (Exhibit 1)

Exhibit 1: Prepays rise and delinquencies fall across RPLs in April

Source: CoreLogic, Amherst Pierpont

The contemporaneous decline in delinquency and rise in prepayment rates was evident across the three largest issuers of seasoned RPL securitizations: Mill City, New Residential and Towd Point. The Towd Point shelf broadly saw the largest uptick in prepayment rates as shelf-level speeds increased from 15 CRR to 20 CRR month-over-month while the NRZT shelf saw the steepest nominal decline in delinquency rates, although from a much higher March reading than the MCMLT or TPMT shelves, as overall shelf-level delinquency rates fell by five points from roughly 25% to 20%. (Exhibit 2)

Exhibit 2: Comparing changes in prepayments and delinquencies across RPL issuers

Source: CoreLogic, Amherst Pierpont

Deal-level performance

Drilling down to deal-level prepayments across the three shelves, deals are ranked by the largest month-over- month changes in prepayments. Some of the largest increases in prepayments were in seasoned deals. However given the fact that most of these deals have already experienced substantial upgrades on mezzanine and subordinate bonds, there is limited upside to elevated prepayments. Given this, deals across the three shelves are filtered to 2018 and later vintages that have not experienced material upgrades and have more potential to roll down the spread curve. The majority of deals that saw a material rise in prepayments last month were backed by ARM or second-lien collateral, a cohort that has historically exhibited elevated prepayments. Speeds could rise even more against the backdrop of strong HPA, where that second lien could be refinanced into a first lien. Some fixed-rate deals, like TPMT 2018-6 saw elevated prepayments as well, with speeds increasing by 15 CRR month-over-month. (Exhibit 3)

Exhibit 3: Stacking up RPLs with the largest and smallest changes in prepays

Source: CoreLogic Amherst Pierpont

A spike in speeds in a deal like TPMT 2018-6 is not only surprising given that over 9% of the pool is non-performing securitized forbearance, but it highlights a phenomenon that may become more pervasive in seasoned RPLs in the months to come. These deals may experience WAC decay as higher WAC loans without forbearance may continue to prepay out of the pool, making the non-performing balance a larger percentage of the remaining collateral. This may not only serve to drive the pool WAC lower, reducing refinancing incentive and driving speeds slower, but may also lead to interest shortfalls on deeper mezzanine bonds if the pool WAC is not sufficient to support the coupon on bonds further down in the capital structure. And while faster prepays may help the overwhelming majority of the capital structure, investors in premium, open-window ‘AAA’ classes may look to target deals backed by slower paying deals with larger amounts of securitized forbearance to enhance carry and increase spread against the backdrop of slower speeds.

Turning to deal-level delinquency rates, nearly all deals across the three shelves saw a decline in delinquency rates across all vintages. The largest percentage declines in delinquency rates came in deals backed by second liens in the Towd Point shelf, where the 2018-SJ1 and 2019-SJ2 saw delinquency rates decline by upwards of 20%, admittedly only representing slightly upwards of a 1.0% decline in nominal delinquency rates. The largest nominal declines came in collateral backing sequential-pay structures issued by New Residential, which saw delinquency rates fall 3-4% between March and April across certain 2019 and 2020 transactions.

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