CPR Affecting Scratch and Dent Loans

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CPR Affecting Scratch and Dent Loans:

Last month, this blog suggested to liquidate all scratch and dent loans quickly and not to pool them with market conditions in mind. Right House Capital is doubling down on this recommendation due to “Conditional Prepayment Rate” or CPR.  So how is CPR Affecting Scratch and Dent Loans?

What is CPR:

CPR is an estimate of the percentage of a loan pool’s principal that is likely to be paid off prematurely. Scratch and Dent buyers purchase mortgage loans with this estimate in mind. And it also can be connected to the buyers purchase price.

With the continual raising of mortgage rates, loans with coupons in the 2’s and 3’s are producing a rapid decrease in buyers’ conditional prepayment rate which makes sense as borrowers will not be motivated to refinance and possibly dissuade them for looking at buying a new home.

The drop in the CPR rate is already affecting Scratch and Dent buyers’ appetite for loans with low coupons.  Some buyers have stopped bidding these loans altogether and others have dropped their pricing models for this type of coupon.

How it affects Mortgage providers:

If a mortgage provider is currently holding loans with these low mortgage rates with the idea they will remarket once rates settle, there might not be buyers who are willing to purchase due to their CPR estimate. Unfortunately, mortgage providers will have to make a call on liquidating these lower coupon loans for a much lower price that what they could have received a year ago. But if a provider decides to pass on these lower bids. There is still a chance those prices will not improve.  Or worse will not be available at all even when the Scratch and Dent niche settles down.

Right House Capital is here for all types of loans in need of liquidation on the secondary market. If you have any scratch and dent loans, agency fallout loans, near-miss loans, non-QM loans, jumbo loans, sub-performing loans, re-performing loans and non-performing loans. RHC is here to offer our services.

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