Inflation on Scratch and Dent Loans:
Due to inflation, higher energy costs and the Russia/Ukraine war, the United States economy has taken a downturn. Business sectors are negatively affected by this and our Scratch and Dent Niche within the mortgage industry is no different. This leads to inflation on Scratch and Dent Loans.
When inflation occurs, the Fed normally will raise rates. If this happens gradually, S&D loans are not impacted too much. But when it happens rapidly it can cause a lot of problems and that is what we are experiencing currently.
The first issue has to do with buyer appetite. Right House Capital has seen some buyers change their acquisition appetite with mortgage loans. Many buyers have reduced what type of loans they want to buy. This will reduce the amount of loans that are traded on the secondary market.
Secondly, buyers have lowered their pricing models to offset rate volatility. Bottom line, the amount buyers are willing to pay for those loans has gone down. This is affecting new scratch and dent loans with lower bids and increase spreads in the “Bid vs. Ask” price. This too will reduce the amount of loans on the secondary market in 2022.
Last of all, Right House Capital has also experienced price fading across the board with buyers in the first quarter of 2022. Price fading occurs when rates take an egregious turn for the worse. Unfortunately, price fades are part of the Scratch and Dent industry, but Right House has strategies to check and combat price fading. RHC checks all fades with MBS prices to make sure they are accurate and warranted. This protective strategy ensures all fades are legitimate and correct to market conditions which mitigates the loss for any mortgage lender, mortgage provider or mortgage bank.
Whether or not we are in a good economic environment or bad economic environment, Right House Capital is here for all you liquidation needs for scratch and dent loans, agency fall-out loans, re-performing loans, sub-performing loans or non-performing loans. If you have any problem loans in your pipeline or just want to see what price the secondary market can provide, contact Andrew Zale at 502-365-5632.