The Perfect Storm – NMP
Many factors can lead to this decision. Some of them are the combination of running at a loss and worrying about the potential for a margin call on their MSR lines. Today, many businesses are making minimal profits or are at a loss until they bring their expenses in line with their new revenue margins.
A company’s service portfolio is one of its greatest assets, especially since it is currently full of low-interest loans. Many companies borrow against their MSR asset (much like a line of credit on your home) and use it to offset losses.
The catch is that most MSR lines don’t allow you to borrow more than 60% (almost) AND the value of the asset backing that MSR line changes often. When the value goes down (rates go down, etc.) and you may be exceeding the maximum borrowing limit. Warehouse lenders then ask you to pay it back up to your maximum loan value. This is called a margin call. If you don’t have the money to pay it, you find yourself in a very difficult situation.
One of the results could be closing your doors. Unfortunately, it doesn’t end there. Any lender who has entered into a best effort lock with this investor and is left “uncovered”, must essentially go to market with the loans they have locked with said investor who no longer exists.
For example, I was talking to a lender the other day. It is a medium-sized store with approximately $1.5 billion in closed volume per year. They had 22 loans locked with FGMC at the time their doors closed. These loans were locked in as best efforts and left uncovered as the rates offered by FGMC were not offered to any other investor/agency. These were all agency qualified loans, closed/funded and cleared for purchase. Since they had to switch to current market prices on Friday when FGMC closed, they lost $70,000. It is simply because they are not hedged and the prices are at market.
As an industry, we are also seeing an increase in buybacks, declines to buy, appeals and other negative events after the close. Most companies experience these events in a normal market, the cost of doing business. In these cases, an IMB must sell these loans on the Scratch and Dent market. Typically, a scratch auction pays $0.90 to $0.95 per dollar. In this market, they pay $0.60 to $0.80 per dollar. It is a substantial loss.