With the recent agency position change regarding a “zero-defect policy,” one would have thought that would be the end of scratch-and-dent loans sold into the secondary market. However, that is NOT the case. As a matter of fact, some of the scratch-and-dent buyers are busy bidding loans and packages as we speak. This can be one loan or many (hopefully not, as these loans can sell for deep discounts). The agencies now offer specific criteria to provide approved sellers the option to review their alternative repurchase requirement program as a logical step if a loan is pushed back to the originator. I have also been told that they even offer a waiver desk for such loans, depending on the loan defects. As aggregators clamp down with increased scrutiny on files purchased, there is ample opportunity in 2016 to position yourself properly to minimize losses and problems associated with aged loans stuck on a warehouse line and/or in portfolio.

As in any private market, scratch-and-dent investors can be selective as to what assets they prefer to purchase and at what pricing. This market is seeing more consistent pricing of late, where a recent auction saw all buyers within a similar trading range for the same pool of loans. Many of these buyers are non-traditional in that they don’t have a lending platform but claim “exclusive representation” to certain hedge funds. That makes it challenging at times to know who the end buyers are. Caution should also be noted that pricing in this space can be predicated on supply and demand, so it is critical to try to receive multiple bids. Most buyers will bid individual loans, yet there are some end buyers who will offer one price for an entire pool of loans, provided it meets their minimum volume requirements. Additionally, just recently, it was announced that yet another mortgage banker with an existing servicing platform is looking at bidding non-compliant TRID loans. Some of these same buyers were opportunistic and participated in actively bidding HARP loans.

What Lenders Should Know:

A key guiding principle for lenders to be aware of in the scratch-and-dent space is that once a loan is identified as a “problem” and it is further determined that one needs to sell the loan into the secondary market, please provide as much information as possible in a bid tape that captures the loan data points. Just as critical as the completeness for the loan data points is the comments section/reason for repurchase so the potential buyer understands why the loan is not saleable. This will provide a clear picture to the bidder, which can result in maximizing your price execution and reduce data discrepancies before a final due diligence review prior to funding the loan. If these steps are not followed correctly the buyer/investor can re-bid the loan with a lower price. If the new bid is unacceptable to the seller/originator, the auction process for the loan(s) would have to start over again!

If you have any questions, please contact your MGIC Account Manager for further details.

Lloyd San

Lloyd San - Retired MGIC Mortgage Market Manager

A 30-year mortgage industry veteran, retired in 2021, Lloyd San served as Mortgage Market Manager for Mortgage Guaranty Insurance Corporation (MGIC). Overseeing a national effort, he was responsible for managing all client-related capital market activities in the areas of bulk and correspondent loan referrals, investor introductions, structured products, whole loan sales, as well as product and personnel introductions.

In addition, he is chairman of the California Mortgage Bankers Association, Secondary Marketing Executive Committee and also serves on the Western Secondary Conference Committee.

A graduate of San Diego State University in California, Lloyd received his MBA in Financial Management from National University. He also holds a California Real Estate Broker’s License.

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