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Residential Real Estate

Helped a Large Regional Bank Source Higher-Quality, High-Yielding Loans Without Hiring Additional Personnel

Business Need

Diversify the Balance Sheet by Building a Low-Risk, High-Yield Residential Whole Loan Portfolio.

Results

Closed 295 separate deals valued at $415 million over three years

Closed 24 loans/month on average with a value of $11.23 million

Acquired primarily high-credit, scratch-and-dent loans as well as some QM loans

Built a portfolio for the client with an average FICO score of 750, average LTV of 70%, and an average DTI of 37%

In 2017, a large regional bank needed to grow its residential whole loan portfolio to diversify its balance sheet.

Rather than create an in-house team, the bank sought to outsource the assignment to an experienced partner who could provide access to loans at lower costs and higher yield, as well as the operational expertise and infrastructure to support and streamline execution.

Solution & Outcome

A Full-Service, Turn-Key Platform to Purchase Residential Whole Loans.

The bank reached out to SitusAMC, which already priced mortgage servicing rights (MSRs) for portfolios within the bank’s short-term warehouse lending line and facilitated introductions to new originators. The timing was ideal: SitusAMC had recently closed the last of its three opportunity funds that invested in so-called “scratch-and-dent” mortgages. These are loans that have a compliance issue preventing them from being delivered to the anticipated channel. For example, a home buyer purchases an automobile just before closing, increasing the borrower’s debt-to-income ratio beyond the maximum allowed by the guidelines of the intended loan buyer, so the originator must find a new investor to purchase the loan. SitusAMC had the platform and capabilities to source higher-quality scratch-and-dent loans based on specific yield thresholds set by the bank. Moreover, the bank had provided a credit line for SitusAMC’s opportunity funds, so it had data on the loans’ performance, which helped it get comfortable with the risk profile of the scratch-and-dent loans. SitusAMC established a turn-key operation, performing all of the sourcing, pricing, preliminary due diligence and bidding on loan pools that met the bank’s criteria. SitusAMC built a streamlined process that enables the bank to find loans that the market undervalues at a lower cost, lower risk and excess yield relative to other opportunities in the market. In the first three years of the engagement, SitusAMC closed 295 separate deals valued at $415 million, primarily high-credit scratch-and-dent loans as well as some QM loans. SitusAMC built a portfolio for the client with an average FICO score of 750, average LTV of 70%, and an average DTI of 37%. Yields ranged from 80 to 200 basis points higher than jumbo yields or in general ~320bps over interpolated swaps. The majority of the loans SitusAMC purchases for the client are at discounts to par, thus eliminating the premium risk in most other residential mortgage assets. This also provides some upside in yield in the event a loan pays off faster than modeled speeds at the time of purchase. If SitusAMC is awarded the loan, it provides a letter of intent via power of attorney, orders additional due diligence, gathers the results, gives its recommendation, coordinates getting the mortgage loan purchase agreement executed between the bank and the seller, and coordinates fundings. In the end, the bank only needs to check on the collateral and approve SitusAMC’s findings. SitusAMC also provides services needed for the rare delinquent loan. SitusAMC is now building out origination guidelines for full-doc, interest-only loans for the bank, with a goal of finding additional niche product that meets the bank’s credit quality and balance sheet needs.