Q2 2020 MFA Financial Inc Earnings Call
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[noise], ladies and gentlemen, thank you for standing by.
Welcome to the M.S.A. financial incorporated second quarter earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded I would now like to turn the.
Conference over to your host Hell Schwartz. Please go ahead.
Thank you operator, good morning, everyone. The information discussed on this conference call today may contain or refer to forward looking statements regarding financial Inc., which reflect management's beliefs expectations and assumptions that I'm not based future performance and operations.
When used statements that are not historical in nature, including those containing words, such as well, but we expect anticipate estimate should could would or similar expressions are intended to identify forward looking statements. All forward looking statements speak only as of the date on which they are made.
These types of statements are subject to various known and unknown risks uncertainties assumptions and other factors, including those described the NFL <unk> annual report on form 10-K for the year ended December 31, 2019, and all the reports that it may file from time to climb with the Securities and Exchange Commission.
These risks uncertainties and other factors could cause their interphase actual results could differ materially from those projected expressed or implied in any forward looking statements. It makes for.
For additional information regarding phase use of forward looking statements. Please see the relevant disclosure in the press release announcing and that base second quarter 2020 financial results.
Thank you for your time I would now like to turn this call over to end up base Neo and President Craig Knutson.
Thank you how.
Good morning, everyone.
I'd like to thank you for your interest in and welcome you to imitate Financial's second quarter Twentytwenty financial results webcast also dialed in with me today or Steve yard our CFO, Good Wonder Christiansen and Brian Wolfson, Our co chief investment officers and other members of senior management.
Before we begin I'd like to give a shout out to our entire imitate team. The last five months has obviously been extremely challenging and made exponentially more so by the fact that all of our efforts have been remote as the company fully implemented our business continuity plan during the third week of March the effort.
And commitment to put forth by our entire team over the last five months has been extraordinary and I had been awed by their dedication.
Although the bottom line earnings per share results for the second quarter of Twentytwenty might that first with appeared to be a return to normal for MFS. The second quarter was anything but normal.
After a co vid 19 induced mortgage market meltdown that began in mid March we were in the middle of negotiating a forbearance agreement was our significant lenders as the second quarter begin. These negotiations resulted in our first forbearance agreement, which took effect 10 days into the quarter on April 10.
Although our lenders who were party to this agreement has essentially been granting us forbearance since March 23rd.
Forbearance agreements were extended on April 27th and again on June 1st and we exited forbearance on June 26.
So we spent nearly the entire second quarter under forbearance and while these forbearance agreements were expensive and required a massive effort to manage they did afford us the time necessary to de lever our balance sheet generate liquidity and conduct a thorough and competitive process to source third party capital.
Please turn to page four.
Our second quarter financial results were overwhelmingly dominated by unusual events and transactions.
Sales of residential mortgage backed securities in the second quarter generated 177.5 million of net realized gains versus their marks or March 31 marks the sale of a large non QM whole loan pool generated a loss of 127.2 million. However, 70.2 million of this lawsuit.
This book does impairment in the first quarter in anticipation of this sale. So the second quarter recognize loss was 57 million.
We booked a 49.9 million dollar loss related to swap hedges that were terminated during the first quarter.
Hi, forbearance interest expense and 14.2 million of amortize swap losses generated very high interest expense of $82.1 million for the period that resulted in no net interest income for the quarter. We also recorded $40 million of expenses related to forbearance and portfolio.
Restructuring.
So although we earned 19 cents per share the second quarter. This was the result of many large and unusual items.
GAAP book value was up primarily due to GAAP earnings that were not paid out in dividends economic book value was up. Additionally, as we saw continued price improvement in our carrying value whole loans.
We elected the fair value option to account for all new and reinstated financing.
This allows us to extent upfront fees and other costs associated with these transactions, thereby allowing us to present, a more true economic go forward cost of these financing arrangements or leverage ratio at June 30 was two point does is two to one.
And our investment mortgage assets consisted of $5.9 billion residential whole loans at approximately 400 million of mortgage backed securities.
Please turn to page five.
As previously announced we closed our capital transaction with Apollo in a fee on June 26. This transaction included a 500 million dollar senior secured term loan a warrant package to purchase 7.5% of them if they common stock.
Over $2 billion of new non mark to market financing provided by Apollo and the theme together with Barclays and credit Suisse.
In addition, Apollo and a theme have committed to purchase the lesser of 4.9% or $50 million of them with a common stock in the open market over the next year and the theme has committed to purchase a portion of them a phase first non QM securitization.
I cannot stress enough that this transaction was about a lot more than a 500 million dollar check. It is a very is very much a holistic solution and a strategic and collaborative partnership.
Please turn to page six.
With the pause afforded to us through forbearance and with assistance from Apollo in a scene. We have also been able to profoundly restructure our liabilities to a much more durable form of financing.
Of the 4.7 billion of borrowing that is asset base or secured 3 billion is non mark to market and two year term and another 785 million is intentionally under levered by approximately $55 million, thus, creating a margin cushion of approximately six points.
In addition, we have 330 million of unsecured debt with our senior note and convertible bonds.
So all all told over 80% of our borrowing is either non mark to market or under Levered.
As you can see in the last bullet point on this page the cost of the aggregate secured financing away from the Apollo with being senior loan in our existing securitized debt is approximately 3.6%.
Replacing some of this borrowing with securitization, particularly for non QM loans at current new issue levels could lower this cost by about 100 basis points, depending on how deep in the capital stack we sell.
Please turn to page seven.
As previously mentioned, we exited forbearance on June 26, with substantial liquidity no outstanding margin calls and all lenders we paid in full.
Although an extensive and time consuming process. We believe that we were able to protect protect hundreds of millions of dollars of book value by liquidating assets in an orderly and negotiated fashion rather than through a fire sale liquidation during the last two weeks of March.
In addition, we were able to conduct a robust and competitive third party capital process, which again, we believe led to a much better transaction than we could have achieved in a compressed and rushed timeframe.
[noise], please turn to page eight.
While I'm at Bay is admittedly a smaller company than we were in February we believe that we're on very solid quoting during what remains a very uncertain economic environment not only do we have very durable financing, but we also have substantial liquidity the securitization mark.
It continues to improve amidst dwindling supply offering us the ability to realize considerable cost savings. Additionally, we have reinstated the payment of all accumulated but unpaid dividends on our series B and series C preferred stock issues and we have declared a common stock dividend of five cents per share.
Payable on October Thirtyth 2020 to stockholders of record on September Thirtyth.
Please turn to page nine.
As most of you know as a reach we are required to pay 90% of our taxable income in the form of dividends and those dividends can be quote on preferred stock in common stock.
To the extent that we pay 90% or more but less than 100% of our taxable income we're required to pay income taxes on the amount by which our dividend distributions fall short of 100% of our taxable income.
Finally, while we generally have until October of the year. Following the tax year to make these distributions we are required to pay an excise tax to the extent that we do not declare at least 85% of the required distribution during the current year. The excise taxes paid on the amount of shortfall below the 85%.
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So preferred dividends for the year at the contractual dividend rate will totaled $29.8 million or about six and a half since.
Per common share so the preferred dividends will satisfy the distribution requirement on the five cents, a 2019 taxable income with a penny and a half approximately to apply to taxable 2020 income.
With an estimated 14 cents of taxable income through June thirtyth, the 85% distribution required to avoid the excess tax the excise tax is about 12 cents or tenant has since after the preferred dividends.
Pages, 10, and 11 present pie charts to illustrate how our portfolio composition and how our secured liability structure changed during the second quarter.
Our investment portfolio is lower by a third and is now comprised of 94% whole loans up from 74% at March 31, and our secured liabilities are lower by 43% and our nearly two thirds non mark to market versus nearly 100% mark to market at March 31.
I will now turn the call over to Brian Wilson to provide more details on the investment portfolio.
Thank you Craig.
Turning to page 12.
The pandemic has had a material impact on the origination of non Ken.
Production basically ground to halt coming into the second quarter.
It is gradually had been gradually increasing with the stabilization of the securitization market and markets more general.
Underwriting standards have tightened a bit on new production.
Even at standards were already conservative free Covance.
Change hasn't been dramatic.
Part of our de leveraging process to rightsize the balance sheet.
Indicated on a sale of approximately 1 billion of loans in the second quarter.
The loans in the portfolio sold at higher LTV.
Resulted in a reduction of the remaining weighted average portfolio LTV at the end of the second quarter by two points.
Sure the pandemic our relationships with our originators remains strong.
We are working with our partners to be a stable source of liquidity moving forward.
Approximately half of the portfolio is now finance with non mark to market leverage.
And we expect to be a programmatic issuer securitizations, which will further increase the percentage of non mark to market funding. In addition to lowering our cost of funds.
Turning to page 13.
Significant percentage of borrowers that are noncomp portfolio have been impacted by dependent.
Any of our borrowers are owner is a small businesses that were affected by shutdowns across the nation.
The instituted a deferral program in March with our Servicers and efforts to help our borrowers managed through the crisis, while maintaining value for our shareholders.
Any borrower that was current leading up to the pandemic and raise their hand during the month of March April and May thing that they were impacted for granted a deferral until the June 1st payment and were reported as current through that time period.
Looking at the table on the right hand side of the page.
And see the cumulative percentage alone impacted by coated increased over 30%.
As of June 30, it we're happy to report over two thirds or the bars that receive received colvin related deferrals have made one or more payment hosts deferral conclusion.
And continue to be correct.
Turning to page 14.
Our RPL portfolio of 1.2 billion has been impacted by the pandemic.
Continues to perform well.
83% of our portfolio remains less than 63 days or 60 days delinquent.
Although the percentage of the portfolio 60 days delinquent and status 17%.
Over 20% of those borrowers continued to make payment.
Prepay speeds in the second quarter slowed down a bit from elevated speed seen previously however, and maintain within our expectation and we could see them tick up.
EBIT in coming months, given the mortgage rate landscape.
This portfolio exhibited similar percentage impacted by Cove, it as a noncash portfolio.
We're working with our Servicers to ensure positive outcomes post work there.
Turning to page 15.
You're lucky to have an exceptional asset management team to manage through our portfolio of nonperforming loan.
Team has worked through the pandemic in concert with our servicing partners to maximize outcomes on our portfolio.
This slide shows the outcomes for loans that were purchased prior to the second quarter ended 2019. Therefore.
For more than one year.
34% of loans that were delinquent at purchase and now either performing painful.
46% liquidated or are you have to be liquidated.
And we have significant inc. significantly increased our activity liquidating Oreo properties, selling 90% more properties versus second quarter a year ago.
20% of loans are still in nonperforming status.
Our modifications have been effective as three quarters are they're performing or paid for.
We are pleased with these results as they continue to outperform our assumptions at the time purchase.
And now I'd like to trying to call over to good wonder to walk you through our business purpose.
Thanks, Brian.
Turning to page 16.
The Cobiz 19 pandemic negatively affects this fixes with borrowers that's project completion and home sales slowed down dramatically in April and May and borrow some general were negatively impacted.
Severe contraction economic activity.
Colin 19 synthetic.
At the results principal Paydowns slows down and delinquencies increased in our portfolio in the month April and may be stabilizing and all recovering slightly in June.
And the face expenses portfolio declined $116 million, approximately 860 million new PBF ended the second quarter.
Principal pay downs for about 65% FICO with levels in April may.
Who covered almost fully in June for a total of 135 million a principal pay downs.
Well equivalent to about 45 CPR on annualized basis.
The third quarter looks on track to continue to extract and principal pay downs in July exceeding 50, Mike.
You asked about 26, knowing of we have caused make no new investments in the quarter.
Average yield on the fixed portfolio in the quarter was 5.73%.
It's probably more exits one forbearance, we refinanced from existing secured financing we borrowed against previously on such loans, all sort of fixed with Lonza crime. He can answer to your term mark to market that with the cost of funds of around 4%.
Delinquencies in our portfolio increases borrow struggled with delays and probably transaction would slow down or we have worked and pet personal financial conditions. There's a good coated 19 sometime it.
The instruments the payments referral programs with most of her services.
Works were assessed on a case by case basis.
Assess where those short term payments deferral would be beneficial to the bar and loan outcome.
Regardless of the required to document negative income impact from cobot 19 on the process of the problem.
Congrats payments the girls usually between myself I want to have two cents of outstanding loans in the quarter.
Turning to page 17.
As previously noted we said delinquencies increasingly quarter at least 60, plus days delinquent loans, increasing by approximately 70 million or 10% to approximately 182 million, 21% of you could be at the end of the second quarter.
That does not have first enough to increase was due to new delinquencies on two and a half dozen of increases cost by loan portfolio balance due to pay downs.
And let's say is fortunate to have a highly experienced and talented management team.
Thats a year's consistently improved outcomes loss mitigation efforts on the residential whole loans in particular, our nonperforming loan portfolio.
The team consisting of people, who has extensive experience in deciding loss mitigation strategies deal with title issues bankruptcy filings and other common issues because the merchant dealing the seriously delinquent loans.
You look closely at those services are confident in our hard work will lead to acceptable outcomes.
Approximately two thirds of the service would be like good loans.
These projects are bricks loans were limited or no work, it's expected to be done getting these properties shifting decent condition.
In addition, approximately one third of the seriously delinquent loans are already listed for sale.
These new reserves of 30 million recorded at June Thirtyth, where expected credit losses.
This is modest modestly down from $35 million enters the first quarter.
Loss reserves are recorded in earnings and this number so that have already been reflected in our first and second quarter earnings.
As mentioned previously we believe our asset management team provides us with acute abandoned some loss mitigation.
In addition, we believe that because he had secured term non mark to market financing and our entire fixed income portfolio, you'll be able to patients. He works one tool could lost to achieve acceptable outcomes.
In addition to loss mitigation axes, lower level reps and warranties Mesa originators other time with loan purchase.
We currently have repurchased claims outstanding of 7 million associated with delinquent loans.
Well, we agree the services that these launch will be purchase overtime.
Finally on a massive level, we believe fiscal and monetary policy are supportive of home prices.
As the fed is lowered rates and purchased assets mortgage rates had an all time low and home sales recovered through depressed levels and people in there.
Turning to page 18.
Our single family rental long portfolio held recently, while in a tough quarter.
So I feel that portfolio was relatively unchanged 490 million, that's prepayments made low due to strong prepayment protection.
And you make no new investments in the corner.
The portfolio yield was relatively unchanged in the quarter at 5.8%.
60, plus delinquency was increased to 5% during the quarter.
Primarily starts the leases increase in the month of April May you can stabilize in June.
And we have seen some positive delinquency trends post quarter end.
Similarly to the fixed this portfolio, we worked closely with a services into monthly payments deferral equally balanced program for US assessed on a case by case cases to assess the benefit of a deferral or programs.
Congrats payment to close the for parents, usually for three months on about 3% of outstanding loans in the quarter.
As mentioned before you need a fiscal and monetary policy policy.
So from a credit perspective for business purpose loans. In addition, short term push for Boston, new vital apartments densely populated cities to single family homes, the more space as well as long term trends towards increased single family rental supportive to our SFR assets.
And now I'll turn it over to crack for some final comments.
Thank you good wonder.
The second quarter of Twentytwenty for an update was unprecedented in so many ways.
It was through an unwavering determination at a herculean effort on the part of all of our dedicated team that we have repositioned and restructured our company. So that once again, we can focus on creating value for our shareholders. While we are still somewhat cautious about the macroeconomic environment today and the still unknown post cold.
Good 19 World. We believed that we are positioned to weather future storms, while we evaluate investment opportunities manage our capital structure and look to grow earnings.
Greg would you please open up the lines for questions.
Thank you, ladies and gentlemen, if you'd like to ask your question. Please press one linzer on your telephone keypad you may withdraw your question at any time by repeating the one zero command if you're using the speakerphone. Please pick up the handset before passing the numbers. Once again if you ever question. Please press. One then zero at this time and one moment. Please for your first question.
Your first question comes from the line of Steve Delaney from JMP Securities. Please go ahead.
Hello, everyone and first just congratulations on all your work over the last five months now to position the amount paid to to be able to move forward.
And it's exciting or your you know yeah, hi, Craig so.
I'm hearing that give them with your financing your package with Apollo anything and everything and it sounds like you guys are kind of chomping at the bit type to put some of that 600 million of cash to to work and.
If I'm hearing you right. It's it's it's probably could be unity in QM learn a product and with an eye towards you know securitizing bad first I guess am I am I hearing you correct on that and getting that can you just give us an update have you actually started buying any loans or here in August and.
Is you don't wish that effort kind of well under way and then I guess attached to that question you've you've got almost 6 billion alone should we expect that the spoke about on securitization that some of which you already have that you'll be working to structure Securitizations securitizations on those.
Existing loans as well thanks.
Sure. Thanks to the question, Steve So I guess, the first thing I would say is almost as much as we feel good about having a high cash balance you know I wouldn't say that it's necessarily burning a hole in our pocket and we need to go invested tomorrow.
Thank you beat as Brian said most of the the originators if they didnt shut down they almost shutdown for several months and maybe you know they've started to originate again, but I think it'll probably be another month or so before you know we see any sort of volume of close loans to purchase just because the underwriting process takes them.
On so it's certainly on the agenda, but it hasn't happened yet, but I think we're certainly close on that in terms of securitization you know with with securitization spreads they're not quite as tight as they were back in early March but they're pretty close is it feels a price this weekend.
Triple A.'s were well, maybe 125 over swaps and Swaptions. So low right now so the securitization execution is really compelling and you know ironically because to your question about the existing portfolio because originators have not been active or that back.
Over the last few months or so if you talk to some of the dealers that are active in Securitizations you know there a little word where their volume will come from over the next month or two while everybody ramps back up. So I think you know we have a great opportunity to be able to securitize, the existing portfolio and as I said.
During my remarks, the the execution with securitization is substantially more attractive than then then.
Non mark to market financing.
It's probably on the order of 100 basis points over a little bit more and it probably provides almost as much as double the amount of leverage even if only selling down through a single layer. So it's you know it's very compelling right now there's not a lot of supply. So I think you know the the the supply demand dynamics are good.
And so I think you know that's it that's where we stand on securitization also in terms of of the cash balance you I think there are a variety of investment.
Situations that we can make but you know one of those is obviously that the the obvious one to look at is we have that note from from Apollo where the theme at a fairly high interest rate. So you know, it's pretty easy to figure out what the OE is if you pay down a portion of that no. Unlike.
Most of our other investments where the ultimate return depends on things that we don't really control like prepayments in interest rates and so and so forth.
It's pretty simple to calculate the are are we on that so I think we have an array of things that will consider deploying cash on but its you know it's across the spectrum.
Great and that pay down it's interesting you would say that some some of the.
We use the term rescue financing that we've seen.
The the facilities have had a minimum required interest payment over one or two years. It sounds like you might have more flexibility.
Where you're you're not locked in to having a certain amount outstanding for periods am I am I hearing you right on that you're you're correct that the its callable its callable right away and I'd like to take out a part of that but there was actually someone else that broken ground on that and getting callable debt. So we were able to take a bit.
After that as well.
Okay, great. Thank you so much for the comments.
Thanks, Steve.
Your next question comes from the line of Henry Coffey from Wedbush. Please go ahead.
Yes, good morning, and let me add my congratulations.
10 enormous amount of work has been done and <unk> and a lot of value preserved.
If you you you look through your existing assets to home values, which are actually holding up fairly well you know I don't know on a ZIP code by ZIP code basis, but on a national basis, they or.
What do you see what would the outcome be if you had to go to foreclosure on a lot of these properties, which would you be able to recover par would create a manageable loss what you know for you.
Maybe that's obviously not the solution you want to pursue but what would it look like if you did pursue that revenue.
Sure. So I'll I'll sort of give an overview in less than that Brian and good wonder talk about some of the specific but obviously, we you know we didnt take some allowances for credit losses.
In the at the end of the first quarter and I guess, we reversed some of those slightly at the end of the second quarter. So you know it's hard for me to say, we're going to get back part everything because we've taken you know allowances for loss reserves, but you're right home prices have have held in there pretty well a mortgage rates already.
You know all time historic lows.
And then you know also consider what the LTV was of the of the loans right. So that the non QM portfolio those lpvs or are typically in the in the mid or high Sixtys.
And on the on the fixing flipped portfolio those ltvs again or in the mid high Sixtys generally so we think we've got a pretty good cushion.
It takes some time to work through those.
You know more time, probably on on non QM than fixed and flip only because those are business purpose loan so they're not owner occupied.
But you know that's part of what this this solidified financing is about as well you know good wonder said virtually our entire fixing foot portfolio is financed with a with two year non mark to market financing. So we have the time to work through those to get good outcomes and as you know it's come under also pointed out.
Yeah, we have a very experienced asset management team. That's been doing this for you know for five or six years. So I think we have the we have the ability we have flexibility given the financing.
To get the best outcomes that we can.
Right and as it relates to the Nonqm portfolio right.
Talking about a weighted average LTV 63.
Yeah.
Right.
Most likely outcome of a borrower really gets into distress.
Going to be just a borrower sale of the property on their own.
Right, we we really want even have to necessarily go through the foreclosure process and if unfortunately, we had to do that when you get to that auction most likely it would go to a third party, resulting in no loss and if you look at the three years with health plans I think we've taken.
Oh, two loans or one loan so far is it really gone the Oreo.
That property you know is not expected to take a lot. So so far so good obviously when you look at project things out you know you you have to think about downside scenarios as well, but but so far so good.
I mean mailing it sounds like you. She was time and you have time.
That's right right, that's exactly right and I.
I was just add look I mean, you're right home prices held up well probably better than people expected and certainly better than you expected probably late March early April obviously, well it has to do with Cisco Lumpiness in numbers, where it's a very low and you won't see they haven't been mortgage rates right now that will go and supports our home prices.
You know.
I'm sure is still you know expenses is for closure costs.
Basically throughout the entire process United deal within income taxes insurance all the things at the end of the daily. So we take all the property on the side. This is eight in the real some cost in Poland support so.
I think you know.
Hi, home prices and how's the wells that's positive, but like you know, it's still costs money to taking since the close here and so our our preferred outcome is too to get to a solution before that but we're confident in our ability to get to acceptable solution to most of these cases.
Great. Thank you very much for answering my question.
Thanks, Eric.
Your next question comes from a line of Doug Harter from Credit Suisse. Please go ahead.
Thanks, you talked about you know how those forbearance financing was you know what it was more expensive in a drag on the second quarter can you just talk about kind of the new financing levels, where they are relative to what you were paying and forbearance. Yeah. And then you know just help us all.
So understand what the pacing it could be of securitization to to achieve that that cost saves that that you talked about on that.
Sure. So you know Forbearances just suffice to say was was very extensive.
You know I would say LIBOR, plus 500, maybe even a little bit more so it's it's not really indicative going forward. We do when we actually have a couple of places in the press release, where we lay this out by product type, but you know I mentioned in my comments, Doug that the the secured financing away from the Apollo a scene.
Large loan and Securitizations that average cost is about 3.6%.
And then it'll vary a little bit by product type, but you know I would say.
Generally speaking, it's probably in the vicinity of LIBOR plus 302 in some cases, maybe LIBOR plus 400.
Oh no named about secure you asked about securitization. So you know not many people probably remember this but we were one day away from pricing a non QM securitization on March 16th.
So you know suffice to say, that's that's probably our single biggest priority right. Now is to is the move is to move forward on securitization and as I said before I think you know the timing is very good because throwing a lot of deals in the market and the you know when the executions have continued to improve.
I guess, how can we think about the sizing I mean is kind of the signs that you were looking to do before the Rightsized. Obviously you have a lot of.
A lot of loans could you do bigger you know just kind of how should we think about that and potential for sizing.
Sure. So it's a good question. Obviously you know we're we're not a first time securitize are booked for non QM loans. It will be our first securitization that so I think at least the first deal that we do you know, we probably don't want to bite off too much you want to make sure that that deal is an orderly dealing.
That's a good execution.
But I think you know over overtime, we can look to grow though so I think when we when the deal that we were close to doing back in March I think was 400 odd million or so I think it was probably safe to assume that's that's sort of a good place to start.
But you know depending on demand.
We could grow that I think that the existing non QM portfolio is about 3 billion dollar. So there's a there's a lot of securitization to do.
Very helpful. Thank you Craig.
Sure. Thanks, Doug.
Your next question comes from the line of Rick Shane from JP Morgan. Please go ahead.
Hey, guys. Good morning can you hear me.
We can hear you Rick how are you.
I'm doing well thanks, how are you guys.
Well good good okay. Good to hear Hey, I'm wanting to talk a little bit about the allowance.
On the non QM portfolio.
And I realize that there was a significant reduction related to the sales which makes sense.
But when we look at the characteristics in and understandably there were sort of the normal slides when we look at the FERC for first quarter, but if we compare the December 31st Statoil metrics on the non QM portfolio versus the 630 on theres not a huge change.
Change it doesn't it doesn't look like there is a big change in terms of portfolio quality terms of FICO LTV coupon.
Yet the reduction of the portfolio was about 30% and the net reduction of the reserve was close to 70% I'm curious sort of what drives that discrepancy I know, there's a comment anything in the footnotes related to economic outlook I'm also.
So curious what timeframe, you're comparing economic outlook from March Thirtyth, two June Thirtyth reserves.
Okay, Steve I don't know, yeah, well talk about that Rick I would point out that we implemented Cecil in 2020, so anything that you compared to December 31st you know what it was it was it a different accounting standard back them, so, but Stefano and I know you want to talk right I understand I'm looking at.
Allowance March Thirtyth two June Thirtyth I was just trying to figure out if it's by looking back to December if the portfolio characteristics would have changed since I don't have the March data, but it doesn't look like you sold something lower quality in the second quarter to explain the decline in the reserved.
So Rick it's Dave I think yeah, I'm not entirely sure which numbers you're looking at whether it's in the press release in the back but maybe if you have a look on slide 23 of the deck you can see a bit of a roll forward by product right, then and backing out the reversal of the adjustment that we made at March 31 on the loans that were being sold back 70.
2 million dollar adjustment.
The reduction in the Nonqm was Oh, yeah. It was about 2.3 million for the three month period and you're right. The if you look at the statistics, we had since you have a table in the press release title six on page right. If you look at the statistics and even on the delinquency levels that they certainly the FICO and the M.L.P. basically.
Take a month's rent portfolio aren't that different so what's what's driving the Cecil between March and June is primarily some assumptions that we made back in April around unemployment and teacher unemployment and.
Yeah, we've modified Dutch slightly.
Yeah, and that's really driving the that reduction in the say so reserve.
So.
You Yeah, we.
When we did I say so those back in the end of the first quarter, we had a little bit more time to yeah, I think about economic outlook in say some of the bigger banks, who are doing that stays where it doesn't announcing earnings.
Before we did and so we yeah, we had I, what I thought were appropriate, but yes silly conservatives assumptions for unemployment for example, and we've sort of just all does back a little bit at the at the end of the second quarter, obviously, the store uncertainty around what might happen. If there's a double dip in the would slow down with the state's causing.
And whatnot, but yeah, we still feel that out unemployment assumptions are appropriate into the second quarter, but that did drives.
Some of that reduction in the non from Cecil Reserve.
And not and rapidly tends to be.
Just a big players I think it's it's a little it maybe a little bit confusing just with the presentation, we had a $70.2 million valuation adjustment on our non QM loans at 331.
That was that that large pool that we sold that I referenced in my comments that we had a total losses of about $127 million on that's 70 million was not a credit adjustment. It was it was a valuation adjustment on loans held for sale. We knew at March 31st that we would be selling those two basically that's $70 million right.
Down was to take that down to where the Mark was on March 31, and then the sale occurred. So it gets reversed out so what was it never really part of about credit loss allowance if you will.
Got it okay. So that makes that makes sense, what you're basically saying and and we understand all the geography on this the fair value Mark was in fact greater than the Cecil reserved for the remaining portfolio. So that's really that's.
Really what's driving that differential.
The what the follow up question to this is that with a.
Relatively large is you look at the migration into July and we appreciate those the those metrics. When you look at the migration of a high number of 30, Didnt day delinquencies as loans come off forbearance and a relatively low 60 day.
Hey, delinquency should we expect Cecil reserve to continue to build as a relative is it a percentage on those loans Cascade from 30 to 60 or actually by the time. We have this next conversation 90 or 120 days.
Sure. So Steve you want to talk about that because we have a separate process for a for delinquent loans than we do for just seasonal reserves in general yeah. When we so when we look when loans 60, plus delinquent we.
Our process looks at those loans and looked at them somewhat separate depending on how how certain we are going into foreclosure. So when we when we think they going into foreclosure well look at them more an individualized basis and it will be more of an analysis of Willie off from a security position the value of the underlying collateral.
This is the the loan balance, but you know as as loans are inside that level. The Cecil reserves will look at macroeconomic assumptions. It will look at pier data around historical loss estimates and pay data to drive that say some reserve. So it would probably say sort of flip side or as loans get we'll see or sleep.
Lincoln.
Okay, and look I realized there I just I realize my questions are little bit pointed, but and let's say all acknowledge that the normal probabilities on the loan going from 30 to 60 or 60 day loan default scene.
It is very different than it is gonna be challenging going forward I I need to recognize that as well.
Right and just to be just to try to provide some additional color. So you know we're now in August so that the 30 day population for that non QM portfolio with somewhere between three and 4% delinquent and and not July.
Right. So so a piece of it rolls to 60, so you're out like a 7% 60.
And in July so so you had basically half the guys.
That oh or third other guys sort of stayed where they were.
Half of 'em went to 60, and it's just from that 30 bucket and then another piece of 'em went to car. So you're not seeing that 30 day bucket sort of continue to build it sort of a onetime item. The guys who had experience that segment Covidien pack. So that the concern was you have 30% that's impacted by coding 30% of.
Your portfolio going to be going to be 30, then 60, but really no. That's not the case, it's a much lower number and sort of that's what we're trying to sort of explain.
Got it and thank you for the update on on July I'm I misspoke, when I said I'm looking at so many slide so thank you guys.
Thanks, Rick.
If there are any additional questions. Please press one then zero.
You have a question from a line of Eric Hagen from KBW. Please go ahead.
Hey, Hey, guys. It's good to hear from you.
The I had a similar question as Rick I'm getting a good answer but the the net earnings reported through as it was up through the non performing loan portfolio I think it was $20 million less photo what's the outlook for returns there and they don't typically ascribe a yield that portfolio, but.
I actually think about the earnings potential there and then as a tack on to that.
Is your portfolio of Oreo pledged as any as collateral for any funding lingers essentially just how the equity.
Hey, Eric good to hear from you to.
Although I'll, let Brian talk a little bit about the the the F. B O loans source. The Oreo portfolio that is not encumbered at the present time I'm. So we own all those with equity I think we have said overtime that are our expected overtime returns on our fair value loans, our nonperforming loans.
We generally said.
We see a range of 5% to 7%.
No that that that's really changed at this point, obviously it varies quarter by quarter as you know.
The income that we show on those fair value loans is is not just the change in the fair value Mark, but it's also cash that we receive because many of those loans that we purchased as nonperforming loans and elected fair value accounting on we've been able to modify and they're now performing loans, but once you know once he does it.
Make them as fair value there their fair value forever.
I will say that the the marked change the fair value Mark change on the nonperforming loan portfolio for the second quarter was only about $2 million. So I think of that 20 million about 18, you that was cash. So there was very little change in that mark So.
Again, not to speculate what happens in the future but.
There's there's probably some room in the valuation sides of the market June 30 was not really got much higher than it was.
In in March.
Great.
Thanks, and then I think maybe Steve Delaney asked it kind of similar question, but.
I feel like or just just to clarify around any run off that might be reinvested or kind of kind of shored up to.
Potentially reinvest later, what what's the current status and third quarter and you guys.
Able to reinvest any paydowns or is are.
Are you religious obtaining that liquidity.
For the I guess kind of near future I'm sure.
So you know we're in conversations with originators. So I'd say you know, we're close to <unk> to start putting out some money again, but but I think we're proceeding somewhat cautiously you know we don't mean, we don't know what the world looks like in a post coated world.
We don't know for certain that we won't see another downturn. So I think you know we feel really good about where we are from a from a you know liability standpoint from a balance sheet standpoint, and from a liquidity standpoint, and I think you heard similar theme on on pretty much every other mortgage recall that.
I think anybody says well have a lot of cash have too much cash obviously, it's a drag to have that much cash, but I think you know given what we've all live through over over the last five months or so it's you know, it's probably understandable that we're going to deploy cash you know maybe somewhat conservatively at least for the short.
Term.
Right.
<unk> lung loan sales, Craig I mean can do.
You know as the market continues to recover your fair value Mark its back to where are you guys think it should be could you.
Would you entertain selling a portion of the Nonqm portfolio.
And here.
I said I suppose we could I think you know, it's certainly not our intention. We did you know we did sell some in April I guess about me closed in May but at this point I don't really think.
Well I don't really think thats on our.
I'll never say that will never do it but I really don't think that we're thinking that a loan sales make all that much sense. I think you know securitization makes a lot of census, particularly right now given where rates are and where spreads are.
I think thats, probably the more likely route to go.
Got it. Thank you guys so much.
Thanks, Eric and that at this time there are no further questions.
All right well thanks, everyone for your interest in them if they financial we look forward to our next update after the third quarter in early November.
Ladies and gentleman that does conclude your conference for today. Thank you for your participation and for using 18 T. teleconference. You may now disconnect.