May 19, 2016

Whole Loan Sale vs. Securitization

New rules and wider spreads for securitizations may make a whole loan sale more attractive.

The first quarter of 2016 saw a slowdown in marketplace lending and other securitizations as a result of widening spreads and market volatility.

Year-to-date, commercial mortgage-backed securities (CMBS) issuance has reached a mere $12.4 billion, less than half of the $27.0 billion mark it reached at the same time last year. Whereas the slowdown in the CMBS market in the previous cycle was the result of the tightening of underwriting practices, today's scenario is the result of many other external elements that are making CMBS lenders find it challenging to competitively price new loans.

Spreads for Securitizations Widening
For starters, the number of securitization players has fallen. Many lenders couldn't even break even by the end of 2015 thanks to widening spreads in the fourth quarter, and were therefore driven out of the market. Many believe that large originators and niche lenders will squeeze out mid-sized originators in the near future.

Bond buyers continue to seek out the value of widened spreads on bonds, and are looking for stronger returns from bonds. As such, spreads for CMBS securitizations are widening even further.

Imminent Dodd-Frank regulatory requirements for securitizations which are to take effect this coming December are pointing to a heightened level of ambivalence. These new rules will require originators to hold on to a portion of their originations and retain some of the risk associated with the loans on their balance sheet for five years in order to discourage risky lending. The impact of these new regulations, along with other external factors, has led to a continued widening of spreads.

Securitizers are concerned about how wider spreads might make them less competitive compared to other lending sources.

Working to Stay Competitive
When spreads increase, securitizers' profits are essentially slashed. In the event of a widening of spreads, securitization programs must boost the coupon offered to borrowers in order to keep profits beefed up. Such a scenario makes this segment less competitive compared to banks and life companies that don't experience the same level of volatility in the cost of capital. If CMBS is not competitive enough, they'll likely be viewed as lenders that are only able to provide lower-quality assets.

While increased regulations are certainly affecting all lending segments, securitization programs will probably be among the more severely impacted. New rules put in place will likely lead to much more conservative securitization programs when it comes to lending standards in order to ensure that all loans originated can be sold off.

Selling Whole Loans From Loan Portfolios May Be An Attractive Option

In order to reduce their risks, lenders may want to consider selling whole loans. Whole loan sales are and efficient and attractive alternative to securitizations.

By selling whole loans, lenders can earn money from origination fees. Secondary market entities that purchase these whole loans will likely require that they meet specific underwriting criteria before the transactions go through. As such, it's important that lenders work with experienced advisors to ensure their whole loans are in full compliance in order for them to be sold off successfully.

At Garnet Capital, we help all types of lenders, including marketplace lenders who are looking to sell whole loans. We carefully analyze lenders' loan portfolios and recommend the next steps necessary to reduce risk, increase profitability, and induce growth, including setting up flow purchase programs. Discover more about our loan sale services and register for our online portfolio auction system today.