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What drives valuations of re-performing residential whole loans?

Re-performing loans (RPLs) are defined as loans in which payments had previously ceased for at least three months but have been consistently made for the past 12-24 months. New buyers of RPLs and longtime holders of the assets continue to question how best to quantify the risks associated with loan performance and how that translates into pricing. Both investors continue to evaluate their prepayment, default and loss assumptions in the context of a tightening market over the past 18 months, particularly when portfolios have loans with such varied characteristics and performance history.

On June 28, MountainView Financial Solutions, a Situs company, will provide firsthand insights on these topics in a webinar: Re-Performing Residential Whole Loan Valuations – State of the Market, Valuation Issues and Approaches to Deferred Balances. The webinar’s presenters are Brian Dunn, Managing Director of Analytics on MountainView’s Whole Loan and Structured Finance Securities Valuation Team, and Mike Kelleher, Vice President of Business Development on the company’s Residential Whole Loan Transaction Advisory Team.

While the cash-flow driven valuation methodology for re-performing loans is similar to the methodology used for performing loans, Dunn states that the framework and approach for pricing RPLs need to be unique and factor in issues related to loan modifications. He says deferred balances are one of those issues they often discuss with clients, so deferred balances will be one of the webinar’s focus areas.

“Modifications come in all shapes and sizes, and analysts and investors continually ask how deferred balances are going to be monetized,” says Dunn. “Assigning a value to the deferred balances can be challenging and requires a number of considerations.”

The RPL market lacks the transparency found in other areas of the secondary market for mortgages. In the webinar, Kelleher will discuss recent trading activity and trends for RPLs, share MountainView’s thoughts on the influences of that activity, and give an outlook for the market.

“The RPL market has evolved significantly in the last 18 months, and careful portfolio construction can result in very significant changes in execution levels,” says Kelleher. “The differences in value from one portfolio of RPLs to the next can be very sizable, and understanding what drives the value of the underlying loans is critical to all market participants.”

Experienced investors and new participants in the market are encouraged to register for the webinar.