Non-agency RMBS / non-QM / investor-purpose
Re-performing loans (RPL)
status: draft
Re-performing loans (RPL)
Re-performing loans are mortgages that were previously delinquent but have since been cured or modified, with the borrower now current again. Also called “scratch-and-dent” when acquired from originators with early payment or documentation issues. RPL carries higher re-default risk than never-delinquent loans because the borrower has already demonstrated payment stress.
Product categories
Re-performing loans (RPL proper)
Loans that experienced 60+ day delinquency, were modified (rate reduction, term extension, principal forbearance), and have returned to current status.
Modification types:
- Rate modification: Interest rate reduced to affordable level
- Term extension: Loan extended to 40-50 years to reduce payment
- Principal forbearance: Portion of principal set aside (due at maturity or forgiven)
- Capitalization: Arrearages added to principal balance
Seasoning requirement: Most capital providers require 6-12 months of on-time payments post-modification before considering the loan re-performing.
| Seasoning | Classification | Advance Rate |
|---|---|---|
| 0-6 months | Early re-performing | 65-72% |
| 6-12 months | Seasoned re-performing | 70-78% |
| 12-24 months | Established re-performing | 75-82% |
| 24+ months | Mature re-performing | 78-85% |
Scratch-and-dent
Loans that fail originator quality control, have documentation defects, or have early payment defaults (EPD). Acquired at discount directly from originators.
Common defects:
- Missing or incomplete documentation
- Compliance issues (TRID timing, disclosure errors)
- Appraisal concerns
- Early payment default (30-60 days DPD in first 6 months)
- Guideline exceptions that buyer won’t accept
Pricing: Typically 92-98 cents on the dollar depending on defect type and cure potential.
Performing modified loans (PLM)
A subset of RPL where the modification was successful and the loan has sustained performance. These command higher prices than fresh RPL.
status: draft
Performance benchmarks
Re-default rates
| Seasoning Post-Mod | 12-Month Re-Default | 24-Month Re-Default |
|---|---|---|
| 6 months | 12-18% | 18-25% |
| 12 months | 8-14% | 14-20% |
| 18 months | 6-10% | 10-16% |
| 24 months | 5-8% | 8-14% |
Key insight: Re-default risk is highest in the first 12 months post-modification. Loans that survive 24 months have materially lower subsequent default rates.
Modification success rates
| Mod Type | 12-Month Success | 24-Month Success |
|---|---|---|
| Rate reduction only | 70-80% | 60-70% |
| Rate + term extension | 65-75% | 55-65% |
| Rate + principal forbearance | 60-70% | 50-60% |
| Principal forgiveness | 55-65% | 45-55% |
Principal modifications perform worse. Borrowers with principal forbearance or forgiveness typically had the most severe distress, making sustained recovery less likely.
Severity in re-default
| Factor | Impact on Severity |
|---|---|
| Lower current LTV (due to principal reduction) | Reduces severity |
| Extended timeline from prior default | Increases severity |
| Property maintenance during prior delinquency | Variable |
| Market conditions at resolution | Major factor |
Typical severity on re-default: 25-40%, compared to 20-30% on never-defaulted non-QM loans.
status: draft
Acquisition pricing
Price drivers
| Factor | Impact on Price |
|---|---|
| Months seasoned post-mod | +1-2% per 6 months |
| Current LTV | Higher LTV = lower price |
| Modification type | Rate-only > principal mods |
| Payment history consistency | Clean > sporadic |
| Property location | Judicial states lower |
Typical purchase prices
| Loan Category | Price (% of UPB) |
|---|---|
| 12+ months RPL, clean payment | 90-95% |
| 6-12 months RPL | 85-92% |
| Fresh modification (0-6 months) | 80-88% |
| Scratch-and-dent (minor defect) | 95-98% |
| Scratch-and-dent (material defect) | 90-95% |
| Scratch-and-dent (EPD) | 85-92% |
Market timing matters. RPL prices are highly sensitive to credit spreads and liquidity conditions. During 2020 COVID volatility, RPL traded at 70-85 cents before recovering.
status: draft
What capital providers focus on
Payment history analysis
The post-modification payment history is the primary underwriting criterion.
What “current” means:
- Not just one payment made, but consistent monthly payments
- No missed payments or partial payments
- Payments made on time, not after grace period
- No payment plan or special servicing status
Red flags in payment history:
- Sporadic payments (3 on, 1 off, 2 on)
- Partial payments accepted
- Payments funded from loss mitigation reserves
- Servicer advances covering payments
LTV recalculation
Post-modification LTV should be calculated on:
- Current principal balance (after any reduction/forbearance)
- Current property value (new BPO or AVM, not original appraisal)
| Pre-Mod LTV | Post-Mod LTV | Recovery Profile |
|---|---|---|
| 120% | 95% | Still elevated, limited equity cushion |
| 100% | 80% | Reasonable, modification created equity |
| 85% | 70% | Good, meaningful borrower equity |
Modification terms
| Term | What to Review |
|---|---|
| Rate | Is the modified rate below market? Above? |
| Term | Extension to 40 years signals severe stress |
| Principal forbearance | How much is deferred? When due? |
| Principal forgiveness | Fully forgiven or contingent? |
| Balloon payment | Any lump sum due? |
Contingent forgiveness: Some modifications forgive principal only if the borrower remains current for 3-5 years. If they re-default, the forgiveness is reversed. This affects recovery modeling.
Servicer quality
RPL performance is heavily dependent on servicer capabilities in loss mitigation and borrower communication.
Key servicer attributes:
- Experience with modification servicing
- Borrower contact frequency
- Early intervention on payment issues
- Modification success track record
See servicer selection for evaluation criteria.
status: draft
Structure considerations
Warehouse financing for RPL
| Feature | RPL Warehouse | Performing Warehouse |
|---|---|---|
| Advance rate | 70-82% | 85-92% |
| Pricing | SOFR + 250-400 bps | SOFR + 175-275 bps |
| Dwell time | 120-180 days | 90-120 days |
| Mark-to-market | More frequent | Standard |
| Performance triggers | More sensitive | Standard |
Illustrative pricing. See pricing disclaimer.
Key risk for warehouse lenders: RPL can re-default during the warehouse period, requiring workout or liquidation. Longer dwell times and lower advance rates compensate for this risk.
Securitization
RPL securitizes separately from performing non-QM due to different risk profiles.
Major RPL issuers:
- NewRez / Shellpoint
- Bayview Asset Management
- Caliber Home Loans
- Carrington
Enhancement levels:
| Rating | RPL (Seasoned) | RPL (Early) | Performing Non-QM |
|---|---|---|---|
| AAA | 22-28% | 28-35% | 14-18% |
| AA | 17-22% | 22-28% | 10-14% |
| A | 12-17% | 17-22% | 7-10% |
RPL requires significantly more enhancement than performing loans due to demonstrated credit issues.
Whole loan sale
Major RPL buyers:
- Credit funds (Oaktree, Angelo Gordon, Fortress)
- Specialty servicers with modification capabilities (Carrington, PHH)
- Insurance company platforms (Athene)
Flow vs bulk:
- Flow programs: Ongoing purchases with regular delivery schedules
- Bulk: One-time portfolio sales, competitive bid process
status: draft
Red flags
At acquisition
- Seasoning less than 6 months: Re-default risk very high
- Multiple prior modifications: Borrower has failed before
- High post-mod LTV (above 90%): Limited cushion
- Sporadic payment history: Not truly re-performing
- Principal forbearance balloon near-term: Upcoming payment shock
- Owner-occupied now vacant: Occupancy change signals stress
In portfolio management
- Re-default rate exceeding 15% at 12 months: Pool quality issue
- Advancing duration exceeding projections: Workout not progressing
- Modification success rate below 50%: Servicer or borrower issues
- Geographic concentration in judicial states: Extended timelines if re-default
Structural
- Insufficient seasoning requirement in facility: Accepting too-fresh loans
- Advance rate above 80% for early RPL: Inadequate cushion
- No servicer performance standards: No recourse for poor servicing
- Weak re-underwriting at acquisition: Not catching payment pattern issues
status: draft
Regulatory and accounting considerations
GAAP treatment
RPL acquired at a discount presents accounting complexity:
| Method | Treatment |
|---|---|
| ASC 310-30 (formerly FAS 91) | Accrete discount into income based on expected cash flows |
| CECL | Reserve for expected credit losses |
| Fair value option | Mark portfolio to fair value quarterly |
Key issue: If expected cash flows change (modification fails, loan re-defaults), the yield on the pool must be recalculated, potentially causing income volatility.
Regulatory capital
For banks and insurance companies holding RPL:
| Holder | Treatment |
|---|---|
| Banks | Higher risk weights than performing mortgages |
| Insurance companies | Higher NAIC designation for RPL |
| REITs | QRS treatment may be affected by modified status |
status: draft
Related topics
- Non-performing loans (NPL) — loans that haven’t cured
- Servicer selection — servicing considerations for RPL
- Deal structures — warehouse and securitization mechanics
- Key participants — RPL buyers and servicers