I think that’s a combination of credit risk spreads tightening, and there’s a fair amount of demand for the paper. Our scratch and debt inventory tends to be performing. It tends to have dock defects. So, if you think about a performing loan that you can buy at less than $0.80 on the dollar, that’s a pretty nice yielding asset. And so, that’s what we’re seeing with our scratch and dent inventory. But that’s a source of a lot of the losses that we’ve taken. The additional provisions that we took in the fourth quarter were quite a bit less than they had been in previous quarters, in part because, number one, we’re starting to see that stabilization that I mentioned. And number two, we’re getting caught up in terms of the audits and the repurchase requests as well.
The agencies are working their way through that. So, that’s why I have reason to believe that as we move through 2023, we’re going to start to see that relationship normalize relative to current production.
Willie Newman: Yes, I think we answered the
Mark Elbaum: And the balance was about $26 million in reserves, and that’s reserves against potential future repurchases that are not yet on our balance sheet.
Willie Newman: Yes. The other thing that’s happening, Kevin, is that the rate gap is narrowing because rates are obviously floating kind of high, but the repurchases, because of the lag Mark mentioned, we’re kind of – not only are we getting the lag is kind of catching up to our lower level of production, it’s also catching up to the higher rates for that lower level of production. So, you kind of have two or three positive trends in a – to kind of start to narrow what’s been happening.
Kevin Barker: And then can you remind us how far back the agencies could look back for any loans that may have defects?
Mark Elbaum: They could look back as long as three years, Kevin.
Kevin Barker: Okay. But typically, they have like an upfront review where – or some review in the beginning, right, to try to?
Kevin Barker: I mean, they typically review upfront and they try to do as much as they can. Post that, if the loan’s performing and it’s in a pool, it’s not really in their interest to try to find loans to have us buy back. If the loan goes into default, that might be a different issue and they could certainly look at it at that point and buy it back. But most of the review happens with earlier fresher production, if you will, although they are behind. And so, we do have this one year lag, roughly.
Willie Newman: Yes, which again, with our servicing performance, that’s why we feel good about where we’re at from a reserve standpoint.
Kevin Barker: Great. And so, that provision was, by my math, $8.7 million in the fourth quarter on $1.7 billion of production, which would imply what, roughly 51 basis points of headwind in the fourth quarter on the margin?
Mark Elbaum: It does, yes. Except that if we were to do it on a vintage basis, that 8.7 would be applied to a much larger denominator, but that’s just not the way the math works. And the way the math works is the way you described it.
Kevin Barker: Okay. And so, what was the average amount of basis points hit on gain on sale that you recorded in 2021 when rates were, I would say, less volatile or not persistently increasing like we saw? So, what I’m trying to get at is like, what is a normalized gain on sale that you would be producing right now, given the movement in provision?
Mark Elbaum: Yes, I understand your question. So, on every loan that we originate, we have to put aside something for potential rep and warrant losses. In 2021, that number was circa two to three basis points. Now, that number looks more like between six and seven basis points on every new loan that we put up.
