Goldman Sachs fine from DOJ and current low NPL inventory

[Bob Malecki]

I recently attended the Note Expo conference in Dallas which is annual event which provides me a basic snapshot of the landscape for distressed mortgage debt. Although most of the presentations were more operational in nature, one of the asset managers provided an excellent insight as to why we are seeing a lull in new inventory for small note investors. The presentation included the DOJ's fine for Goldman Sachs who is required to pay over $5 billion in fines from the DOJ for misconduct from the 2008 housing recession. 

What does this have to do with the shortage of inventory? Well much of the inventory that is sold off to the secondary market and should have trickled-down to us was from the GSE (Fannie and Freddie) liquidations of non performing loans over the past 12 months. Normally a subset of these assets would make their way to the smaller asset managers with whom I buy. But -- they did not.

Goldman Sachs was provided an opportunity to dissolve part of their $5B fine by the DOJ if they basically purchase NPLs and forgive part of the borrower's balance with an overall mandate to provide $1.8 billion in consumer relief. This is kind of a 'credit' against their fine. So like any opportunistic bank, GS purchased 4 of the 5 last auctions from Fannie Mae for approx. $2B to keep in house for loan mods and forgiveness to lower their fine balance. Essentially this purchase has cannibalized a large amount of NPL assets which normally would waterfall down to the smaller note investor. For more info, see the article linked below:

https://www.housingwire.com/articles/40897-goldman...

So I think this has contributed to the shortage of viable assets available and the increase in pricing for those that are available. Does anyone else have further thoughts on this? 

Bob

[Bob E.]

@Bob Malecki  I skipped the Note Expo this year, it was on my twins birthday, again.  I think part of what is going on is just the fact that the economy is better.  More people are working and paying their bills, including mortgages so the number of properties starting FC is at a lower level.  Add to that the fact that fewer people are underwater and it means that more people who get in trouble are able to sell or short sell.

I see the lower supply and higher pricing as driven by the above and the classic credit cycle.  We are well into a recover now and debt investors are forgetting about how hard times can be during a downturn, they are buying riskier assets at higher prices to chase yield.  

There will be another recession and the market will flee from these assets again.  Until then we are holding pat with our portfolio, paying off debt, and building reserves for when we see more opportunity in the market.  When the next downturn hits cash will be king and the next group of millionaires will be minted.