Marc Faulkner I can appreciate your opinion.
First I will tell you we are active in whole loans both managing portfolios and working with our clients. What I described as I started out my post was a look into our wheelhouse. We are buying and have been buying in line with what I suggest. We do not passively invest in loans and are extremely active in the disposition process of our loans.
1. Interest Only Comment - we are not bidding any additional discount for an interest only feature. The principal reduction on a short term is not large. I see your side of concern.
2. Maturity - the loan pools we have purchased and advised on have had target life cycles of 36 months or less. Most of the folks we deal with and talk to do not have 5 year money. The shorter maturity passes the option of disposition along to the new investor. It also keeps the burden over the head of the borrower to work on refinancing out. Some folks will indeed purchase this with the hopes of a default while collecting the cashflow.
3. The math - Loan Amount = $240,000; Interest Rate = 7.25%; Remaining Term = 12 months. Assume (for the sake of example) Property Value (Static) = $300,000
95.0% Purchase Price = $228,000 (76.0% Investment to Value)
12 payments @ 7.25% Payment Collection = $17,400 (7.63% yield)
In the event of default and foreclosure: Est. Net Proceeds = $42,000
Foreclosure Total Collection = $59,400 (26.05% ROI)
The foreclose may be caused by maturity and inability of borrower to refinance out. Obviously the yield would be reduced if the borrower defaults and does not pay full 12 months. A deeper discount would also be applied to the purchase level. Additional expenses may be incurred for LPI, VHI, taxes, property preservation, etc, the ROI is reference only here. Further it is likely the disposition timeline would go out closer to 24 months to complete foreclosure and sell the property.
In the event the borrower pays 12 months and refinances:
UPB Discount = $12,000
Payment Collection = $17,400
Refinance Total Collection = $29,400 (12.89% ROI)
4. Bid Levels - those are bid levels we are seeing and delivering. Perhaps since there is some math above it is a little clearer now.
5. Delinquency vs Default - let's make sure our definitions match first. Defaulted loans are loans which are more then 90 days past due. Delinquent would be less than 12 months payments in the last year.
Non Performing Loans are loans which are past due more then 90 days. Sub Performing Loans are loans which are not yet past 90 days late and by proxy have not gone a full 90 days past due. (Spotty pay history is sub performing)
In my example, I said "In the event he goes delinquent one or two times you can discount those numbers by an additional 5% to 10%. " -- so that is not a "non performing loan" it is sub performing
6. Further discount for delinquency - "add 5.0% to 10% if the pay-string goes spotty."
Already cover it is not a NPN. What I think you forgot about the loan of topic is it is 80% LTV at origination. There is definitely a UPB to collateral value relationship, which I don't think I missed.
For reference here is the Bid Level / Investment to Value:
(UPB % / ITV %)
95% / 76.0%
90% / 72.0%
85% / 68.0%
80% / 64.0%
75% / 60.0%
7. "So are you saying that you can get anywhere close to 70 cents on the dollar for non performing notes? IF so we need to talk and we need to talk FAST! I know where there is enough that we could sell together and, BOTH retire by the end of the year!!! Seriously. "
- California non-performing loans, we are seeing trade for 65% to 72% of 30 day quick sale value. California enjoys a short foreclosure time and foreclosure expense is not through the roof. Time value of money and capital expenses into the loan do allow for these bids. If you have some cashflow on the asset you will see a higher bid.
- So if you have a legitimate pile of loans, sure we can chat.
8. My market insight - no harm in questioning things if that is not what you see. I would suppose the counter-parties we are dealing with or the market circles are a little different. I have been the Vice President of Whole Loan Trading and Senior Portfolio Manager of a hedge fund for the last several years prior to opening up our own firm. I am in the market on a daily basis with mid to large level institutional investors and private equity firms. We manage and advise on acquisition and disposition of loans for a living. We have developed and deployed proprietary technology for whole loan trading and management. We have worked with many mortgage servicers and know many folks in the business. Prior to that I was the Director of Operations for a conglomerate correspondent commercial and residential mortgage company, title company and appraisal company. None of what I posted was made up from fairytale land and I would hope you no longer find it...."laughable"
9. Will Barnard, I know you were most likely trying to be sarcastic but I am not sure you caught the math either. Perhaps a couple more months of doing what you are doing still.
10. Alfred Bell, I am sorry if what I posted confused you or if Marc's questions about my post confused you. Certainly, that was not the intent. In threads you will have differing opinions and strategies. I think everyone had your best interest at heart. Good Luck.
