Fannie NPL Sale and What It Means This Time Around

[Doug Smith]

This article in DS News caught my eye as a potential canary in a coal mine for a new wave of NPLs hitting the market. As I looked closer, however, these two pools are a far cry from what we saw in the late 2000s. We originatlly started this company to lend to real estate investors and to purchase Non-Performing Loans...primarily commercial loans...out of banks. We later started to purchase loans out of funds as well. At that time, we were buying at 35%-45% of the market value of the underlying collateral. Although not completely irrelevant, we've not focused on unpaid balances (UPB) like a lot of groups. These sales, however, struck me a bit. There were only 3565 loans sold, which is somewhat of a drop in the bucket, but the price is shocking me a bit. The loans in the pools sold are averaging over 3 years delinquent, but the winning bidder paid mid-to-high 90%s of UPB for the loans. Now, we always focused on a % of the collateral and only looked at UPB to make sure we weren't under water, but for loans that delinquent, that's a very high number. To put that into perspective, we made the decision to back away from NPLs in June of 2014 when Lone Star paid over $3B for all 16 HUD traunches that were sold that month. They paid over 77% of the market value of the collateral. I couldn't make the math make sense for us at that level. In the immediate aftermath of the last crash, we were able to pick up great deals to fill the portfolios. With metrics like this, It makes me wonder what were going to see this go around and if the numbers will make sense at all. I would be interested to hear the opinion of others in the space. Thanks, Doug

[Doug Smith]

Quote from @Chris Seveney:

Quote from @Doug Smith:

This article in DS News caught my eye as a potential canary in a coal mine for a new wave of NPLs hitting the market. As I looked closer, however, these two pools are a far cry from what we saw in the late 2000s. We originatlly started this company to lend to real estate investors and to purchase Non-Performing Loans...primarily commercial loans...out of banks. We later started to purchase loans out of funds as well. At that time, we were buying at 35%-45% of the market value of the underlying collateral. Although not completely irrelevant, we've not focused on unpaid balances (UPB) like a lot of groups. These sales, however, struck me a bit. There were only 3565 loans sold, which is somewhat of a drop in the bucket, but the price is shocking me a bit. The loans in the pools sold are averaging over 3 years delinquent, but the winning bidder paid mid-to-high 90%s of UPB for the loans. Now, we always focused on a % of the collateral and only looked at UPB to make sure we weren't under water, but for loans that delinquent, that's a very high number. To put that into perspective, we made the decision to back away from NPLs in June of 2014 when Lone Star paid over $3B for all 16 HUD traunches that were sold that month. They paid over 77% of the market value of the collateral. I couldn't make the math make sense for us at that level. In the immediate aftermath of the last crash, we were able to pick up great deals to fill the portfolios. With metrics like this, It makes me wonder what were going to see this go around and if the numbers will make sense at all. I would be interested to hear the opinion of others in the space. Thanks, Doug

 As someone who plays in this space we scratch our heads when we see these sales. In speaking with a very large ($1B fund) on NPL's they target low double digit returns. With the pool in question the total payoff to acquisition was probably in the low 80's high 70's. 

the LTV was not like it was a decade ago. But if we do see dip in pricing it will be interesting to see how they make money. This pricing way to risky for our blood but it does seem like Fannie and Freddit are starting to look to reduce their balance sheets for defaulted loans (probably because they see a slew of them coming)

 ...then you're math and our math are aligned. We got out in 2014 because it got too difficult to hit investor expectations. I was pretty certain that we would be able to get back in and find assets this time around, but when bigger players come in throwing around those kinds of buy numbers, I'm not sure it's going to be a space we sink into that heavily. You and I are in lock-step in this @Chris Seveney