Other Exit Strategies For NPN (First Lien) Besides Foreclosure?

[Jason Eyerly]

I'm looking at the FCI Exchange, just to give myself a sample of ideas as I look into notes. I can't seem to get my head around it. Another BP member mentioned to me that so far him and a partner have only gone for non-performing 1sts. You can get NP 2nds for about 20%, but what on average are you looking for in 1sts? Is your primary exit strategy to just foreclose and turn it in to a turn key rental or to attempt to get them re-performing? There doesn't seem to be much of a gap in the UPB and what you get it for to allow you room to work with them on reducing payments, balance, etc.

Take these two notes for example:

• FCI Example 1
• FCI Example 2

• Example 1
  • Purchase @ $26,000: 85% UPB
  • UPB = $30,000
  • This is only a $4,000 reduction on what they owe, how could you get this performing again and keep it profitable?
  • ARV @ $75,000
  • Makes more sense to foreclose and give them the choice to jump back on payments or no-go!
• Example 2
  • Purchase @ $11,500: 40% UPB
  • UPB = $28,000
  • ARV @ $9,500
  • Is this just garbage?

    I'm not sure if there's something I'm missing, haven't read up on, a number I'm leaving out, or if I am just too slow to comprehend NP 1sts. 2nds seem much easier to understand when they are current on the first, as far as your options to get them re-performing, foreclose subject to first, etc. Thanks in advance!

[Dion DePaoli]

This is not a real property trade. After Repair Value does not apply - you do not have authority to repair a property you are not the deed owner to. You can preserve your interest and that is it. That's not the same as repairs. We will use FMV - AS IS Real Estate Value in the examples. We will assume the number given is the As Is Where Is value of the property. Assume these are all high level reviews for conversation sake but to add some additional price feedback from my eyes and experience:

Example 1:
UPB = $30,000
FMV = $75,000
- This asset has lots of equity. The LTV is 40%. As such the bid request is 85% of UPB. A reasonable bid level given the equity. NY can take up to 36 months to disposition. There could be some defects but assuming 'standard' distressed loan, the price would work. As you advance to pay for taxes, insurance and legal fees, those will increase the overall payoff amount and the arrears will also increase the claim. This asset would likely trade at auction and not revert back (assuming no other liens) due to the equity.

Example 2:  
UPB = $28,000
FMV = $9,500
- This will not work.  The bid is zero.  Costs to hold and foreclose would erode the FMV.

Example 3:
** Do not use ARV. This is not a real property investment.
UPB = $31,000
FMV = $35,000
- Not clear what state this is in, so TVM can't be judged.  In general assets below $50k get pushed down quickly.  It's not worth 50% or $15k.  More like half that number even in a quick foreclosure state.  So at best - $7,500 +/-.  If a longer state - closer to half that number so more like $3k.  

In general, the value of a NPN secured by real property at or below $20k - is zero. You will not stand to recoup the advances needed to be made. Most stuff in the $30k range trades for around 10% to 15% of RE Value provided taxes and other liens are not too large.

Example 4 (Mike's Mod) 
UPB = $75,000
Rate = 9%
FMV = $60k
2nd Lien = $40k
-Re-performing sale - It's romantic to think that the sale would simply be about yield. Perhaps to some that might fly, however the trade value in the example does not seem to properly convey the risk involved. Not going to address this as a partial. As a whole loan trade assuming 12 payments on time you might see $40k. The asset has a CLTV of 130%. That price would depend on the underwriting of the MOD and can drop quickly. If the Borrower late pays or slow pays, that will drop that price to.

Example 4 (Mark K FCI Bid) - some comments
UPB = $35k
FMV = $48k
Bid = $25k (52% FMV / 71% UPB)
COC = 16% ($4,000)
- The COC is realistic but the bid level dollars is too high.  The LTV as displayed is 75%.  Disposition by true sale, there is equity - that was the red flag that should have jumped out at you.  In general when we look at $50k, the best pricing will be in the 25% of FMV.  Additional liens or defects would lower that number.  The FMV was from Zillow - not the best place to get values without crunching numbers on real comps or getting a BPO.  See my note above about sub $20k - zero is the right number.

OP (Jason) - a Mortgagee usually does not get interior condition information out side of just guessing/approximating.  That also speaks to the sort of common error in understanding these.  You do not have a right to make repairs.  It's not your property and you are not entitled to the property.  

In most cases NPN to re-performing to refinance exit takes more time than most probably expect.  Not as much of a legitimate exit strategy as I think may believe it is.

Thanks for giving me something to do with my insomnia to all.