Non-Performing Note Purchase Prices

[Liz Brumer-Smith]

Hey guys,

I'm a NPN investor that buys all over the US. I'm interested in hearing what others are paying for their NPN's. I know some lenders/institutions price it based on UPB (Unpaid Balance) or CMV (Current Market Value). I'm currently finding the asking price of being about 40% - 60% of CMV in most states some lower, some higher. I've found one off's around 15 - 20% of unpaid balance. Is that the same in your market (with the exception of CA, HI, and some areas of TX).

[Dion DePaoli]

The reality is it is hard to quantify the price level easily even though folks like to have the discussion. Many factors have to be considered and from asset to asset, those factors can vary greatly.

Whether you use UPB or a RE Value as the baseline of price discussions is specific to the assets and seller. The driving force for the price will be the RE Value since the purpose of a loan is to be collateralized with some level of equity. The two ideas are related obviously. In general, most of the discussion generally occur around the real estate value and percent thereof. In those cases, UPB discussion are an idea of loss or potential loss of the current mortgagee so you tend to see banks and lenders resort to that baseline more often than PE firms who purchased that asset.

In the event the loan has negative equity, discussing the price around UPB does not present a clear understanding of what is likely the final disposition of the asset and I personally think can be a little misleading for an investor or new buyer. A loan which has negative equity can trade for 10% of UPB but that does not really express the idea in relationship to the amount of equity the investor is entering into that asset at but it clearly denotes the loss on the UPB.

For instance, loans in the Midwest and other geography which has seen large drops in real estate values saying you purchased at 10% of UPB does not clearly represent the level of equity. Say the UPB is $100K, well in some Midwest geography the real estate value may only be $10k, so that is not really a good deal.

The opposite is true if we reverse the numbers and discuss a loan with equity. If the property is $100k in RE value and $10k in UPB buying at 10% of RE Value is still not a good deal. (the example is only meant to illustrate the point, not a legitimate deal) If you are an experienced NPN investor, you already understand this and I am only typing this out for other readers who hear 10% and think it MUST be a great deal.

All that said, they are interchangeable concepts, one number and percent equals the other in some fashion. From a Buyer side stand point, it is usually a good idea to consider it from a RE Value standpoint but I really think you should never discuss the other without an understanding of the other.

The price level is going to also be heavily influenced by the RE Value. RE Values less than $120k see a drop in price and there is a price drop for less than $50k. It used to be, many moons ago that RE Values less than $20k were automatic zeros. There is still some justification to that idea. As a RE Value approaches zero, it is simply too hard to out run the fixed costs of foreclosure, repair and resale. It is also possible to generalize the assets based on geography in some sense. RE Values in the Midwest tend to be around the $50k or less so putting them into the discuss in relation to RE Values outside of that area skews the discussion.

Additionally, the timeline to get to the asset in the case of a NPN matters. Certainly we know we have judicial and non-judicial foreclosure states. So innately, non-judicial go a bit faster. So the discount applied for time value of money will not be as great as judicial states. However, one concept that seems to allude the conversation is the amount of foreclose seasoning in either jurisdiction. The more seasoned the foreclosure is, in general, the faster you will get to the disposition. So two assets in the same jurisdiction and even with the same relative RE Value can have two different bids. The shorter the time for disposition, the less the discount that will be accepted.

So provided you can take into consideration those driving forces, we can have a very general and vague discussion around the price levels. If we assume we are discussing RE Values around the median US home value ($180k) we see 3 to 9 months disposition time at 62% 68% of RE Value. In general, for every additional 6 months the additional discount is around 5%. As the RE value falls, so will that level.

I think it is important to understand, the math which is used is the same for everyone. Time is a major factor. Net recovery is a major factor. When I discuss trades with lower tier capital investors, the main point has to be how they can exploit some form of niche. In general, a sale will not take place unless the investor can reduce the time or somehow capture more market value in their disposition plans. Otherwise, any seller of an NPN can do the same thing and does not need to take any additional discount. Laymen tend to think there is a duty for a seller to sell at a discount and this is not true, even for banks.

Acceptable bid levels tend to go under scrutiny this time of year every year. There is a little fuel to the fire from investors who are factoring in some form of RE Value appreciation. In some cases, that uptick is simply from it being "season" for sales. More RE sales tend to take place in spring in summer than fall and winter. There tends to be a fairly consistent investor sentiment that "good" deals are drying up and so price levels get pushed up because RE Values are being pushed up. I would also add, this year probably more than most in the past, there are many more "street level" investors trying to get into the whole loan markets. While the general consensus is that street level investors with no experience are simply vulture bidders it creates activity around the asset class giving it more attention, attracting more people which drives up the price.

Liz, sorry for the thesis, but I thought the additional ideas and concepts were needed.