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Note Sales Build Private Market for Distressed Assets

Fannie Mae Package Brings it to $4 Billion NPLs to Date

Faith Schwartz    |    Housing Policy

The foreclosure numbers continue to improve markedly, as the latest CoreLogic report shows (completed foreclosures were down 20 percent for 2015 and have been tracking lower for 50 consecutive months). But that doesn’t mean that there isn’t still a sizable batch of defaulted properties, many in judicial states, which are 20 percent, even 30 percent underwater.

The GSE’s forecosure guidelines, which limit principal write-downs, have been less effective in modifying and resolving these more difficult cases. Recently, however, public and private interests have come together to provode an innovative solutions to the so-called “zombie” loan problem.

Fannie Mae and Freddie Mac have been taking a portion of these loans back from servicers, discounting them and packaging them into note sales.

Who’s buying? Mainly hedge funds, rent-to-own players, and larger nonprofits (the agencies require working with nonprofits, who are interested in any program that will help resolve foreclosure issues for their particular communities). Private buyers have more options, and incentives, to work with borrowers. Because they are acquiring these assets at sizable discounts, allowing for flexibility, they can afford to write down lost principal and modify payments to keep borrowers in the property, and hopefully bring these assets back to reperforming status. And investors have an obligation to track borrowers and disposition after the sales, to keep the program on track to measure good outcomes.

Even if they can’t, it may be possible for investors to keep those borrowers in the home as renters, if the economics work. And that, in turn, benefits communities, which have people in houses instead of empty, eyesore properties.

If all else fails, investors are often able to use short sales and more attractive deed in lieu and key for cash deals to shortern the period in which these properties remain in limbo.

Proponents of note sales, and I count myself as one of them, are providing borrowers a new lease on life and blunting the effect foreclosures have on communities. Plus, they are bringing new private capital into the distressed assets field.

As Fannie Mae’s Joy Cianci, SVP of Credit Portfolio Management put it “the sale of seriously delinquent loans can create additional opportunities for borrowers to avoid foreclosure while reducing the impact of these loans for Fannie Mae and the taxpayers.”

The pools can be of considerable size. Fannie announced Feb. 10 it had sold four pools with a total unpaid principal balance of $1.32 billion in 6,540 loans. Two pools totaling about $400 million of the total were purchased by a subsidiary of Goldman Sachs, MTFLQ Investors L.P. The other pools were bought by Canyon Partners (Carlsbad Funding Mortgage Loan Acquisition, L.P.and Pretium Mortgage Credit Partners I Loan Acquisition, L.P.

This was Fannie’s fourth note sale, and it collaborated with Bank of America Merrill Lynch and First Financial Inc. to start marketing the sale in January. In all, it has packaged $4 billion in NPLs through these four financings.

The Federal Housing Association has a program that dates farther back than the GSEs’ (the pilot program was in 2010 and has a higher volume of sales. In FY 2014, for instance, it logged sales of $8.1 billion. Some investors prefer the GSE program as being a little more flexible on terms. HUD has built in provisions for neighborhood goals and ‘first-look’ opportunities for non-profits.

It’s always a temptation to doubt what seems like a win-win situation, but investors, defaulted borrowers and communities all seem set to gain by these note sales. And the advantage to the big mortgage agencies is clear: finding another innovative way to move distressed assets off their balance sheets.

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