In our next case study, we are taking a look at a non-performing 2nd position loan that was sold as part of a package portfolio to a note buyer. Looking back on this transaction, pricing this asset at 45% of the UPB was a great deal for the buyer – in 2021, we saw equity NPL 2nds with current 1st liens trade for as high as 75%+ of UPB. For the video review and additional information on this case study, scroll down to the borrom of this article or check out the be.the.bank live YouTube show for more!
|Fair Market Value||$470,000|
|Senior Lien Balance||$345,192|
|– % of Equity||= 24.2%|
|– % of UPB||= 26.9%|
purchased October 2019 & exited May 2020 = 7 months
Borrower Resolution Unsuccessful
Although it is best to work with our borrowers to help resolve a non-performing loan, in this case we were not able to get in touch with the homeowner to ask our three questions (what happened, where are you now, what do you want to do? learn more in our free course). Most importantly, a borrower resolution concludes a homeowner’s default with a modification or payoff whereas a loan sale “kicks the can” to a future lender to find a solution to the borrower.
In this case, we attempted to locate the borrower through online research and skip-tracing, but despite our efforts we were not able to make contact. Often the most difficult step in the non-performing loan resolution process, without getting in touch with a cooperative borrower the exit strategy for this loan was either a foreclosure or non-performing loan (NPL) sale.
On the upside, the borrower was keeping up with payments on their senior lien. In this case, we were safe to assume that this also meant that the property taxes were current (through escrow with the senior lien servicer). If there weren’t any immediate capital needs for our client, the lender on this note – we would advise holding onto this loan. As the borrower pays down the balance of their first mortgage, the equity position increases and it’s only a matter of time before they come to a resolution on the junior lien.
Negotiating the Non-Performing Loan Sale
Since the subject asset (our junior lien) had an acceptable amount of positive equity, both from the junior lien investor’s perspective ($124k covering our $112k note) and from the borrower’s perspective (97% CLTV, ~$12k of positive equity above the 1st + 2nd lien), there was a pricing premium for this non-performing loan sale. Perhaps even more of a factor than the positive equity, the current status of the senior lien put this loan into a premium price category.
On the other hand, the investor that purchased this loan also took down two other assets in a package deal. Since the other two loans included in this portfolio weren’t as high quality, the note buyer’s inclusion of these other assets gave them the ability to negotiate the price downwards slightly. In hindsight, although the pricing was acceptable for the trade at the time, values increased substantially in 2021 and holding onto this loan would have been a better decision (if there weren’t any other competing capital requirements).
Non-Performing Mortgage Note Sale
This loan was sold in a non-performing loan portfolio sales event that attracted over 20 note buyers and concluded following a 2-week due diligence process. The general process by which non-performing loans are sold is pretty straightforward:
- Release Data-Tape (sales inventory in Excel) with updated loan information to buyers under NDA
- Include timeline and instructions for acceptable offers
- Review Letter of Intent (LOI) with indicative offers & contingencies
- Accept best offer after initial negotiations (subject to buyer due diligence)
- Review buyer due diligence results and finalize pricing & Loan Purchase Sale Agreement (LPSA)
- Close the deal! Prepare AOM/allonges, initiate servicing transfer & ship collateral
As mentioned above, our portfolio management client launched this non-performing loan sale event based on competing capital requirements. From time to time, we release non-performing and cash-flowing mortgage notes for sale, sign our NDA and be notified when the next opportunity presents itself – Buy Notes.
See below for a time-stamped video presentation of case study #4 in episode #2 of our YouTube series: