Note Buying – On the PPIP

On Note Buying:

I listened in on an interesting call with the FDIC recently.

Note Buying: What I Learned about the Legacy Loan Program

a) FDIC and Treasury are two separate entities, and don’t always see alike. The two need to coordinate on the terms of the non performing debt (guarantee fees, interest capitalization, interest rate,”turbo- charging” returns on the debt side, and equity “control” and loss position for the equity side)

b) when asked how large a typical deal size might be, the FDIC admitted that the size of each note trade has to “make economic sense”. The only guidance given thus far is that a deal might equate to $1B

c) each deal will have its own covenants and restrictions imposed by the FDIC, in other words, on performing notes, for example, the FDIC might look for special loan modification capabilities or targets. This implies that the FDIC will likely make deals homogenous in the types of defaulted mortgages that are being sold.

d) in addition to each note deal having its own characteristics that the FDIC will be looking for from each prospective bidder, the FDIC will also be taking a close look at the servicers that will be servicing each non-performing note pool.

e) both (c) and (d) are an operational challenge, meaning that in order to set restrictions and covenants, enforce them, and to have evaluation guidelines for servicers – and to execute against those evaluation requirements – is an enormous task. Part of my background is in project management – I used to manage 10-person teams at Chase when we were reviewing brokerage trades in response to regulatory inquiries – and I can tell you that overseeing / evaluating and reporting on each PPIF will be a nice little bit of work.

The difficulty of executing (e) above points to a limited number of PPIF’s that will be allowed or approved.

Note Buying and the PPIP

PPIF’s are the individual funds approved for participation in the “P” “Pip” as it’s nicknamed.

So what I’m seeing evolve out of this program is:

A much larger note buying-side to the equation than I originally thought, with minimum trade sizes similar to the legacy securities side, and with similarly deep-pocketed investor participants. The role of the small, minority, veteran-owned firms in the note buying business will be as some form of limited partner in these funds, in my opinion.

———————————————————- Note Buying – How Will it Be Affected? ———————————————————-

My real concern is on the re-trades…

In other words, the amount of loan re-trading that will happen after a $1B non performing note pool is bought, for example.

What’s cleared the loan markets historically has been the ease with which larger trades could be broken up into smaller ones, and where the big buyers could carve out bits of their note portfolio to sell and to generate a pop in their funds’ IRRs.

I don’t see how that will happen in this scenario, unless the FDIC debt has some unique way of attaching to individual loans

There was some talk this morning about structuring the FDIC debt as some form of seller-carryback note on the banks’ balance sheets.

I’m not yet clear on how that might impact the note buying side, though.

Talk to you soon,

Dean

Interested in learning more about the Note Buying Business? Watch Hours of FREE Training Videos here: Note Buying Real-life, Up-to-Date Information for You. Visit NoteBuyingProfits.com