I wanted to share with you some insight from an Insider who’s a loan sale advisor. One of the “quiet types” who’s happy to work inside larger trades. Here’s a summary of what he’s seeing in the market at the upper levels. Trickle-down being what it is, I wanted to let you know what’s happening at the top …

• there are a smaller number of what he calls “public market” packages – open to bidding and publicly announced through loan sale advisors
• “private market packages” are selling aggressively, and in greater numbers
• prices on these private packages are coming down slightly from the beginning of the year – non-performing loans (90+ del) are trading in the mid 40s; sub-performing loans are trading in the low-to-mid 40s “although lower doc types in this category settle lower” (e.g. no doc, low-doc loans trade at a lower price); and pre-REO’s (e.g. late-stage foreclosure) are trading in the high 40s – they’re pricing higher because it takes less time to get access to the underlying collateral
• The fact that sub-performing is trading at a higher discount to value than non-performing indicates that the news about re-defaults is keeping expectations down on whether sub-performers can get current (see: this revealing study – 30-45% redefault, though some reports claim the redefault rate is as high as 58% within a year)
• More sellers are selling loans and justifying them as a “forward REO sale”. And they’re engaging in smaller sales because ”the only way to get an idea of price on a large portfolio of loans, is to sell a small pool of loans”. Further, the insider points out that another reason for steady sales volume is due to “management periodically having to prove that ’some’ liquidity exists.”

The ARM’s are coming – the ARM’s are coming!

One other trend that’s growing is that “strategic default” – when a borrower walks away from a home with a perfect credit score – e.g. you see the following on their payhistory: 0, 0, 0, 0, 0, 0, 30, 60, 90, 120, 150 …. where they go from current and then drop off a cliff – is affecting prices. Our Insider notes that loans with one or two 30-day lates are now pricing in the 90+ delinquent range – showing “at a minimum … a lack of confidence in short-term home price appreciation (or stability). At worst, it indicates a growing realization that there are no viable modification strategies in the market place.”

2nds are trading actively

Finally, it looks like sellers are picking up the pace on selling pools of 2nds. A colleague of mine closed on a $675M package, and performing appears to be trading in the 7-16 cent range (depending on CLTV) and non-performing is still sub 1% of loan balance.

Any sign of buyers raising price expectation? Not according to the Insider: “The reality is that with continued rising unemployment, and declining home prices; there’s no reason to change a buyer’s draconian loan pricing model.  Further, with 88% of all the loans in America “current”, there’s no real rationale for a Bank seller to hit a low-ball bid either…

The Gap continues….

Dean

Leave a comment below and let me know what you think–and what you’re seeing out there…

Barney Frank just announced today in the Huffington Post that he’s preparing to re-open the bankruptcy cramdown debate this fall in a financial regulatory reform bill – he claims there aren’t enough borrowers getting put into loan mods, so he’s looking to the courts to help meet the purported demand. I agree with him on one thing: allowing bankruptcy judges to cramdown firsts is a way to inject much-needed underwriting into the market.

It could also greatly supplement your own loan modification initiatives as an investor – let the courts underwrite instead of doing it in-house, I say! Will it hurt principal balances? Sure, but then any savvy investor would have proposed a principal write-down in the first place given the high recidivism rates for the term and rate adjustments we’ve seen industry-wide.

Weak Dollar will impact note investors

In other news … the dollar has officially tanked. As one Brown Brothers Harriman analyst pointed out today: “As we have stepped away from the abyss people have a healthier appetite for risk” and so they’re dumping dollars and seeking better yields elsewhere. Whether the bulls have won out and whether the economy has turned the corner for good (led first and foremost by house prices), is a topic for another day.

The impact of a weakening dollar, however, is inevitable pressure on the Fed to raise overnight rates in an attempt to prevent further weakening. Bernanke will face increasing (and polarizing) pressures, in my opinion: balancing demand for dollar-denominated debt (investors will have little interest in low-interest rate Treasuries with an underlying stagnating US economy) vs. higher-yielding investments abroad.

Exports are being bolstered by US-manufactured products being priced as cheaply as they have been in over a year, against Asian-denominated currencies, but the mortgage market will come under increasing pressure if rates were to rise. Follow the Fed closely – the next FOMC meeting is Sept 22-23.

The impact of higher interest rates on note investors? Lower yields; larger discounts; and potentially a weaker refi market to exit into. If rates really increase dramatically, this could change a number of investors’ strategies from re-perform (why re-perform at below-market rates?) to cash out (short sale and deed-in-lieu).

Dean

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

First things first: I got a ton of emails from folks who got our news on the 40%-off special with Special Code ‘nofool’ too late.

So, we are leaving that up until Sunday Night.
CLICK HERE if you are ready to take action on that, and
use ‘nofool’ as Special Code. (Need further outside ’social
proof’ that my note buying course really works? READ THIS,)
****************************************

But back to why I am writing you:

I just got back from a distressed debt conference in
Los Angeles and some of the numbers we’re looking at
are enormous.

Check out this short Video I did for you to share some
of my note buying findings with you:

Here’s one estimate for the amount of distressed
whole loans (e.g. mortgages and notes that you and I
could buy as individual loans) in the note buying marketplace
today:

$3-4 Trillion.

This puts a lot of things into
perspective in terms of the number of transactions
that translates into for you and me and the entire Non-
-Performing buyer marketplace in the United States
today.

Buying Notes is something to take advantage of NOW – and with
potential FDIC financing, this could be very
interesting.

For those of you who are looking for some additional
insight (see the note at the end of this piece re:
another person’s assessment of the size of the whole
loan market – and note how wide ranging estimates
are!):
http://www.cumber.com/commentary.aspx?file=032909.asp&n=l_mc

Regards,

Dean

PS: Again, we are leaving the 40%-off SPECIAL up until Sunday night,
if it’s time for YOU to benefit from this market and leave the whiners and
nay-sayers in the dust.

Here is a question I got asked recently:

“My understanding is the federal government is going
to be offering financing to private equity and hedge
funds to buy up the bad debt.

If anything it would seem this would at the very
least invite a whole heck of a lot of competition.

What are your thoughts on this?”

Well, here are my thoughts:

I’ll address your concern in detail on 3/25 in
our Private Access Club live webinar.

* * * The “Competition” merely adds to the
Deal Source for buying mortgages from banks * * *

====> There are 4 “buckets” in the note industry:

a) Big boys – buying $100M and above

b) Mid boys – buying $20-100M

c) Small boys – buying $1-20M

d) Mom and pops – buying <$1M

The majority of the shuffling is happening, in my
opinion, at the big and mid-boy stage, in terms of raw
dollars.

Now, think about their financials for a sec: these
are investors, not originators.

=> They’re hungry for yield.

If you’re a Mom and Pop or a Small boy, the Mid and
Big boys are now Deal Sources to buy Notes for You!

They’re looking for a big IRR (e.g. quick flip) and
they’re buying more competitively than the Small boys
and the mom and pops.

VIEW THEM AS NOTE BUYING DEAL SOURCES, partner up with
them, come up with some transparent “Cost plus 5″ type of
approach where you give them 5 points in exchange for
cherry-picking their portfolio and piggy-backing off
their due diligence, and why wouldn’t they be
interested in selling notes to you?

Trickle-down. (I will talk much more in detail on that on
tomorrow’s Private Access Club webinar.)

So if you’re worried about the drip from the water
fountain (or the firehose!) being intercepted in some
way, just shift yourself a little so that you catch
the drips from the guy who just got in front of you.

And you can always go look for another water fountain
to buy mortgages aka nonperforming notes.

I assure you that the Mid and Big boys are NOT out
there building relationships with the 8,000+ FDIC
insured banks.

And last time I checked, those 8,000 have a few non-
performing notes in their portfolios!

Hope this was useful (and inspirational) information for you.

Talk to you on the Private Access Club webinar?

It’s time to TAKE MASSIVE ACTION.

It’s all out there, for those that choose to see the buying notes
opportunity (and ignore the naysayers &’recession whiners’).

Dean

PS: BTW, this was originally a post in our forum.
To see some responses by some of your peers,
check out the original thread here.

Or, you know what…

Some of the other comments were so valuable, I want to
make sure you read them.

See what Will had to add to this:

“Yes, there is pretty healthy window, an “area” where
the mom and pop and small operations can work with the
mid boys and Big boys.

Where you can either profit by
purchasing directly from these big boy investors, or
develop the right relationships by getting the word
out there that you are a direct source for obtaining
defaulted assets.

If one of these mid size to big boys
know you can bring them pools of 10-50M (residential
or commercial) and they don’t have to go take the time
to find and form those relationships with the right
people themselves …then you become VERY valuable.

At that level, the big boys are looking for convenience
and efficiency in order to simply “stay on course” of
investing and exiting.

I believe the more well rounded
you become, the more you master this industry, whether
that is by brokering or being a principal bidder, the
more opportunities will be presented to you.

All I have seen in the few months since I’ve been involved
has been an enormous need and really, a desire for
people to connect with others…to work with each
other.

There are so many more bridges to be formed.

“I assure you that the Mid and Big boys are NOT out
there building relationships with the 8,000+ FDIC
insured banks.”

In that one statement, if truly recognized, lies HUGE
opportunity.

“Can I get some distressed loans with my bonus, please?”

Credit Suisse (CSFB) just announced that it was going to pay its execs’ bonus compensation from a pool of non-performing assets on their balance sheet ($5 Billion was the initial amount indicated).

Now this is an interesting concept - talk about drinking from the Kool-Aid! Watch below for a bit of analysis on what the implications might be for your note buying business:

OK, so the word is out, the Doctor is in, and the medicine is … loan modifications. Specifically, principal write-downs.

Interesting.

The Hope for Homeowners initiative passed by Congress in July and officially launched a month-and-a-half ago to much acclaim, is a potentially positive FHA insurance package aiming to insure $300B of new mortgages for borrowers in a “negative equity” position.

Negative equity, of course, meaning that the loans are worth more than the home.

So … what’s the catch?

Well, the borrower has to qualify with a 31% or lower DTI ratio, at least 6 payments made and none of them late.

What do they get if they meet those magic criteria? (Oh, by the way, if I had to hazard a guess at the average DTI for loans originated in 2007, it would probably be 40-45%).

So, who’s going to qualify?

The answer is: very few people.

In the first 2 weeks of the program, exactly 49 people applied, and … none were approved.

And as for the highly touted FHA Secure program (remember that one – the one that was supposed to be the saving grace for borrowers who had missed a payment – well during the same period a total of 203 mortgage applications were filed and 49 approved.

In that same time in California, approximately 1,300 homes saw a Notice of Default filing.

So what’s the big deal here? Can’t we just give the H4H program some time?

Sure.

But remember that lenders are going to be looking for federal backing for their principal write-downs if they’re going to be participating in these 90% principal reduction plans. H4H is one of them.

So, while everyone’s waiting for the good news on H4H to come out, why not get your wallets out and make an offer on those 49 non performing notes that were just turned down?

There will be a whole lot more non-performing notes (to buy) where those come from.

Talk soon,

Dean

=========================

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