Buying discounted mortgages

[Lloyd Bonafide]

Is it possible that banks are sometimes selling their non-performing loans at 20 to 30 cents on the dollar? That seems incredible to me. Maybe it's possible, in some areas where prices have already declined by 50%?


http://www.bloomberg.com/apps/news?pid=20601109&sid=acNLJ7FGT15U&refer=home

May 15 (Bloomberg) -- The way out of the worst U.S. housing slump since the 1930s goes through Angel Gutierrez.

Gutierrez buys bad mortgages a dozen at a time for a fraction of their face value from lenders overwhelmed by the highest number of defaults in 23 years. When he goes door to door to negotiate lower payments for homeowners or pay them to move so he can sell the house, he's speeding up the recovery by establishing a price for the homes and flushing out the least reliable borrowers.

``You buy the mortgage for pennies on the dollar, carry the big stick, tell the homeowner how it's going to be, then double your money very easily,'' Gutierrez said.

Gutierrez and his wife Brenda, based in San Diego, are a two- person shop in an industry that is attracting deep-pocketed investors such as BlackRock Inc., which manages $1.36 trillion in assets. While Gutierrez said he can buy up to $300,000 of bad loans with his own money and has funding sources for about $1 million, New York-based BlackRock plans to raise $2 billion to invest in discount mortgages.

The homeowner was $365,000 under water after buying the house with no money down in June 2005, according to a spreadsheet listing about 30 loans for sale by a national mortgage servicer that Gutierrez referred to in his truck. If Gutierrez bought the note for 20 cents on the dollar, or $73,000, he could probably get the owner to leave by giving her $5,000 for moving expenses, then sell the home for about $150,000, well below even the neighborhood's declining market value, he said. That would leave him a profit of about $70,000.

 

[ghrousseau]

Yes is the short answer. Banks have to meet their reserve requirements by law, so they are conserving capital and are very risk adverse. Most of them have taken the write down on the books, so getting the properties off of the books is the next priority. Once the secondary market gets a feeling for the true value of the paper that is out there, you will see many of these loans sold off at steep discount. They will be pooled and seasoned by professional servicing groups. We saw this in the late 80's and early 90's. Some companies specialize in getting under performing loans worked out. They sit on them for a while, as some borrowers get a better equity position and refi or sell off, the investors make a decent profit. This is actually very good for the industry at this point. These investment groups are not buying properties to foreclose on them..........they are looking at marginal loans at this point with an eye on the future. I worked for a Bank for 5 years that had a whole division that specialized in this type of servicing. Once seasoned and performing, they wold sell loans that they bought for say .50 on the dollar for .75 on the dollar. Don't forget in the interim the generated a decent income on the servicing side. Even refinancing some of the loans and selling them to Fannie Mae or Freddie Mac on the retail side.

 

[Lloyd Bonafide]

Interesting... I guess that makes sense, since banks can't sell their performing loans for more than 70 to 80 cents in some cases.

 

[Brad Ellis]

Lloyd,

Is it possible that banks are sometimes selling their non-performing loans at 20 to 30 cents on the dollar?

Great question but I doubt that is the norm at all.

That price perhaps would be for the worst of the scratch and dents- even then we get more than that usually.

I could sell our entire portfolio of REOs for 60 cents on the dollar right now to any one of dozens of firms who have already offered and they would be discounted by about 25% from market (not from loan amount) typically. But we get between 80-90% of list right now so why do that?

I think this is a news report of one small player cherry picking certain stuff and we still do not know at all if he is even profitable. Just conjecture but I think discounts that deep are one off deals subject to unusual circumstances.

Brad