Anyone have experience with non-performing loans?

Looking at a very attractive NPL deal. We really would only benefit if we were able to take control of the underlying asset. Borrower has not been paying the existing loan. Anyone have experience with these? How long before I can start the process of taking possession?

Comments (11)

  • Investment Analyst in PE - Other
Nov 20, 2020 - 3:13pm

You're gonna need to contact the lender, find out if they'd even be interested in selling off the loan, at which point you'd go get a lawyer to give you the rundown on all the loan docs to figure out which covenants have been broken and when you'd be able to take the property back

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Nov 21, 2020 - 5:54pm
Glasscannon, what's your opinion? Comment below:

It can differ significantly depending on the context. I'd strongly recommend consulting local counsel as a first step - it can take anywhere from 1 month to 2+ years. But in my experience, the biggest factors affecting foreclosure time are state law (judicial vs. non-judicial state), rights and remedies/security interests available in the loan documents, and cooperation (or lack thereof) from the borrower. To better evaluate the opportunity, consider the following:

  • What defaults have been called under the loan documents? Are they well evidenced (i.e. non-payment of interest or property tax) or technical (i.e. breach of a borrower's minimum liquidity covenant)? 
  • Has the promissory note been accelerated and the full indebtedness due and owing? 
  • Have the minutes of foreclosure (basically a title report) been pulled? Are there any other liens or judgements on title? Is there a lender's title policy in-place? 
  • Has the current lender started the foreclosure process? If so, how far along are they (generally public record)? Has a receiver been placed on the property?
  • Can you foreclose via pledged membership interests (UCC sale)? 
  • Is the loan recourse, or non-recourse with bad-boy carevouts? 
  • Is there an independent director in the borrower's operating agreement to help mitigate bankruptcy risk? (If the borrowing entity files for bankruptcy, the process can be lengthened from between 2-12+ months and will cost you significantly more in legal)
  • Is the borrower willing/able to contest the foreclosure? 
  • How do your returns look if you're paid off on the note 1 month after purchase and can't finish the foreclosure? Is it worth the default interest accruing on the par value of the note during that time period? 

I'd also keep in mind that you're purchasing a loan, and not the property. Especially if communication between borrower/lender has broken down, asset-level information may not be fresh or easily available. Discounts available on some note purchases exist because there's real time and legal costs involved in the foreclosure process (which again, differ significantly based on the context). 

Feel free to PM me if you have more specific questions. I serve as head of special servicing/workouts for our debt fund and have taken properties through the foreclosure process in a number of different states. 

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  • Associate 1 in RE - Comm
Nov 22, 2020 - 12:49pm

Great post. How often during a workout do you, the lender, accept some diminution of returns, or so, accept a higher LTV without requiring a paydown? Why would you agree to work with a Borrower other than the fact that you don't want to operate real estate assets?

Nov 22, 2020 - 8:10pm
Glasscannon, what's your opinion? Comment below:

Not sure I completely understand your first question, but we rarely, if ever, will accept a lower risk adjusted return on defaulted loans. 

If we're negotiating a forbearance or loan modification and have concerns about our collateral position, we'll usually push for either a paydown or additional collateral. We may also increase the rate, charge a forbearance fee, other otherwise seek to improve our economics

As to your second question, we will almost always try to work with our borrowers rather than pursuing foreclosure. If there's significant equity in the asset, the borrower will often fight like hell to maintain possession. Even in states that are "easier" to foreclose in, there are plenty of ways to drag the process out long enough to secure a new loan. Even though we'd be very happy owning the asset, it's really just not worth the time and effort spent to try and get there. Much easier to tell them to find a new lender, and negotiate a 3-6 month extension for a hefty fee. We make an outsized return, and I can spend more time on new business rather than court proceedings. 

For additional color, the most common reason for default (or anticipated default) at our shop is maturity default. If the borrower was not able to execute on their plan (complete renovations, lease up a property, etc) but is otherwise paying, all else equal I'd much rather give them more time and "incentivize" them to refinance us with a higher rate and more fees. Once you start foreclosing, that income stream will definitely stop.  

Nov 21, 2020 - 6:16pm
redever, what's your opinion? Comment below:

If the loan docs/local laws allow, you could have a receiver appointed at the start of the foreclosure, this helps your overall leverage. Ideally, you can try and negotiate a hand off, or friendly foreclosure from the borrower. If the real strategy is to own/control the property, you should seriously consider a semi-friendly approach to the borrower, obviously, you give up zero rights by negotiating here.

Nov 22, 2020 - 10:45am
Glasscannon, what's your opinion? Comment below:

Agreed. If/when you decide to negotiate with the borrower, it's very helpful to make sure they sign a pre-negotiation agreement (PNA). Many attorneys will have a template available.

  • Associate 3 in RE - Other
Nov 22, 2020 - 2:07pm

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