Modelling a Portfolio of Non-Performing Loans
Hi, I'm interested in learning how to value a portfolio of non-performing real estate loans, although any information on modelling other non-performing loans such as credit card receivables would be most welcome if that is something you are more familiar with. Even some starting points would be very useful. Or any useful websites you may have come across. By way of some background, I'm a real estate finance analyst used to underwriting single performing loans.
When purchasing a NPL, you're going to have a few options. I typically underwrite to own the real estate. For this objective, you'll want to use foreclosure assumptions (notice of default, bankruptcy, etc.) These costs and time periods can vary greatly depending on the situation. You'll want to look for delinquent taxes, mechanic liens, and other liens/encumbrances. You should also review any borrower guaranties and financials. You may be able to collect from these, although this is more complicated than it sounds. After you take possession of the real estate, underwrite the property exactly how you would if you were purchasing the fee-simple interest. If you do not want to own the real estate due to construction, environmental, or other issues, you can negotiate with the borrower for a loan modification. This allows the borrower to make smaller payments, reduce their principal balance, modify their maturity date, etc. Also, the lender can achieve their returns through the note’s maturity, since you (hopefully) purchased the note at a discount to UPB. Another option is to enter into a forbearance agreement, which will give the borrower a specified period of time to do whatever it is so that he/she can start paying again.
All of this should apply to purchasing NPLs on a portfolio level. It obviously can become much more complex, but this is about as simple as I can make it.
Any thoughts on costs not typically associated with straight RE transactions? Like are there higher legal costs to look out for, or any tax implications that could be beneficial/negative? What about any tax implications to consider on an LP? Thanks.
pe_re is spot on. A couple other high level points:
1) LTV is key. If your collateral value is greater then the balance, you can assume some sort of discount to UPB as a payoff. What could they refinance you out at? The issue with assuming you still foreclose is that the borrower could go into bankruptcy and spread the equity in the asset to other assets.
2) If the borrower has some assets, you can take the property back but add a couple settlement payments in to help bump up your purchase price. The borrower can protect themselves from a judgment this way.
A portfolio can encompass 100's of loans and 100's of relationships (more than one loan per relationship). Until you know you are in the running to win you want to keep it high-level. For this I would take a discount off the appraisal and if the LTV is higher than 90%, sell at the discounted appraised value in month 12-18 with 7k - 15k in legal/other and any taxes (foreclosure case). If it is less than 90%, sell in month 10 at 90% of the UPB with ~7.5k legal (refinance case). This way you are only looking at appraised values and LTVs to value. Pretty easy to build some if-statements for this.
Finally, as a rule of thumb, purchase price will be 55% - 65% of collateral value, excluding taxes and other abnormal expenses. I know some shops that spend all of their time on the collateral value and just bid 65% of it - no in the file work outside of environmental and taxes. Also a quick way to answer interview questions FYI.
Nice to actually see some hard numbers used as an example or a rule of thumb sk8247365. There is always a lack of that when q's are being answered on here.
@pwar - I've bought everything from 17 cents on the dollar to 90, and have spent $5k to $400k per deal on attorney fees, but sk8247365 is correct if you wanted to pinpoint it, assuming you have appraisals to work from, which is much more common these days.
Many thanks for your input here guys. Extremely helpful.
My shop doesn't do NPLs but this is interesting, thanks for the feedback pe_re and sk8
Sorry to bring up an old thread but would anyone be kind enough to share a simple NPL model / anything similar for test prep via pm? Many thanks in advance.
Did you get a response on this? I'm looking for the same thing...
also interested - bump!
Also interested in a sample NPL model. Bump
I can not share a specific model with you, but can help to answer your questions. At my current shop I have done some NPL deals (CRE backed and unsecured insolvency claims).
Happy to help.
Single asset or portfolio of assets? I ask because I have done some single asset deals and they are quite easy to wrap my head around. How is it different when you have a portfolio of 100 assets with different borrowers? Do you underwrite each individually or somehow aggregate them? I ask some similar questions on another thread (https://www.wallstreetoasis.com/forums/recommended-booksresources-for-n…), mind to take a quick look?
I can just speak for my shop but I think this will answer some of your questions:
Top 10 - 15 Assets: 40 - 50% Top 30 to 50 Assets: ca.80% Rest
If the portfolio contains really small claims, we either right them off directly or sell them immediately via auction and take what we can get. We normally try to value 80% - 90% of the portfolio in detail (more or less).
special servicers do everything to find new tenants (which is hard most of the time, because you do not buy RE in prime locations but rather old factory halls, etc.), go through the contracts, make a first initial valuation to have a ground for a first indicative bid, collect the rent, etc. They are basically and literally on ground to oversee everything. Banks need to sell the assets because they need to need to keep the capital requirements under Basel regulation and for strategic reasons (but that's a huge topic).
Portfolio sales by banks are very relationship and trust driven. E.g.: How is Cerberus (despite their very aggressive servicing and pricing) able to buy so many bank portfolios? They know the key people in the right positions. They bought BAWAG in Austria a while ago and have a huge impact and good relationships to Banks like Commerzbank, HSH, NordLB, etc. Often times it is not about the highest price, but about your servicing, communication, relationship, etc.
Hope this helps.
Any thoughts on costs not typically associated with straight RE transactions? Like are there higher legal costs to look out for, or any tax implications that could be beneficial/negative? What about any tax implications to consider on an LP? Thanks.
would you have more info on basic steps of NPL valuation?
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