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Whole Loan Trading

Trading of non-performing residential whole loans is historically a process of working with given financial institution’s asset disposition group, obtaining the institution’s non-performing portfolio, researching and underwriting the properties, and assessing where those properties are in the foreclosure process (credit curve or timeline).

A whole loan trader’s research and underwriting process typically involves breaking the portfolio out by geographic markets (state, city, physical address), identifying targeted properties, defining the foreclosure timeline of targeted properties, evaluating those properties’ mortgagor pay histories, obtaining prior appraisals and “broker opinion of values (BPO’s),” and assessing pricing risk.

Whole loan trading value is a function of pricing, which is determined by the underlying asset (properties) “true market value” at the time of whole loan portfolio purchase.

Three primary strategies used in today’s non-performing market include:

  • Value added portfolio acquisition involving “workouts” and “loan modifications” with mortgagors
  • Arbitrage the loan portfolio and make a profit on “spread” between purchase and sale
  • Obtaining a portfolio at a discount to hold long term

In prior real estate cycles, whole loan trading yields were fairly stable and predictable, but in our current chaotic real estate cycle (2008 -2011), yields are much more volatile given pricing risk assessments. Contemporary market issues including the banking “mark-to-market” accounting rules and regulations, government intervention in the private sector foreclosure process, the future of Fannie Mae, Freddie Mac, and Ginnie Mae, and the foreclosure “Robo” signing debacle. These events are currently immobilizing the whole loan trading marketplace.

The current market malaise is further exacerbated by historic banking culture. A culture that restricts non-performing assets from the market for fear of negative public perception of a given institutions financial stability. This is because when a portfolio of loans sells below book value, it results in both a negative “write-down” and “reserve” event for the bank. Hence, many whole loan portfolios are not marketed effectively to the trading community.

Currently there are more buyers than sellers, and while the marketplace is stagnant, emerging opportunities abound.

By: Chris Negri & Kyle Cascioli, February 18, 2011

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