Republished with permission from the RealtyTrac Housing News Report — read the full report.
Robert Woods learned about the world of non-performing loans when he answered a phone call in 2011 from an investor who had purchased Woods’ strategically defaulted loan and was foreclosing.
“We signed a deed-in-lieu (of foreclosure) and the house was gone. The place had stainless steel appliances, we left it clean,” Woods said of the Florida condo he had purchased in 2006 with buddy while in college using a stated-income loan and $2,000 down. “We were part of that. Even with a finance degree from college, (we were) truly uneducated about an adjustable rate mortgage.”
That phone call put Woods on a path toward eventually buying defaulted (non-performing) loans himself. Now he is on the other side of the phone calls to “deadbeat borrowers.”
What a deadbeat borrower looks like
“Want to know what a deadbeat borrower looks like? You’re looking at him. I’m a deadbeat borrower, said Woods, who founded his loan-buying business, NexGen Coastal Investments, in 2012.
Woods said his experience as a strategic defaulter instills him with more compassion for distressed homeowners truly trying to save their homes, but also makes him keenly aware that some homeowners may try to take advantage of the situation through scams such as rent stripping — when the delinquent borrower/homeowner rents the property, collecting rent even while not making mortgage payments.
“You’re either going to pay me or go into bankruptcy by the end of this,” said Woods, who also co-hosts a weekly podcast, NoteMBA, about the non-performing loan space.
NPL sales gaining steam
Woods, who is based in Orlando, jumped on the loan-buying train in 2012 just as it was gaining steam.
RealtyTrac loan assignment data — including sales of both performing and non-performing loans — shows that loan sales peaked at more than 687,000 in the second quarter of 2012, up 57 percent year-over-year and up 341 percent from the third quarter of 2010.
The third quarter of 2010 was a significant milestone in the world of non-performing loans because it was when the U.S. Federal Housing Administration (FHA), kicked off its Distressed Asset Stabilization Program (DASP) — selling non-performing loans insured by the government agency.
FHA sold just 410 non-performing loans through the new program in the third quarter of 2010, but then quickly ramped up in 2011 and 2012 before peaking at more than 50,000 sales of non-performing loans in 2013, according to loan sales summaries provided on the U.S. Department of Housing and Urban Development (HUD) website.
While FHA non-performing loans sales gradually tapered off in 2014 (35,262) and 2015 (15,624), sales of Fannie Mae- and Freddie Mac-backed loans accelerated during that same time period.
Freddie Mac launched its non-performing loan sale program in July 2014 with the sale of about 3,000 loans, and quickly scaled up in 2015, selling 8,582 loans in the first half of the year and selling 15,790 in the second half of the year, according to its Non-Performing Loan (NPL) Transactions Web page.
Fannie Mae joined the NPL sales party about a year later with the sale of more than 3,000 loans with an unpaid principal balance (UPB) of $761.7 million in May 2015. Fannie completed two more NPL sales in 2015 and ended the year having sold nearly 14,000 loans with a combined UPB of $2.8 billion. And the government-backed agency showed no signs of slowing its NPL sales program in 2016, kicking off the year with its biggest sale yet in terms of dollar volume — more than 6,500 loans with an UPB of $1.32 billing that closed in February.
The NPL waterfall
Longtime loan buyer Eddie Speed said the flood of NPL sales over the last few years is beginning to waterfall down from large institutional investors — who purchased the loans by the thousands in the initial auction — to mid-sized buyers like his company, Colonial Funding Group — which purchases loans by the hundreds — and eventually trickling down to mom-and-pop investors who purchase by the tens.
“The waterfall of selling these non-performing notes started a year ago to any measurable degree,” said Speed, who also runs NoteSchool, a company that trains investors how to find, research, buy and service loans. “We might buy 100 loans, but we are not Carrington and we are not going to buy 10,000 at a time.”
Carrington’s investment partner Oaktree Capital Management has purchased 4,772 non-performing loans with a total unpaid principal balance of $807.6 million through the FHA program alone — the sixth biggest buyer to date in the program, according to a HUD report published in February. But large institutional buyers such as Carrington may now be interested in selling off some of their NPL portfolios to mid-sized investors like Speed, who in turn sells them to mom-and-pop investors.
Daren Blomquist is the vice president of RealtyTrac.