Speed of Sales and Buyers Create Questions about Purpose of Fannie’s NPL Bulk-Sales by Amanda Maher
Goldman Sachs and investment fund Fortress (a/k/a New Residential Investment Corp.) are the proud new owners of 7,000 delinquent, serviced loans as of yesterday. The companies spent a collective $1.24 billion to oust other bidders for Fannie Mae’s latest round of non-performing loans.
By shuffling the delinquent loans in to the private market, “We are offering non-performing loan sales to investors and their servicers who can help borrowers avoid foreclosure wherever possible by applying a wider range of loss mitigation options than we have available,” said Joy Cianci, Fannie Mae’s senior vice president for credit portfolio management.
This round of loans is considered “severely delinquent” as indicated by the metrics below:
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Pool #1: 1,963 loans with an aggregate UPB of $418,837,669; average loan size $213,366; weighted average note rate 5.21%; average delinquency 52 months; weighted average Broker Price Option (BPO) LTV of 108%.
Pool #2: 3,823 loans with an aggregate UPB of $588,367,863; average loan size $153,902; weighted average note rate 5.32%; average delinquency 34 months; weighted average BPO LTV of 70%.
Pool #3: 1,224 loans with an aggregate UPB of $235,320,739; average loan size $192,256; weighted average note rate 4.90%; average delinquency 36 months; weighted average BPO LTV of 135%.
Fortress won pools one and three, and Goldman Sachs took number two. The transactions are expected to close in mid-December. Credit Suisse Securities, J.P. Morgan Securities, Bank of America, William Lynch and the Williams Capital Group marketed the sale of the loans.
Yesterday’s sale occurred right on the heels of another major Fannie Mae NPL selloff in which the Loan Star Fund’s private equity trust LSF9 Mortgage Holdings bought a pool of 3,900 loans totaling $765 million in unpaid principal balance (UPB). Fannie’s first-ever bulk NPL sale closed in May, a transaction that included approximately 3,000 delinquent single-family home loans totaling $762 million in UPB.
When the loan pools first came on the market, Cianci indicated that Fannie Mae’s goal was to “market these loans to a diverse range of buyers, including non-profit organizations, smaller investors and minority- and women-owned businesses”.
To achieve that goal, Fannie packaged 71 loans focused in the Tampa, Florida-area for sale as part of a “Community Impact Pool”. In September, New Jersey Community Capital (NJCC), a nonprofit community development financial institution (CDFI) was the winning bidder on these loans, which have an aggregate $10 million in UBP. Prior to this purchase, NJCC had already acquired 761 troubled mortgages with a total of $193 million in UPB. “Through our loss mitigation programs, which utilize principal reduction as a key part of right-sizing borrowers’ firs mortgage debt, we have already helped over 200 homeowners in Florida and look forward to continuing this progress,” said Wayne Miller of NJCC at the time of sale.
It does not appear as though there was such a Community Impact Pool included in Fannie Mae’s most recent bulk-sale.
Freddie Mac announced earlier this week that it would be auctioning off its eighth round of delinquent loans. These Wells Fargo Bank-serviced loans total $1.2 billion in UPB, though the exact number of loans included in the sale remains unclear.
The bulk-sale of NPLs is intended to provide the GSEs with some cushion as their profits and capital reserves continue to decline. By shifting illiquid assets into the private sector, it hedges against the need for another taxpayer-funded bailout which cost $187.5 billion back in 2008.
In March, Michael Stegman, a senior advisor at the Treasury, urged FHFA to accelerate the sale of illiquid assets—specifically, through the sale of NPLs at auction. At the time, Freddie had sold off $1 billion in defaulted debt; Fannie Mae hadn’t yet begun.
“We move at a pace we think is a reasonable pace,” said FHFA Director Melvin Watt. “We evaluate things very carefully,” he said.
Fannie Mae – These sales raise a few concerns.
First, the sales indicate that the myriad rules, regulations, restrictions and programs that FHFA has put in place over the past several years are inadequate to help borrowers remain solvent. HAMP, HARP, you name it – none are actually sufficient.
Second, if the sale of NPLs is really to “help neighborhoods stabilize and recover,” as Cianci has been quoted as saying, why are there so few loans being sold through the Community Impact Pool? Why is it that more than 10,000 loans have been transferred to the private sector, while only 71 were transferred to NJCC? If the thought is that companies like Goldman Sachs have more products available to restructure loans, let’s not forget that CDFIs are usually best-equipped to modify loans for lower-income individuals and can provide a host of technical assistance and wraparound services to help at-risk borrowers stabilize their entire financial portfolios.
It leads us to believe, then, that these bulk-sales are really less about keeping families in their homes and helping distressed communities recover, and more about finding a way for Fannie Mae and Freddie Mac to wind down their retained asset portfolios from $400 billion to $250 billion in accordance with the terms of conservatorship. Might as well start with the riskiest assets first.
This leaves us with one final concern: if Fannie Mae and Freddie Mac’s portfolios are indeed still so volatile, with tens of thousands of loans that are 4+ years delinquent, why is this only Fannie Mae’s third bulk-sale? There are many flaws in Stegman’s suggested management of GSEs (including, most recently, his affirmation that the Obama Administration will not “recap and release” them)—but this is one time he may indeed be right. Selling off NPLs should be happening more quickly, to both investment firms and CDFIs alike. That is how we best protect homeowners and taxpayers.