Welcome to mortgagesforsale.net! Use our contact form to find more information on Mortgages for Sale. We specialize in Mortgages for Sale. Thank you for visiting mortgagesforsale.net!
1. Investing in Mortgages for Sale:
1.1. Current Marketplace Analysis
The RMBS market has been, in our view, the most disrupted and systematically cheap corner of the fixed income universe for the past few years. The buyer base transformation (from ratings-based holders to credit specialists) taking place in the massive (>$1 trillion) Non-Agency market has resulted in securities priced to quite adverse outcomes that appear to be at odds with observable housing market trends over the longer term. High returns (to long average lives) are achievable without improvement in housing.
Since the spring of 2011, the distressed Non-Agency RMBS landscape has become an increasingly broken market where (dramatically lower) prices have become more and more detached from (steady to improving) fundamentals. We are regularly buying securities at 25-35 percent discounts to trading levels from earlier this year.
The state of disruption in the distressed RMBS market is relatively stark. It isn’t very often that the market presents us with a chance to buy senior debt securities with 20 percent or better return potential that offer:
- Very low principal risk (IRRs to maturity are slightly positive even in the event of catastrophic housing deterioration from current depressed levels). We believe these securities are priced to withstand more in the way of economic/housing deterioration than just about any other asset category in which we invest.
- Very high (1,000-1,500+) loss-adjusted credit spreads to long average lives (spreads would be even higher if we used less conservative assumptions with regard to defaults, loss severities, prepayments, etc.)
- Relative value (loss-adjusted yields in distressed RMBS are substantially higher than nominal yields in other asset classes)
- Exposure to an asset class that is naturally (and significantly) improving in credit quality as the worst borrowers continue to default; as these pools become less distressed in credit quality, it is likely that they will also become less distressed in price as they begin to appeal to a broader base of investors and become priced to less severe scenarios and/or lower yields; another way of thinking about this is that credit improvement can occur without housing market improvement)
- Exposure to an asset class that has never endured a distressed cycle, and where traditional investors lack the credit background necessary to underwrite this risk. Much of the highest return profile collateral is found within the SubPrime and Pay Option ARM sectors. These are among the most complicated areas of the market, where credit expertise and security selection are critical, emerging variables such as put-back settlements and modifications take on amplified importance, and collateral is often only available in small size. Due in part to these factors, PPIP managers and mutual fund complexes have been less active in these areas.
- Positive leverage to US dollar debasement/inflation (which would tend to boost homeowner equity, slowing default rates and increasing recoveries)
- Rapid return of cash (many securities, by virtue of seniority, amortize in excess of 20-30 percent per year; recouping our investment quickly allows us to reduce our dependence on a friendly back-end housing/economic environment)
- Free options on voter-friendly policy initiatives (principal modifications designed to keep people in their homes are increasing in frequency and effectiveness; we are buying securities that should benefit from the lower default, higher recovery, higher prepayment environment that could be expected to result from a scenario in which borrowers have higher home equity)
In spring 2011, distressed Non-Agency RMBS prices began to fall precipitously. Importantly, the selloff occurred in the absence of unforeseen deterioration in housing fundamentals. Rather, the initial downdraft arose from supply fatigue attributable to the Federal Reserve’s disorderly liquidation of its $31 billion Maiden Lane II portfolio (which consists mostly of SubPrime, Alt-A and Pay Option ARMs) and well-telegraphed additional supply from other players (such as Dexia’s >$7 billion portfolio). Many market participants have relatively short term investment horizons, and were disinclined to buy or hold assets with short term mark-to-market risk when they knew additional supply of those assets was due to hit the market in the near future.
Subsequent to this flood of supply, the severe risk-off climate in August/September weighed further on prices (especially as general de-risking and uncertainty around capital requirements resulted in reduced participation from Wall Street investment banks).
Like most markets, certain parts of the mortgage arena are overbought while others are either underappreciated or thinly sponsored. However, on the whole we believe certain portions of this asset class are poised over the next couple of years to generate higher returns with less risk than virtually any other sector in which we operate. The asymmetry embedded in these assets at current prices (positive yields to maturity even in a severe left tail scenario, with quite high total return potential in the event of reflation or even a perpetuation of the status quo) stands out starkly versus the rest of the RMBS market as well as other asset classes. In this uncertain macro environment, we believe that assets with these kinds of return profiles (where left tails can be cut off but right tail options are substantial) will be increasingly coveted. Scarcity value should also not be ignored – long-dated (5-10+ years), high loss-adjusted spread (>1,000 bps) debt with positive leverage to inflation is hard to find at the moment outside of distressed Non-Agencies (over time, pension funds and insurance companies struggling to meet liabilities should find this asset class difficult to ignore).
1.3. Credit-Intensive Approach
We deliberately are targeting some of the most distressed mortgage pools that were originated at the peak of the housing market (2005-2007) and the trough of lending standards. The reason we are focused on these poor credit quality pools is they require a great deal of credit expertise and most of the mortgage investor base do not employ a credit-intensive approach. Before 2008, the mortgage space was dominated by ratings-based buyers (insurance companies, banks, pensions etc. that needed to buy AAA assets). Credit rating, not credit quality, was the primary criteria for investment. The process of ratings downgrades a few years ago is one of the primary reasons this opportunity exists – the major holders of this debt became forced sellers in droves once it was downgraded. Moreover, they were largely sellers into a vacuum because there was not a well-established distressed mortgage investor base (this is the first nationwide distressed cycle in the mortgage market).
A credit-intensive approach to the space leads us to believe that current prices do not reflect the substantial returns likely to be reaped from these distressed mortgage pools. This is largely a function of the fact that the Non-Agency asset class is huge (over $1 trillion), and the marginal movers/determiners of price tend to be the largest participants (Pimco, Blackrock, TCW, etc.), members of the long-only community that, due to the vast sums of capital they have to deploy, are compelled to take a somewhat macro, less credit-intensive approach to mortgage security analysis. If these large asset managers tore apart every $5M security for sale and stress-tested it for several hundred default, recovery, prepay and modification scenarios (as we do), they would find it difficult to put their money to work. To some degree they need to buy and sell in bulk and apply more blunt methods of security valuation. These dominant methods of mortgage security valuation tend to set prices, and (in our view) fail to appreciate various forms of optionality (on fundamentals, interest rates, and policies) embedded in the assets as well as evolving dynamics with regard to default and recovery trajectories. This phenomenon, in conjunction with the more recent supply/demand dislocation in the space resulting from wide scale deleveraging, has resulted in a situation in which these assets are priced to adverse outcomes that seem to be inconsistent with observable housing market trends.
Our ability to perform in-depth analyses into the underlying mortgages helps us discern portfolio attributes (particularly credit quality dispersion) and trends that are generally missed by the bulk of investors. We have exploited numerous of these opportunities in the mortgage market (on both the long and short side) over the last 4 years which have arisen from the market’s tendency to extrapolate current trends into the future. Much of our success in the mortgage space, which has taken place across very different market environments, has rested upon our ability to identify inflection points where those trends break down, creating opportunities for high returns.
2. OUR POSITION:
2.1. What We Do
Our goal, through these transactions, is solely based on the ability to acquire these large portfolios of notes, service each asset in-house, and then dispose of the asset to attain the highest possible ROI. Summerlin Asset Management has direct relationships to purchase said portfolios via Financial Institutions such as Deutsche Bank, JP Morgan Chase, HSBC, Bank of America, and Citi Group. These large scale and accredited firms have chosen to liquidate their Real Estate asset portfolios. Recently the banks have decided that it is essential to start liquidating the pools of mortgage backed securities and strip out the notes that have trending delinquencies. Ideally, they are holding mass portfolios of liabilities; these said liabilities can be acquired at significant discounts, conversely turning them into assets for our firm.
2.2. Securitizing Your Investment
Your funds will be used for the acquisition of these portfolios and will be secured by first lien positions on residential properties. Our LLC, which you, the investor, will be a member of, will be the recorded mortgagee on title in the public domain. Quickly referencing back, SAM is now the bank; we have the money, and possess the power.
In addition, all operations will take place under an LLC that you, the investor, is a general partner. Direct access to all financials will be available at your discretion per the articles of organization and the operating agreement. At SAM, we service each transaction for our investors and are dedicated to complete operational transparency.
2.3. Choosing The Notes
There is a very tedious and important timeline involved with these large unpaid balances of notes. Most importantly is the “scrubbing” process. This is a period where we will assess each individual file within the pool of notes. While looking through these larger pools, we inevitably find certain files with scenarios that will take longer to exit and in that case we can categorize whether the yield is high enough to move towards acquisition. After identifying these files, we, in some cases, remove them from the pool, as these types of notes do not fit our business model. This will typically bring down the unpaid balance by 20 percent from an un-scrubbed pool to a scrubbed pool, ultimately saving investor dollars and increasing the rate of return on capital injected. This is an important step in our due diligence process to make our investor’s money secured. We also account for 3 percent attrition rate on the scrubbed pool for these same instances, bankruptcies, and deaths as time goes on to collect or exit on the notes.
In this scenario, the balance of the borrower’s loan is 175 percent or greater than the value of the home. In this case, borrower wants to keep their home. However, the borrower realizes they will never recoup the negative equity that they are paying down.
SAM will structure a 12 month program to write down the balance of the borrower loan in exchange for 12 months of un-interrupted, on-time payments. Here is an example below:
Unpaid Balance $300,000.00
Home Value $200,000.00
Purchase Price of Note $120,000.00
Monthly Principal and Interest Payment $1,896.20
We will give the borrower a $5000 per month balance reduction at the end of the 12th month assuming borrower has made 12 on time payments. The end result is our portfolio enjoys a cash-on-cash return of 18.96 percent on our $120,000 investment while the borrower has the benefit of reducing the balance of their loan by $60,000 by month 12. This gives the borrower hope that their house will become an asset in the near future. In addition, SAM now has the ability to sell a 12 month, seasoned, performing loan, upwards of 70 percent of the home value. In conclusion, our return on investment for 12 months is 35.62 percent.
Loan Modification/Forbearance Agreement
In this case, the borrower fell behind for a variety of reasons; loss of income, health issues, career change, etc. The borrower has expressed the desire to stay in the home and demonstrated the financial ability to sustain the current mortgage payment. We create a forbearance agreement that will take the total amount of payments owing and divide the sum by 12. We add the 1/12 to the regular monthly payment. This will immediately help borrower to get back on track, increase our cash-on cash return, and reestablish the borrower as a seasoned performer. In the event that the borrower lapses on their forbearance payment, we reserve the right to initiate foreclosure.
Cash for Keys/Deed in Lieu of Foreclosure
This is an instance where borrower is emotionally disconnected with the home and is living in the home. We create an opportunity where the borrower is released from all personal liability on the obligation and walk away with enough cash to relocate and establish a new life. We offer them an aggressive cash incentive to sign over the deed to the home. This scenario exists if the home only has a first position lien (that we purchased) and the balance of the loan is higher than the value of the home. After we come to a formal agreement in writing, we perform a thorough inspection of the home to identify potential problems. Our contract states that within our discovery process we identify problematic situations, i.e. roof leak, we have the right to reduce our cash offer to the current owner. Our team encourages the home owner to treat this as a business decision.
One of the most equitable options we have for a borrower is a short payoff. In this instance, we provide a 6 month option where borrower can pay off their mortgage at a price below the market value of the property. This happens by way of a family member putting up the cash, private money financing, or using 401k proceeds (if available) to pay off the home. Here is an example:
Unpaid Balance $300,000.00
Home Value $200,000.00
Purchase Price of Note $120,000.00
In this case, we would offer the borrower a payoff at $180,000.00. In addition, we will write off the remaining debt and relieve the borrower from the difference. Since SAM is still profitable, we do not 1099 the borrower for the difference, thus creating no tax liability for the borrower.
The most common of all workouts, we work with the borrower to list their home. During the short sale period, we allow the borrower to live in the home with no mortgage payments. By keeping the borrowers in the home, it ensures SAM that the house is being properly maintained while the short sale process continues. If the borrower has a 2nd lien, SAM will work diligently with the subordinate lien holder to reduce their balance and be paid through escrow. Upon closing, SAM will provide the borrower with financial assistance to relocate in a smooth and efficient timeframe.
Foreclosure is the last resort for SAM. If our asset managers are not able to complete either of the above, we deploy our legal team to recoup the asset via Foreclosure. This process can take from 120 days to 360 days. Our philosophy is to price the asset to sell at the foreclosure court steps. In doing so, we immediately recoup funds and do not ensure the sale process. In the event the asset reverts back to SAM, our team of realtors will list and dispose of the asset as an REO.
Sam will perform an asset search of any borrower. If other assets exist, we will explore our deficiency rights against the borrower. This is an unlikely scenario, but one that still exists.