REO, Non-Performing, and Performing Portfolios

The "big deal" right now is matching up big buyers with big sellers. What do I mean by "big?" In this particular case its buyers that want $10 million portfolios of REOs, non-performing notes, and/or performing notes in weekly stages, up to over $1 billion dollars. Makes your head spin doesn't it! The key is finding the direct buyer and finding the direct seller. WE HAVE FOUND BOTH. We have direct connections to many banks and funds that have REOs, non-performing and performing notes available.


The non-performing notes are the cheapest, because they have yet to incur the cost of bankruptcy and are still tangled up with a sometimes messy borrower. Yes, in some cases the payor has said they will sign a deed in lieu of foreclosure, but when asked to do so, there is no promise they will if they know they can live there paying only the utilities until after the foreclosure and an eviction takes place. In fact, as a practicing attorney I told my clients to stay as long as possible because it was free rent and they could save up the difference for the move. Most had already declared bankrupcy, so they weren't incurring more personal costs to stay there for free. If a deed in lieu of foreclosure is not signed by the owner, then foreclosure is required and that can be a 2 - 6 month process in many states. Because there is a time element with non-performing notes, they can be purchased in large increments at a low 17 - 35% LTV with 3 points based on face value. That's quite a buy for the fund which can cover the costs of foreclosure, renovations and holding until resale.


Portfolio orders can be narrowed to certain areas of the United States (i.e. coastal states, New York City, rust belt, etc.). About 3 - 5 days after a letter of intent is delivered and proof of funds is provided, the investor will be provided a spreadsheet of assets to review and have a brief due diligence period. HOWEVER because there is constant bidding on these packages, UNLESS/UNTIL a deposit is made, the portfolio is first contract to purchase wins. Closing is usually very quick - be prepared to use the funds you've shown because portfolios have a short time fuse for closing.


REOs is the next type of portfolio, with a higher LTVs since the foreclosure or deed in lieu of foreclosure have been completed. REO packages are coming out in the 35 - 65% LTV range, again with 3 points of face value. The REO package can also be narrowed to specific geographic locations.


The performing note market usually has the highest LTV and is in a very competitive market, as both institutions and private note buyers wish to invest in these instruments. Remember, these are first position notes, as the knowledgeable investor usually won't touch a second, unless the CLTV is 80% or less. In this credit crunch, institutional note buyers have tightened their funding requirements and are insisting that the mid-credit scores be above 600. Private investors may be a bit more lenient based on the entire credit report history, since medical bills and student loans can decrease credit scores, but may not be detrimental to the payor's ability to make their house paymetn. The sale of a subprime (below 600) note to institutions may be possible when seasoning has occurred, i.e. after 6 months to a year of payment.


If these sound attractive to you but you may not wish to get $10 million packages, the alternative is to invest in a fund that is purchasing these packages. Private Mortgage Association (http://www.privatemortgageassociation.com/) does have a new fund opening for just this type of accredited investor: interested in the foreclosure market, but not wanting a hands-on management of the assets. If you are an accredited investor (see the PMA website to determine if you qualify) ask for a copy of our offering memorandum when it is available to determine whether this will meet your investment needs.