I’m a little skeptical. Here’s some critical thinking.
The banks have had eight years to do this on their own. Why will they now agree to write down a non-performing mortgage by way of an outside third party when they haven’t had to mark-to-market their losses in all this time? And does AHP even have the credibility and clout to have the necessary high level access to purchase non-performing mortgages?
A $800 to $500 reduction is reasonable but that example would be for below market properties, i.e. Section 8 housing and mobile homes. Mortgage payments are not going to be anywhere near $500 to former subprime and NoDoc borrowers who bought overpriced single family, subdivision homes even after a 50% reduction in amortized balance owned. It seems to me all that will ultimately happen is that the REO inventory will shift from the banks to AHP. Unless AHP has a proven plan in place to fix up and wholesale flip the resulting REOs, the inventory will just build up as technological unemployment continues to spread.
And I don’t see any indication this will ultimately be a profitable business venture as opposed to acting as public benefits corporation. If I want to support charity, I donate specifically for that purpose.
Thanks for your comment.
I think the idea of banks acting logically is an assumption I would never make. If they did then the whole marketplace lending industry wouldn’t exist cause banks could do all this lending themselves. Yet they don’t and that hole in the marketplace is where the Lending Clubs of the world come in.
The mortgages AHP buys are normally lower income homes or starter houses so they are not doing this with $500,000 homes.
The one logical thing that a bank does in this circumstance is look to sell fast as these non-performing notes are a liability for them and limit their lending capacity until they get off the books.
You make some good points on the shift of REO inventory. Perhaps AHP CEO Jorge Newbury will chime in with a couple of additional points.
AHP has been purchasing nonperforming mortgages since 2011 and we have purchased directly from Citi, Banco Popular, GMAC, Aurora Bank, FDIC, Caliber, Impac, and many others, including some of the largest hedge funds in this space. We do have the access and relationships to purchase these mortgages. I appreciate the concern, though, as this is a somewhat inefficient and opaque space.
Banks routinely sell distressed assets and, ver the last couple of years, there has been a purge of nonperforming mortgages from banks and HUD, FNMA, and FRMC. Groups like Citi, which previously would sell directly to AHP, now want to sell in much larger trades, often around 100MM spend or more. Thus, these trades go to larger hedge funds, some of whom will cull out the mortgages secured by lower-value homes(sub-75K value, and often sub-50K) and sell to AHP.
Larger funds often see limited value in expending resources on these assets. Yet, behind each mortgage is a family. If they owe 100K and the home is currently worth 50K, we can likely acquire that mortgage for 15-20K and share the discount with the family. The results are transformative. To date, we have helped almost 750 families stay in their homes with sustainable solutions and aggregate payment savings of over $3MM annually. We have helped put a similar number of vacant, unwanted homes back into service. Collectively, we have extinguished over $78MM in negative equity.
There are millions of families in homes worth less than 75K, and many less than 50K. This includes some mobile homes and Section 8 rentals, but the majority are owner-occupied traditional homes which just happen to be located in low- and moderate-income communities. Even eight years after its start, the housing crisis is still in full bloom in these neighborhoods: 53% of homes with values under 50K are severely underwater, which is to say that the principal amount of the mortgage is more than 125% of the value of the home. In comparison, 5.7% of homes valued at $1 million and up are seriously underwater.
To compound the challenge, low-value homes are generally falling in value while all other price categories have improved. According to RealtyTrac, between Q3 2015 and Q1 2016, the number of underwater homes with values under 50K increased by 13.4%. All other value categories showed decreases, with the percentage of underwater homes generally dwindling as values increase.
At the prices we pay, we can still typically generate a gain selling our REOs to investors who buy, renovate, and sell or rent. We are not in the business of renovating homes, an endeavor made more difficult as our assetsare located all over the USA. Local investors are better-equipped to take this work on. Thus, we sell REO fast and at competitive prices, typically through local real estate agents.
I appreciate the concerns and welcome additional questions.
Its really a nice concept, it will benefit for both lender and borrower. Thanks for sharing very useful information.
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