Despite tighter lending standards, the COVID-19 crisis has left many banks holding non-performing residential loans (NPLs). As the pandemic continues and job creation stagnates – or in the case of some sectors, declines – U.S. mortgage NPLs are likely to increase.
NEW YORK, Oct. 14, 2020. According to a recent S&P Global report, worldwide, banks can expect credit losses of $2.1 trillion between 2020 and 2021, more than twice the level in 2019. This number will rise in the event the pandemic has a second wave.
Banks holding NPLs have two options: They can spend their own time and capital pursuing homeowners who are delinquent or have defaulted on their payments, a costly and complex process that may stretch the bank’s internal resources; or they can sell the loans to a third-party.
Financial institutions with residential mortgage loans in judicial states face a particularly protracted and complex procedure in resolving NPLs. Judicial states such as New York, New Jersey, Connecticut and Florida have among the highest delinquency rates in the U.S. following the outbreak of COVID-19, according to the Mortgage Bankers Association.
In judicial states, home loans are secured by mortgages, not deeds of trust, so all foreclosure cases must filter through the court system. This process can last from six months to several years, depending on the state. As many banks lack the time, resources or legal teams needed to work through their NPL backlog, selling these loans is often the preferable option.
Due to the ongoing increase in NPLs both domestically and globally, institutional investors are looking to NPLs as a significant opportunity. Finitive recently facilitated a $175 million joint venture between a division of one of the top 50 global banks and Florida-based investment firm Lakeport Capital, to acquire non-performing residential mortgage portfolios. Lakeport specializes in buying and working out defaulted first and second-lien mortgages in judicial foreclosure states. It purchases NPLs from small and medium-sized banks and non-bank lenders at a loan-to-value of no more than 70%.
Unlike the banks looking to sell their NPL portfolios, specialty investors like Lakeport have the time, staff and expertise needed to manage even the most intricate NPL situation. Such strategies include finding solutions so that homeowners can become current with payments, restructuring the loans, or moving forward with the foreclosure process.
The opportunity for NPL investors is currently unprecedented. Not only are NPL numbers expected to continue rising over the next 12-18 months, but the many moratoriums on evictions and foreclosures currently in place in states across the nation have significantly driven down NPL prices.
Pre-pandemic, investment firms could generally expect to pay roughly $0.70 on the dollar for each NPL. Today, banks saddled with NPLs are selling them for between $0.50 and $0.55 on the dollar, getting the attention of investors.
Investors currently have a unique opportunity to help both banks, which are looking for solutions to manage their NPL volume, and struggling homeowners seeking options to reduce their payments and return to good standing.
Jon Barlow is the Founder & CEO of Finitive, a technology platform providing institutional investors with direct access to private credit transactions. For more information visit www.finitive.com.
Read more on LinkedIn