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Servicers to Play Important Role in Toxic Asset Plan
April 2, 2009
The companies that help private investors resolve toxic assets they purchase through a government program will be critical to its success. And the servicers are likely to include ARM companies.
The Adminstration’s plan for toxic assets on banks’ balance sheets will require private investors who participate in the “public-private partnership” to work closely with special servicers to determine the best way to maximize the returns on assets, many of which will be non-performing mortgages.
Under the plan, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, in partnership with private investors, will establish a Public-Private Investment Fund (PPIF) to provide government capital, financing, and guarantees to help get private asset investment markets working again. The fund will be targeted at the “legacy” bad loans and assets that are now burdening many financial institutions. The PPIF would look to buy $500 billion in toxic assets in the near term, a figure that could eventually grow to $1 trillion – far beyond the second half of the $700 billion in the Troubled Asset Relief Program (TARP) fund allotted last year.
The Treasury would select four or five companies as "fund managers" to purchase toxic securities. Each of the fund managers would need to already have a minimum of $10 billion in toxic securities under management. Each of these managers are likely, in turn, to directly or indirectly use the services of servicers, special servicers, debt collectors, attorneys, accountants, appraisers and other real estate and financial professionals.
“Once someone invests in [a portfolio], they have to be able to manage it,” said John Jay, senior analyst at Aite Group, explaining there would be one servicer at the investor level, and a special servicer at the loan level. The special servicer would need to work each separate piece of the portfolio differently, because a real estate loan in the fast declining market in California would be quite different from a loan in some parts of the Midwest, which didn’t have the fast-rising real estate values, and therefore, not the fast declines of the coasts (some parts of the Midwest are suffering, too, however).
The banks want to get these assets off their books – they don’t want to be landlords, Jay said.
“The important thing is to get proper valuation on these assets,” Jay said, expecting the difficulty of the pricing to start easing once some of the assets start being priced – helping to establish prices for similar assets, though there will still be regional and timing considerations.
“The clearing price is not always tied to intrinsic value. A lot of it depends on the [available] financing,” Jay explained.
Now that the government has shown a willingness to at least partially back some of these assets, they should be able to command a higher price than before, though the pricing is likely to still be very complex, Jay said.
However, Jay doesn’t expect the TARP pool or a similar government-sponsored pool to ever include credit card debts. The U.S. government and taxpayers have always placed real estate in a “special category” of debt, seeing shelter as one of the necessities of life, Jay said.
Credit cards, on the other hand, are seen as a vehicle for discretionary spending. So even though credit card delinquencies and charge-offs continue to rise without any immediate change in sight, the government is unlikely to attempt another rescue for that debt, according to Jay.
Under the plan, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, in partnership with private investors, will establish a Public-Private Investment Fund (PPIF) to provide government capital, financing, and guarantees to help get private asset investment markets working again. The fund will be targeted at the “legacy” bad loans and assets that are now burdening many financial institutions. The PPIF would look to buy $500 billion in toxic assets in the near term, a figure that could eventually grow to $1 trillion – far beyond the second half of the $700 billion in the Troubled Asset Relief Program (TARP) fund allotted last year.
The Treasury would select four or five companies as "fund managers" to purchase toxic securities. Each of the fund managers would need to already have a minimum of $10 billion in toxic securities under management. Each of these managers are likely, in turn, to directly or indirectly use the services of servicers, special servicers, debt collectors, attorneys, accountants, appraisers and other real estate and financial professionals.
“Once someone invests in [a portfolio], they have to be able to manage it,” said John Jay, senior analyst at Aite Group, explaining there would be one servicer at the investor level, and a special servicer at the loan level. The special servicer would need to work each separate piece of the portfolio differently, because a real estate loan in the fast declining market in California would be quite different from a loan in some parts of the Midwest, which didn’t have the fast-rising real estate values, and therefore, not the fast declines of the coasts (some parts of the Midwest are suffering, too, however).
The banks want to get these assets off their books – they don’t want to be landlords, Jay said.
“The important thing is to get proper valuation on these assets,” Jay said, expecting the difficulty of the pricing to start easing once some of the assets start being priced – helping to establish prices for similar assets, though there will still be regional and timing considerations.
“The clearing price is not always tied to intrinsic value. A lot of it depends on the [available] financing,” Jay explained.
Now that the government has shown a willingness to at least partially back some of these assets, they should be able to command a higher price than before, though the pricing is likely to still be very complex, Jay said.
However, Jay doesn’t expect the TARP pool or a similar government-sponsored pool to ever include credit card debts. The U.S. government and taxpayers have always placed real estate in a “special category” of debt, seeing shelter as one of the necessities of life, Jay said.
Credit cards, on the other hand, are seen as a vehicle for discretionary spending. So even though credit card delinquencies and charge-offs continue to rise without any immediate change in sight, the government is unlikely to attempt another rescue for that debt, according to Jay.
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Comments
Comment from nad3800 on April 2, 2009 at 12:30PM EST
Am I wrong or is the collection industry-debt buyers and collectors appear to be getting setup to be the scapegoat, regardless if the plan sicceeds or fails.
Also, aren't some of the same players that are getting the benifitting of writing-off, selling, bailed out-whatever, the same ones that will participate in the funding process to purchase the toxic portfolios.
The whole plan seems to come full circle. Ultimately, the taxpayers will end up footing the bill for an illusiory multi-trillion dollar shell game.
Comment from giants1 on April 2, 2009 at 4:35PM EST
nad3800 you are so on track.
Comment from Anonymous on April 2, 2009 at 6:39PM EST
We have many smart owners in this industry - I hope and pray you are smart enough not to get into this practice. You'll be part of the disaster and how can this be sellable when debts can't be paid to the banks/creditors now? How the heck will you get paid? YOU WON'T and you'll have no choice but to go out of business and let your people go. Don't be part of the problem be the solution. Your interest should be in helping the consumer not tearing them apart.
Will this crazy BS ever stop?
The answer? When every consumer loses everything they worked so hard for (home, retirement savings, savings, college savings etc etc etc) thrown out into the street and never have the opportunity to get out of the hole this mess has created.
Of course, if you are one of the high risk consumers who fell for these programs when you knew you wouldn't be able to afford them, then shame on you. It's the innocent consumer who pays the price and dearly.
Let's hope this subject exits the industry and fast as someone thought of it. We are not TARP.
Comment from A Collection Manager on April 2, 2009 at 7:01PM EST
The debt is going to be soooo cheap and easy to write off. I believe it can be a GOOD investment - IF you purchase the right paper.
Comment from SpyBoy on April 2, 2009 at 12:49AM EST
Greetings,
If those servicers dont have, or cant get, the proper documentation to determine that the loan is legitimate, they could be in for more trouble than they want or need. The spread is too thin to handle too many Qualified Written Requests from savvy homeowners.
The documentation on this particular loans is likely to either not exist or be virtually un-findable. And the homeowners are getting to knowledgeable about the need to be able to produce a duly authenticated copy of the original promissory note, or something else to support the substance and amount of the debt.
I know of someone, actually a limited partnership, that got a 15 million dollar apt. building free and clear because FDIC could not produce such evidence ( it involved a mortgage from a bank the the FDIC took over in the S&L crisis ).
And that was before securitization, that was just because the bank had gone bust and no one could find what they needed, in the bank. Now its 100 times more complicated.
I imagine some homeowners are out there just waiting, licking their chops.
Thank You. Spyboy
Comment from Hamilton on April 3, 2009 at 9:45AM EST
In some ways everything is different now but we also know that the more things change the more they stay the same. The new thing is this huge financial mess that the world is in. The old things are know what you're buying (or collecting), try to understand the value, and price accordingly.