Living examples and stories of hedge funds going after non-performing loans

non-performiong-assetsNo less an authority than Bloomberg Businessweek has just published a new write-up referencing a former Lehman Brothers exec, David Sherr, who is now running One William Street Capital management LP, a $2.7 billion investment firm and a huge buyer of non-performing loans, or NPLs, tied to delinquent borrowers who haven’t yet lost their homes to foreclosure. A letter to investors released by the firm (also referenced by Bloomberg) states that, in their view, NPLs offer the “cleanest exposure” to housing.

This is what we’ve been reporting all along!

As, I’ve written before, NPN’s are now the investment of choice for private equity firms which enjoy MUCH greater latitude than HUD, a major seller of these loans, when it comes to modifying the loan for the borrower and/or employing other methods to get the loan “re-performing”– thereby helping the borrower to stay in the home and rekindling the payment stream. The private investor, having worked with the borrower to get the loan modified, has now made the investment good again. At the same time, with housing prices moving ever upwards, LTVs  drop and, since the loans were bought at substantial discounts to begin with from banks forced to charge them off, the investor’s yield skyrockets.

You don’t need to be a deep-pocketed hedge fund manager to profit in the NPN market. As I’ve written before, the same formulas being utilized by the bigger players can also be used by smaller, individual investors like you and me who wish to start out at a lower level and build from there– using other people’s money.

Major factors driving this ongoing mass selloff of NPNs include newer regulations for banks (rendering it extremely cost-prohibitive to continue holding these loans, thusly expanding the already-mushrooming volume of chargeoffs/divestitures), as well as an eye-opening 24% increase in housing prices from 2012 which greatly increases the value of the underlying security.  At the same time, the inventory of foreclosures (a traditional favorite investment for hedge funds) is now drying up (they’re at the lowest level since 2007) and, alternatively, investment capital is now flowing rapidly to NPNs.

Put another way, NPNs are now at the forefront and assuming center stage as the investment of choice for these billion-dollar hedge fund firms AND there are big opportunities for smaller, individual investors as well who know their way around this market.

Quotes investment firm Ellington Management Group CEO Michael Vranos: “The supply of NPLs is going to be very substantial for the next several years.”

You can read the full article at Bloomberg here.

Tune in to for Tim’s regular posts and columns on notes, investing, and personal wealth building. You can email him or call him at 312-922-1695.

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