Non-performing residential loans that are often shunned for their associations with the toughest local workout laws have become a priority for Distressed Capital Management, said CIO Matthew Browndorf.
DCM, an Irvine, California component of Plutos Sama LLC, recently raised hundreds of millions of dollars to begin building a portfolio of NPLs in “judicial” states where foreclosures are managed through courts, including some highly populated states such as New York, New Jersey and Florida, Browndorf said.
Those three states have been among the toughest to complete a foreclosure, resulting in extending timelines for loan owners and RMBS investors, according to analysts. As of last quarter, an average foreclosure in New Jersey took 1,383 days, the second longest in the nation next to 1,403 days in Utah, according to ATTOM Data Solutions. New York foreclosures took 1,186 days and Florida took 1,186 days, the data showed. In non-judicial California, the wait averaged 583 days.
The longer timelines also resulted in stubbornly high loan loss severities at or above 80% in judicial states, compared with levels around 60% in non-judicial situations, according to 21 November report by Deutsche Bank analysts Ying Shen and Jin Ahn.
But Browndorf, who has spent the past year closing NPL deals in Eastern Europe, says a combination of motivated sellers and his firm’s connections with local law firms has generated a good opportunity.
“We love that stuff,” said Browndorf. “We’ll take New York, New Jersey and Florida all day long.”
Trading in judicial pools is spotty because buyers and sellers can be as far as 9 points apart on price, especially the larger pools, he said. But sellers are willing to segregate judicial state loans from big, blended pools, suggesting that funds are interested in getting out of the harder-to-cure “tails,” he said.
“Now the better trade for them is to get out” of the tails, he said. But some investors can’t afford to sell, or won’t sell, at the price he can offer, he said.
In part, DCM is making a play for these loans because its parent has invested in law firms that specialize in managing loans and foreclosure, he said. One of the law firms, BP Law Group, was recently ranked among the top eight of some 200 firms for its ability to meet expected timelines, according to Statebridge, a servicer.
The loans are still risky, of course.
Foreclosure timelines for New Jersey and New York are still on the rise, including year-over-year spikes of 17% and 27% in 4Q16, according to ATTOM. In Florida, they rose 16% year-over-year, it said.
And even when foreclosures are completed, the properties are often so distressed after prolonged foreclosures that they are more difficult to sell, according to one broker cited in a recent ATTOM report. A first-time home buyer would have a harder time getting financing, it said.
On the other hand, scheduled foreclosure auctions in states like New Jersey and New York are rising, suggesting a light at the end of the tunnel, the data show.
And across the nation, the US average time to foreclose in 3Q16 fell for the first time since the housing bubble burst, the data show. The timeline spiked to 803 days in 4Q16 but have ranged between 604 and 631 days since 4Q14.
DCM is taking advantage of changes in local foreclosure laws, including one in Florida aimed at expediting the process, Browndorf said.