Can such transactions possibly help to stimulate new lending? And given that many books are still largely comprised of distressed debt, why do investors buy and what happens to the loans?
With regard to the first question, at face value brokers have every reason to be optimistic – after all, in theory, when a lender sells off assets it frees up capital and creates capacity on the balance sheet, which potentially enables a lender to use that capacity to generate new lending. For some lenders this could indeed be on their medium-term radar.
However, our view of the strategic objectives of current sellers is that this is rarely the key driver. Many sellers entered the residential mortgage market in an opportunistic manner, when the returns from new lending were higher and losses lower than is currently the case – and most often the seller’s objective is to strengthen their balance sheets so they can return to core investment areas.
They have alternative strategic uses for the capital rather than use it to launch themselves back into the new lending market.
On the other hand, the market has seen some shift in the type of mortgage assets coming into play, and in some of the potential buyers too.
When the Bank of Ireland sold its two residential mortgage books back in 2011, they could well have been of interest to a buyer looking at a purchase of prime assets as an entry method into the new lending market (although the eventual buyers, Nationwide and Coventry Building Societies, are of course originating regardless).
Nevertheless, the majority of books currently trading are not typically prime asset and this brings us to the second question: we see why a bank or building society would want to relieve itself of such portfolios, but who would want to buy such debt?
The most common – but by no means only – answer to this is investors such as hedge funds or private equity houses. They have an appetite for mortgage pools as a short to medium-term investment, attracted by purchase prices of well below par.
Such buyers seldom have the capacity, appetite or infrastructure to manage the debts themselves, which is where the role of the specialist servicer comes in. We need to rehabilitate customers, who are often substantially in arrears, in order to deliver a return; and the skills required to deliver the required results in a truly TCF manner, always critical for investors, are even more relevant now than before the global financial crises.
The servicer is required to build an understanding of the assets and the individual customers themselves based on types of loan, the value of the underlying real estate assets, and insight into borrowers’ current and predicted ability to pay.
Non-performing loans require far more focus and personal attention by the servicer than typical primary servicing functions, such as the production of an annual statement or a direct debit set-up.
Servicers are required to manage the case-by-case issues of borrowers at an individual level. We apply innovative forbearance and workout strategies and collections processes that strike the balance between helping customers to manage or even relieve themselves of debt, and delivering an economic return to the investor.
While the performance of even the most distressed debts can be improved in this way, the trading of such portfolios continues to represent an area of opportunity in the UK market.
Richard Klemmer is partner at Oakwood Global Finance
