how does the Non-performing Loan work?

Recently read lots of news : companies buying non-performing loan, such as Colonial Capital. When they bought the NPLs, they own the notes, the borrowers shall pay interests to the buyers. However the loan is in default, borrower might filed Chapter 11, or the properties are in the process of foreclosure. Does the buyer need to finish the foreclosure in order to own the property? how long does it take? why do banks sell NPLs instead foreclose the property? how do the buyers make money on purchaseing NPLs.



Any thoughts?

I welcome someone more knowledgeable to answer the question.



In the meantime, I suggest you may have been reading about non-performing portfolios of loans. You know, securitized loans that exist as a block.



Say a bank owns a tranche of loans and the majority of the loans are not performing. They could sell those loans to somebody else for less than they paid for them. They will take the loss but it is not a complete loss, the buyer may take a loss, but it will never be a complete loss and they only paid, say 20% of the original value. I apologize if I'm jumping to the wrong conclusion.



It does seem odd to me if there were a single loan that was non-performing that a bank would sell that loan. I'm no banker, but from what I've read in the single-loan case, non-performing loans goes to foreclosure. It's when you get into securitized loans that things get complicated. The individual loans that form the tranche are serviced. And individuals loans in the portfolio may be default, and enter foreclosure, but the portfolio as a whole could be sold to another firm.



The most offensive example was when JPMorgan bought the entire WaMu portfolio of $182 billion in loans. I seem to recall they paid about $2 billion for it. Do you think they might get a little extra money out of that deal? Please someone correct me if I'm wrong because I would rather be wrong and humbled than right and royally pissed off.

^^^ That is pretty much what is happening. I can clarify on tranches if people are interested, but for the most part it is correct. Now if JPM bought a pool for $0.20 on the dollar, but can sell them for $0.40 on the $1 they make a nice profit. This is what is happening, and really... there are some really good deals out there. I know, I just looked at a pool that had some fantastic deals in it.



You can buy individual notes. <a href="https://www.bigbidder.com/default.asp?">BigBidder.com</a> is one source for them. I haven't checked recently, but most of the notes that could have any value are priced at $0.80 on the $1. So really there is no value there. They may have changed how they price the notes since I checked, but when I did it wasn't worth it. They also allow for qualified people to bid on pools, again... do your own due diligence.

My understanding is that a tranche is not a group or bundle of loans.

A tranche is a portion of cash flow from a MBS or a group of MBSes.

CDOs which are built with tranches do not have any actual mortgages or bundles of mortgages in them. They are built with portions of cash flows from assorted or maybe one bundle of mortgage(s). But, the CDOs are collateralized by the mortgages in the MBSes.

Nice, huh?

So, when one or more mortgages defaults, not only must those mortgages be removed from any associated MBS before they can be sold or foreclosed on, but their portion of the cash flow must be removed from the CDO and their portion of the collateralization must be accounted for in the CDO and approval from the CDO holder must be obtained.

So, can you imagine how difficult and time consuming it must be for the servicer of the mortgage to foreclose? And since the MBSes have been sold multiple times, the servicer or trustee must track down the original mortgage documents with the original signatures.

[quote author="awgee" date=1255193751]My understanding is that a tranche is not a group or bundle of loans.

A tranche is a portion of cash flow from a MBS or a group of MBSes.

CDOs which are built with tranches do not have any actual mortgages or bundles of mortgages in them. They are built with portions of cash flows from assorted or maybe one bundle of mortgage(s). But, the CDOs are collateralized by the mortgages in the MBSes.

Nice, huh?

So, when one or more mortgages defaults, not only must those mortgages be removed from any associated MBS before they can be sold or foreclosed on, but their portion of the cash flow must be removed from the CDO and their portion of the collateralization must be accounted for in the CDO and approval from the CDO holder must be obtained.

So, can you imagine how difficult and time consuming it must be for the servicer of the mortgage to foreclose? And since the MBSes have been sold multiple times, the servicer or trustee must track down the original mortgage documents with the original signatures.</blockquote>


Dude... why did you have to come in here and muck it all up with CDOs? I tried to keep it simple with plain old MBS pools. But... Oh... No... you come in here and make it all complicated and shite with CDOs. I didn't even get to explain tranches and you blew that way out of the water. KISS... one step at a time with the newbies... Why you got to go all CDO on them? You have to explain how the sausage is made first, then explain how the sausage is chopped up second. Help me out here!

[quote author="graphrix" date=1255194668][quote author="awgee" date=1255193751]My understanding is that a tranche is not a group or bundle of loans.

A tranche is a portion of cash flow from a MBS or a group of MBSes.

CDOs which are built with tranches do not have any actual mortgages or bundles of mortgages in them. They are built with portions of cash flows from assorted or maybe one bundle of mortgage(s). But, the CDOs are collateralized by the mortgages in the MBSes.

Nice, huh?

So, when one or more mortgages defaults, not only must those mortgages be removed from any associated MBS before they can be sold or foreclosed on, but their portion of the cash flow must be removed from the CDO and their portion of the collateralization must be accounted for in the CDO and approval from the CDO holder must be obtained.

So, can you imagine how difficult and time consuming it must be for the servicer of the mortgage to foreclose? And since the MBSes have been sold multiple times, the servicer or trustee must track down the original mortgage documents with the original signatures.</blockquote>


Dude... why did you have to come in here and muck it all up with CDOs? I tried to keep it simple with plain old MBS pools. But... Oh... No... you come in here and make it all complicated and shite with CDOs. I didn't even get to explain tranches and you blew that way out of the water. KISS... one step at a time with the newbies... Why you got to go all CDO on them? You have to explain how the sausage is made first, then explain how the sausage is chopped up second. Help me out here!</blockquote>
Sorry, I thought "tranche" refers to CDOs. Are there also tranches in MBS pools?

[quote author="gld42" date=1255062629]Recently read lots of news : companies buying non-performing loan, such as Colonial Capital. When they bought the NPLs, they own the notes, the borrowers shall pay interests to the buyers. However the loan is in default, borrower might filed Chapter 11, or the properties are in the process of foreclosure. Does the buyer need to finish the foreclosure in order to own the property? how long does it take? why do banks sell NPLs instead foreclose the property? how do the buyers make money on purchaseing NPLs.



Any thoughts?</blockquote>


Banks sell NPL's because they take a lot of time, energy, and $$ to resolve. Nonperforming loans by regulatory definition are 1)loans that are nonaccrual (typically 90 days past due or more and other loans where the bank has strong reason to believe it will not collect interest and principal according to contractual terms) plus 2) loans that are 90 days past due for payment that are still accruing interest. Loans have to meet certain criteria to be still accruing interest at 90 days past due but won't bore you here with that detail.



Even the largest banks have huge portfolios of individual loans that have not been securitized, and individual residential loans are the biggest balance sheet chunk of virtually all thrifts.



Say an investor buys a pool of loans that are all in default- let's say 100 loans with a principal balance of $250M each ($25 million dollar par value) and the investor gets the pool for 50 cents on the dollar, or $12.5 million. Yes, the bank will have to write off $12.5 million in total, which they might have already written down in whole or in part.



The investor then pursues individual remedies against each note. Investor might modify some loans by reducing principal balances or loan payments, foreclose on others, etc. They are betting they will ultimately have a return on that $12.5 million. Yes, they do have to go through foreclosure to get the individual houses back and then sell them. It can take quite a bit of time in some cases. I have sold individual loans in the past to investors and some were home runs for the investor, and others took years due to borrowers' bankruptcies and other tactics to drag out the process. It's not easy to work out loans systematically but it can be profitable ultimately because of the bargain price they pay for the assets.

"I thought ?tranche? refers to CDOs. Are there also tranches in MBS pools? "



Yes, there sure are. Not sure if this will link but here's an article that you might find helpful:



http://online.wsj.com/article/SB124804469056163533.html

As far as I know a tranche is not a group or bundle of loans. A tranche is a portion of cash flow from a MBS or a group of MBSes.

CDOs which are built with tranches do not have any actual mortgages or bundles of mortgages in them. So, when one or more mortgages defaults, not only must those mortgages be removed from any associated MBS before they can be sold or foreclosed on, but their portion of the cash flow must be removed from the CDO and their portion of the collateralization must be accounted for in the CDO and approval from the CDO holder must be obtained.