Buying & Selling Distressed Mortgage Portfolios Forum                                          Confidential & Proprietary ...
Disclaimer and Confidentiality  Copyright © 2012 Carrington Holding Company, LLC  No Offer or Solicitation Regarding Secur...
Residential Investment Themes                  Investors Play a Critical Role in BOTH           the Recovery and the Futur...
Residential Investment Themes    Discussion Summary & Themes     Investors play a critical role in the cleanup and future...
Carrington:  Overview                                                  Investment Management Resources                    ...
Residential Investment StrategiesNon‐               Control‐based investment strategy in single family residential mortga...
Carrington:  Residential Investment Strategies    Strategies consistent with US Government policy & housing initiatives:  ...
Residential Investment Spectrum  Evolution of housing investment opportunities since onset of the global financial crisisN...
Single Family Housing Statistics                                                               35.1% peak‐to‐trough home ...
Single Family Housing Statistics                                                                           Large pipeline...
Single Family Housing Statistics      Aging foreclosure inventory:  42% of loans have had no payment in over 24 monthsSour...
Single Family Housing Statistics      US Monthly Foreclosure ActivitySource:  Lender Processing Services, RealtyTrac   PRO...
Non‐Performing Loans                                          Top 10 banks hold well over $150bn in delinquent 1st lien m...
NPL Acquisition & Resolution                       Control‐based strategy NPL Strategy           Optionality exists thro...
Non‐Performing Loans                                             Asymmetric risk/return profile for distressed whole loan...
Non‐Performing Loans        Substantial capital cushion with asymmetric risk/return profile          Low cost basis can p...
Non‐Performing Loans                                          Ability to perform loan level due diligence       Transpare...
Homeownership Statistics                                                                                                  ...
REO Rental Strategy                                          Increased rental demand, low vacancies and stable rental rat...
Single Family Rental Strategy                        “Even the Oracle of Omaha, billionaire Warren Buffett, told CNBC that...
REO Rental Strategy                                              Rent is not linearly correlated with home prices        ...
REO Rental Strategy                                         Typical Property Profile                   Typical Floor Plan ...
REO Rental StrategyRental          Acquire in select markets with significant distressed supplyStrategy                A...
REO Rental Strategy                  Policy initiatives aimed at GSE REO portfolio is slow to proceed Challenges       O...
Carrington:  Single Family Rental Platform                                                   13 affiliate operating compa...
Private Label Mortgage Lending                                                    Non‐Agency Mortgage Lending 2.0  US Mort...
Private Label Mortgage Lending                   Thought and action‐oriented leadership in the private label market is re...
Residential Investment Themes    Discussion Summary & Themes     Non‐Performing Loan (“NPL”) and Rental strategies are of...
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Distressed Conference June2012 (Updated)

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Presentation given at the Distressed Asset Conference 2012 by our Chief Investment Officer, Bill King.

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Distressed Conference June2012 (Updated)

  1. 1. Buying & Selling Distressed Mortgage Portfolios Forum Confidential & Proprietary June 2012
  2. 2. Disclaimer and Confidentiality Copyright © 2012 Carrington Holding Company, LLC No Offer or Solicitation Regarding Securities. This document is for general information purposes only. This document is neither an offer to sell nor a solicitation of an offer to buy any security mentioned herein. Securities related to Carrington funds (“Carrington Securities”) are offered only in jurisdictions where permissible by offering documents available through qualified securities dealers or banks. No Warranties; Estimates Subject to Change; Not Advice. This document is based upon information and assumptions (including financial, statistical, or historical data and computations based upon such data) that we consider reliable and reasonable, but we do not represent that such information and assumptions are accurate or complete, or appropriate or useful in any particular context, including the context of any investment decision, and it should not be relied upon as such. Estimates expressed herein constitute Carrington Holding Company’s present judgment and are subject to change without notice. They should not be construed as either projections or predictions of value, performance, or results, nor as legal, tax, financial, or accounting advice. No representation is made that any strategy, performance, or result illustrated herein can or will be achieved or duplicated. The effect of factors other than those assumed, including factors not mentioned, considered, or foreseen, by themselves or in conjunction with other factors, could produce dramatically different performance or results. Investors considering purchasing a Carrington Security should consult their own financial and legal advisors for information about such security, the risks and investment considerations arising from an investment in such security, the appropriate tools to analyze such investment, and the suitability of such investment in such investor’s particular circumstances. Confidential; Not for Public Disclosure. This document of Carrington Holding Company, LLC is confidential and not intended for public review. No recipient of this document shall use it as a basis for any publication or research report that will be published, distributed or posted in any public domain. This document of Carrington Holding Company, LLC shall not be disclosed to any other party except as required by law, regulatory requirements, court order or discovery procedures. No matter contained in the attached document may be reproduced or copied by any means without the prior written consent of Carrington Holding Company, LLC. PROPRIETARY & CONFIDENTIAL | 1
  3. 3. Residential Investment Themes Investors Play a Critical Role in BOTH the Recovery and the Future of the Housing Market  Unlike other Financial Markets,  Investing in Residential Housing is NOT a Zero‐Sum Proposition Can offer an Alignment of Interest between Investors, Borrowers and Policymakers PROPRIETARY & CONFIDENTIAL | 2
  4. 4. Residential Investment Themes Discussion Summary & Themes  Investors play a critical role in the cleanup and future of the housing market Investors and borrowers interests should be  aligned during the cleanup phase…  Preserve  value of  property Keep the  property cash‐ flowing Keep borrower  in the home PROPRIETARY & CONFIDENTIAL | 3
  5. 5. Carrington:  Overview Investment Management Resources Active residential mortgage loan investor since 2004 Acquired in excess of $26 billion in mortgage loans since inception Utilize internal operational infrastructure to manage pools of distressed loans & residential rental properties Mortgage Loan Servicer Mortgage Lending Tactical Modifications Refinancing Customized Dispositions Resolution Path Selection Scaled servicing platform Organically grown underwriting and loan origination platform Extensive default management and loss mitigation capabilities Focused on quality loan production versus volume Property Management Real Estate Brokerage Rental Management Property Dispositions Due Diligence ‐ Site Visits Qualitative Market Data Property Valuation Fannie Mae on Tenant‐in‐Place Program 42 branch locations throughout U.S. Currently managing properties in 18 states for Fannie Mae Control over property disposition process Property manager proprietary Buy‐to‐Rent program PROPRIETARY & CONFIDENTIAL | 4
  6. 6. Residential Investment StrategiesNon‐  Control‐based investment strategy in single family residential mortgage loansPerforming Loan   “High touch” special servicing capabilities Acquisition & Resolution  Loan mods, short sales, refinancings and rental conversions contribute to returns  The “New” asset class – bringing a regional asset class to institutional worldSingle Family Rental Strategy  Developing national strategy for single family rentals  Homeownership is declining – need to reconstitute vacant  homes into rental stock  Private Label – Mortgage Lending 2.0Non‐Agency Loan   Fill liquidity gap in private label lending marketOrigination  Thought leadership necessary to structure new market with proper alignments PROPRIETARY & CONFIDENTIAL | 5
  7. 7. Carrington:  Residential Investment Strategies Strategies consistent with US Government policy & housing initiatives:  Work with struggling homeowners to offer affordable modified mortgage loan payments  Assist consumers during the transition from homeowners to tenants  Remove excess vacant homes from property markets  Re‐vitalize neighborhoods and communities through property rehabilitation  Help reduce government’s footprint in US mortgage lending market PROPRIETARY & CONFIDENTIAL | 6
  8. 8. Residential Investment Spectrum Evolution of housing investment opportunities since onset of the global financial crisisNon‐Agency RMBSNPLsSingle Family RentalsNon‐Agency Lending 2.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 PROPRIETARY & CONFIDENTIAL | 7
  9. 9. Single Family Housing Statistics  35.1% peak‐to‐trough home price decline  2.6% YoY decline (Mar ‘12 vs Mar ‘11)  Prices have remained range bound since 2009  Trends vary amongst property markets • Phoenix: Cash investors propping up values • Atlanta: Lagging market that continues to decline • Austin: Positive migration is increasing demand  Housing Affordability Index is at all time high  Median Income relative to Qualifying Income  Consumer credit impacted during crisis  Tight underwriting limits loan availability  Affordability not translating into high demandSource:  S&P Case Shiller, National Association of Realtors PROPRIETARY & CONFIDENTIAL | 8
  10. 10. Single Family Housing Statistics  Large pipeline of delinquent borrowers  Trend is clearly moving in the right direction  Increased efforts to work with borrowers  Strategic resolutions include loan modifications  Visible inventory = Existing Home Sales Inventory  Pending Inventory = Foreclosures  Significant inventory is available on market  Pipeline of distressed properties is increasingSource:  Mortgage Bankers Association, National Association of Realtors PROPRIETARY & CONFIDENTIAL | 9
  11. 11. Single Family Housing Statistics Aging foreclosure inventory:  42% of loans have had no payment in over 24 monthsSource:  Lender Processing Services PROPRIETARY & CONFIDENTIAL | 10
  12. 12. Single Family Housing Statistics US Monthly Foreclosure ActivitySource:  Lender Processing Services, RealtyTrac PROPRIETARY & CONFIDENTIAL | 11
  13. 13. Non‐Performing Loans  Top 10 banks hold well over $150bn in delinquent 1st lien mortgage loans* Non‐ Performing   Delinquent and defaulted mortgage loans are generally priced to liquidation Loans  Liquidation timelines vary significantly among states Estimated Foreclosure Timeline by State*** Source: FDIC call reports** Timelines based upon Carrington experience PROPRIETARY & CONFIDENTIAL | 12
  14. 14. NPL Acquisition & Resolution  Control‐based strategy NPL Strategy  Optionality exists through “high touch” resolution & disposition strategies  Evaluate strategies aimed at keeping borrowers in homes and asset cash flowing Customized Disposition Plan for each Loan Loan Prepay at Par Modification Deed-in-Lieu / Government Refi Deed-for-Lease Program Delinquent Current Mortgage Mortgage Refinance after Short Sale Debt Forgiveness Legend Property Sale Foreclose and Re-Default Liquidate or Rent Refinance Loan Sale Secondary Whole Secondary Whole Loan Sale Loan Sale PROPRIETARY & CONFIDENTIAL | 13
  15. 15. Non‐Performing Loans  Asymmetric risk/return profile for distressed whole loan pools NPL Risk &   Basic loan pricing models are generally priced to a liquidation scenario Return  Profile  Liquidation timelines are state specific   Judicial versus non‐judicial foreclosure has the largest impact on timelines Generic Pricing by StateSource:  Carrington Capital Management, LLC‐ “Median Price” means the generic pricing analysis assumes median home price in the particular state‐ “Constant Price” means the generic pricing analysis assumes a constant $200,000 home price for all states PROPRIETARY & CONFIDENTIAL | 14
  16. 16. Non‐Performing Loans Substantial capital cushion with asymmetric risk/return profile  Low cost basis can provide meaningful downside protection • Current market prices for non‐performing loans is generically 60% of current property value • Modeled home values would have to decline 27.25% from current levels to impair invested capital • Modeled probability of $1 loss of invested capital is less than 1.0% Strength of Invested Capital Price as % of Property Value Home Price (“HP”) Simulation (Probability of $1 Loss on Investment) (Stressed Vol over 3‐year Time Horizon) 100.00% 6.75%  Mean Stressed HPD:  10.25%* Assumes 3‐year Time Horizon Carry Costs Standard Deviation: 7.11% 2.25% Annual Carry Costs 6.0% Broker 6.00% Broker Fee at Liquidation 87.25% 0% HPD  At market price of 60.0%  50% probability ‐3% HPD  to property value, home  home values decline  prices can decline an  LESS THAN 10.25% 77.00% ‐10.25% HPD Base HPD additional 17.00% from  50% probability  stress case (27.25% in total)  ‐17% HPD home values decline  prior to a loss of $1 of  MORE THAN 10.25% invested capital. 60.00% ‐27% HPD Acquisition  Less than 1.0% probability of  Price $1 loss of invested capital at  Price = 60% of  60% of current property value Property  37.25% Value ‐50% HPD* Generic stressed case home price depreciation. Stressed for median income and unemployment variables. PROPRIETARY & CONFIDENTIAL | 15
  17. 17. Non‐Performing Loans  Ability to perform loan level due diligence Transparency  Ability to perform exterior site visits to reconcile property value  Ability to review all servicing notes and correspondence with borrowers  Typical diligence pull through rates range between 70% to 90%* Due Diligence  Review loan files for compliance, chain of title, litigation  Accounting constraints keep bank sellers on the sidelines Challenges  AG Settlement temporarily put some bank NPL seller programs on hold  Uncertainty surrounding foreclosure moratoriums and legislated modifications* Based upon Carrington Capital Management, LLC whole loan acquisition experience PROPRIETARY & CONFIDENTIAL | 16
  18. 18. Homeownership Statistics  Structural shift or reversion to normal level?   69.25% peak in homeownership  Since 2004 peak in homeownership rate: • Owners have increased 1.8% (absolute terms) • Renters have increased 18.5% (absolute terms) • Vacant homes increased 14.1% (absolute terms) Total Housing Units 132,596 Vacant housing units 18,474  Assume 100% of 90+ DQs/FCs become renters Owner occupied housing units a 74,601 Renter occupied housing units 39,521 • Between 3 – 4 million increase in rent demand Occupied housing units b 114,122 • New formations could add 2+ million in demand Homeownership Rate (Owner occ. units / Occ. units) 65.37 Mortgage Loans  c 47,000 90+ days plus FC (%) d 8.91 90+ days plus FC (#) e = [c x d] 4,188 Adjusted Owner occupied housing units f = [a ‐ e] 70,413 Adjusted Homeownership rate (%) g = [f / b]  61.70Source:  U.S. Census Bureau, Mortgage Bankers Association, Carrington Capital Management PROPRIETARY & CONFIDENTIAL | 17
  19. 19. REO Rental Strategy  Increased rental demand, low vacancies and stable rental rates  Multiple sources to acquire properties  REO Rental • Auctions, bulk opportunities through banks, MLS, GSEs and NPL loans  Consistent with policy efforts to reduce inventory and reconstitute housing stock Potential New Rental Demand/StockSource:  Mortgage Bankers Association, Carrington Capital Management PROPRIETARY & CONFIDENTIAL | 18
  20. 20. Single Family Rental Strategy “Even the Oracle of Omaha, billionaire Warren Buffett, told CNBC that distressed single‐family homes were one of the best investment opportunities around, asserting, ‘…It’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make.’” ‐ Warren Buffett, Forbes, April 2012 “…rental markets are strengthening in some areas of the country, reflecting in part a decline in the homeownership rate. Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way. Such conversions might also increase lenders eventual recoveries on foreclosed and surrendered properties.” – Board of Governors of the Federal Reserve System, Housing White Paper, January 2012 “The best opportunities for single‐family REO‐to‐rental investors are in Florida and the Midwest, which boast high cap rates and a large stock of potential REO properties” – CoreLogic, Market Pulse, April 2012 PROPRIETARY & CONFIDENTIAL | 19
  21. 21. REO Rental Strategy  Rent is not linearly correlated with home prices  Rent‐to‐ Property   Net cash flow yield targets drive property price point range Value Ratio  Higher running yield targets generally garner the focus of lower value properties Average Monthly Rent Payment & Rent Yield Property Value DistributionSource:  Carrington Property Services, LLC PROPRIETARY & CONFIDENTIAL | 20
  22. 22. REO Rental Strategy Typical Property Profile Typical Floor Plan Average Market Value:  $120,000 Average Monthly Rent:  $1,222 Target Rental Yield:  12%-16% Total Square Footage:  1,750 square feet Rent/Square Foot:  $0.70 Bedrooms:  3.3 Bathrooms:  2.3 Total Rooms:  6.8 Typical Tenant Profile Number of Occupants:  3.4 Number of Minors/Property:  1.5 Rent-To-Income:  20% Average Household Income:  $6,200/monthSource:  Carrington Property Services, LLC PROPRIETARY & CONFIDENTIAL | 21
  23. 23. REO Rental StrategyRental   Acquire in select markets with significant distressed supplyStrategy  Acquire, rehabilitate, identify tenants and manage rental portfolio  Prefer property characteristics conducive to effective rental managementTarget Properties  Target square foot range, bed/bath counts and prefer newer/renovated properties  Limit properties with additional maintenance requirements (e.g. swimming pools)  Importance of internal operational capabilities and controlsInvestment Approach  Risks of outsourcing key functions  Ability to manage and control key aspects of rental process is important PROPRIETARY & CONFIDENTIAL | 22
  24. 24. REO Rental Strategy  Policy initiatives aimed at GSE REO portfolio is slow to proceed Challenges   Operational challenges for new entrants  to Strategy • Technology, pricing, acquisition, management  Empirical data concerning key pricing variables  Select Variables used to assess Rental StrategyLimited historical data exists on single family rentals for non‐operators to accurately explore economics… PROPRIETARY & CONFIDENTIAL | 23
  25. 25. Carrington:  Single Family Rental Platform  13 affiliate operating companies  Approx. 1,800+ full-time and contract employees  National network of field assessors for asset evaluation Local Contractors  Manage approx. 5,200 properties, 3,200 in rental CPS National Network  Disposed of 34,000 assets and managed 10,000 rental units to date Established relationships Over 2,000 real estate with hundreds of local professionals in national contractors Asset preferred network Management Portfolio 34,000+  40 employees Property properties managed Property Over 850 agents and over  Two regional offices Preservation Sales 40 offices licensed in 22 10,000+ states  Nationwide coverage rental assets managed Technological Infrastructure  Over 35 employees  Provide services in 26 states RNT Logistics  Vendor management  Business analytics  Core portfolio systems  Acquisition and disposition tracking  Financial results and reporting PROPRIETARY & CONFIDENTIAL | 24
  26. 26. Private Label Mortgage Lending Non‐Agency Mortgage Lending 2.0 US Mortgage   Prior to 2008, US Gov’t provided explicit or implicit support to 50‐60% of loan volume Market – Supplier of   Recently, Government sponsorship has reached levels approaching 90% Loans  Private label securitization market is extremely limited and economics are challenged Government versus Private Sector Mortgage OriginationsSource:  Inside Mortgage Finance PROPRIETARY & CONFIDENTIAL | 25
  27. 27. Private Label Mortgage Lending  Thought and action‐oriented leadership in the private label market is required The New   Must improve upon the market’s past inadequaciesPrivate Label Market  Alignment of interests between the lender and the borrower is critical  All participants in the process must have “skin in the game”  Borrowers must be able to provide documentation for fully underwritten loansBilateral  • Borrowers must consent to ongoing credit/income requests of servicersTransparencyAnd  • Re‐think Gramm‐Leach‐BlileyEngagement  Lenders must provide plain‐English disclosure   Borrowers should have complete understanding of loan terms and obligations PROPRIETARY & CONFIDENTIAL | 26
  28. 28. Residential Investment Themes Discussion Summary & Themes  Non‐Performing Loan (“NPL”) and Rental strategies are often consistent with policymaker’s goals  In early innings of developing the Buy‐to‐Rent strategy for residential housing on a national scale • Concerns about the number of new players that lack the infrastructure and experience • Concerns about the potential for “rental” operators to become property “flippers”  Future of private lending has yet to be determined • Must rethink the relationship between the borrower, lender and investor   • Successful non‐agency market needs to be built on transparency, alignment of interest  • Rules must be clear and cannot be unilaterally changed  Post election, the discussion concerning long‐term plans for the GSEs will heat up  Investors need to be engaged now to help define the future of the private lending market PROPRIETARY & CONFIDENTIAL | 27

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