More on 'A Good Investment Trend in Real Estate'

Investor’s Corner with Jack Brown

One of the questions asked regarding my post two days ago related to how banks dispose of poorly performing loans.

An early government sponsored response following the credit crisis was called the Public-Private Investment Program (PPIP). The success of that program has not been widely communicated, but it provided decent stimulus to engage large institutional firms to help the government buy assets from banks.

However, PPIP only works with eight firms. Most institutional investors have instead taken a go-it-alone approach. PIMCO, manager of the world's largest mutual fund, has raised over $5 billion over the past couple years in order to buy poorly performing bank assets. They are now seeking an additional $1 billion from interested investors to further this effort. It's not clear whether is fund will be offered to individual investors.

Interestingly, one of the prospective investors noted "Pimco plans to work with a loan servicer to renegotiate the terms of the acquired debt directly with creditors." Working with a servicer is a must for any loan investor because the servicer takes care of all administrative aspects of a loan (mortgage payments are made to servicers not investors). But renegotiating with creditors is what's interesting.

As opposed to simply buying cheap loans from banks and hoping that some will perform and re-selling the rest, PIMCO wants to take non-performing loans and make them perform. This is best achieved with some level of debt forgiveness, but can happen with lower rates - or both.

To me, this is more evidence of a mutually beneficial arrangement between banks (who are removing questionable loans), investors (who are buying loans at attractive values), and troubled home-owners who are being offered new and more favorable terms (via working with a loan servicer in PIMCO's case).

My guess is that this new PIMCO fund (PIMCO Bravo) will sell off individual loans to smaller investors (see prior post) when homeowners choose to walk away from their property (versus loan modification).

Relative to the size of housing market, this fund will have a small impact on the housing woes - but the fund is not unique, and represents a private market solution for troubled homeowners.

Jack Brown, CFA

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