distressed conference june2012 (updated)
DESCRIPTION
Presentation given at the Distressed Asset Conference 2012 by our Chief Investment Officer, Bill King.TRANSCRIPT
Confidential & Proprietary
June 2012
Buying & Selling Distressed Mortgage Portfolios Forum
PROPRIETARY & CONFIDENTIAL | 1
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 anoffer to sell nor a solicitation of an offer to buy any security mentioned herein. Securities related to Carrington funds (“CarringtonSecurities”) are offered only in jurisdictions where permissible by offering documents available through qualified securities dealers orbanks.
No Warranties; Estimates Subject to Change; Not Advice. This document is based upon information and assumptions (includingfinancial, statistical, or historical data and computations based upon such data) that we consider reliable and reasonable, but we do notrepresent that such information and assumptions are accurate or complete, or appropriate or useful in any particular context, includingthe context of any investment decision, and it should not be relied upon as such. Estimates expressed herein constitute CarringtonHolding Company’s present judgment and are subject to change without notice. They should not be construed as either projections orpredictions of value, performance, or results, nor as legal, tax, financial, or accounting advice. No representation is made that anystrategy, performance, or result illustrated herein can or will be achieved or duplicated. The effect of factors other than thoseassumed, including factors not mentioned, considered, or foreseen, by themselves or in conjunction with other factors, could producedramatically different performance or results. Investors considering purchasing a Carrington Security should consult their own financialand legal advisors for information about such security, the risks and investment considerations arising from an investment in suchsecurity, the appropriate tools to analyze such investment, and the suitability of such investment in such investor’s particularcircumstances.
Confidential; Not for Public Disclosure. This document of Carrington Holding Company, LLC is confidential and not intended for publicreview. No recipient of this document shall use it as a basis for any publication or research report that will be published, distributed orposted in any public domain. This document of Carrington Holding Company, LLC shall not be disclosed to any other party except asrequired by law, regulatory requirements, court order or discovery procedures. No matter contained in the attached document may bereproduced or copied by any means without the prior written consent of Carrington Holding Company, LLC.
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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
Residential Investment Themes
Investors Play a Critical Role in BOTHthe Recovery and the Future of the Housing Market
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Investors play a critical role in the cleanup and future of the housing market
Discussion Summary & Themes
Residential Investment Themes
Keep borrower in the home
Keep the property cash‐
flowing
Preserve value of property
Investors and borrowers interests should be aligned during the cleanup phase…
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Carrington: Overview
Mortgage Loan Servicer
Tactical ModificationsCustomized Dispositions
Property Management
Rental ManagementDue Diligence ‐ Site Visits
Property Valuation
Mortgage Lending
RefinancingResolution Path Selection
Real Estate Brokerage
Property DispositionsQualitative Market Data
Investment Management Resources
Active residential mortgage loan investor since 2004Acquired in excess of $26 billion in mortgage loans since inception
Utilize internal operational infrastructure to manage pools of distressed loans & residential rental properties
Scaled servicing platform
Extensive default management and loss mitigation capabilities
Fannie Mae on Tenant‐in‐Place Program
Currently managing properties in 18 states for Fannie Mae
Property manager proprietary Buy‐to‐Rent program
Organically grown underwriting and loan origination platform
Focused on quality loan production versus volume
42 branch locations throughout U.S.
Control over property disposition process
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Residential Investment Strategies
Non‐Performing Loan Acquisition & Resolution
Single Family Rental Strategy
Non‐Agency Loan Origination
Control‐based investment strategy in single family residential mortgage loans
“High touch” special servicing capabilities
Loan mods, short sales, refinancings and rental conversions contribute to returns
The “New” asset class – bringing a regional asset class to institutional world
Developing national strategy for single family rentals
Homeownership is declining – need to reconstitute vacant homes into rental stock
Private Label – Mortgage Lending 2.0
Fill liquidity gap in private label lending market
Thought leadership necessary to structure new market with proper alignments
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Carrington: Residential Investment Strategies
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
Strategies consistent with US Government policy & housing initiatives:
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Residential Investment Spectrum
2008 2009 2010 2011 2012 2013 2014 2015 2016
Non‐Agency RMBS
NPLs
Single Family Rentals
Non‐Agency Lending 2.0
Evolution of housing investment opportunities since onset of the global financial crisis
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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 demand
Source: S&P Case Shiller, National Association of Realtors
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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 increasing
Source: Mortgage Bankers Association, National Association of Realtors
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Single Family Housing Statistics
Source: Lender Processing Services
Aging foreclosure inventory: 42% of loans have had no payment in over 24 months
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Single Family Housing Statistics
Source: Lender Processing Services, RealtyTrac
US Monthly Foreclosure Activity
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Non‐Performing Loans
Top 10 banks hold well over $150bn in delinquent 1st lien mortgage loans*
Delinquent and defaulted mortgage loans are generally priced to liquidation
Liquidation timelines vary significantly among states
Estimated Foreclosure Timeline by State**
Non‐Performing Loans
* Source: FDIC call reports** Timelines based upon Carrington experience
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NPL Strategy
Control‐based strategy
Optionality exists through “high touch” resolution & disposition strategies
Evaluate strategies aimed at keeping borrowers in homes and asset cash flowing
NPL Acquisition & Resolution
Property Sale
Refinance
Loan Sale
Legend
Current Mortgage
Government RefiProgram
Prepay at Par
Refinance after Debt Forgiveness
Re-Default
Delinquent Mortgage
Deed-in-Lieu /Deed-for-Lease
Loan Modification
Short Sale
Foreclose and Liquidate or Rent
Secondary Whole Loan Sale
Secondary Whole Loan Sale
Customized Disposition Plan for each Loan
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Non‐Performing Loans
Asymmetric risk/return profile for distressed whole loan pools
Basic loan pricing models are generally priced to a liquidation scenario
Liquidation timelines are state specific
Judicial versus non‐judicial foreclosure has the largest impact on timelines
NPL Risk & Return Profile
Generic Pricing by State
Source: 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
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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%
6.0% Broker
6.75% Carry Costs
‐10.25% HPD
‐3% HPD
‐17% HPD
‐27% HPD
‐50% HPD
0% HPD
Home Price (“HP”) Simulation(Stressed Vol over 3‐year Time Horizon)
100.00%
87.25%
77.00%
60.00%
37.25%
Acquisition Price
Price = 60% of Property Value
50% probabilityhome values decline LESS THAN 10.25%
50% probability home values decline MORE THAN 10.25%
Base HPD
Mean Stressed HPD: 10.25%*Standard Deviation: 7.11%
Price as % of Property Value
Less than 1.0% probability of $1 loss of invested capital at
60% of current property value
Assumes 3‐year Time Horizon2.25% Annual Carry Costs
6.00% Broker Fee at Liquidation
At market price of 60.0% to property value, home prices can decline an
additional 17.00% from stress case (27.25% in total)
prior to a loss of $1 of invested capital.
Strength of Invested Capital(Probability of $1 Loss on Investment)
* Generic stressed case home price depreciation. Stressed for median income and unemployment variables.
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Ability to perform loan level due diligence
Ability to perform exterior site visits to reconcile property value
Ability to review all servicing notes and correspondence with borrowers
Non‐Performing Loans
Transparency
Due Diligence
Challenges
Typical diligence pull through rates range between 70% to 90%*
Review loan files for compliance, chain of title, litigation
Accounting constraints keep bank sellers on the sidelines
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
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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)
Assume 100% of 90+ DQs/FCs become renters
• Between 3 – 4 million increase in rent demand
• New formations could add 2+ million in demand
Source: U.S. Census Bureau, Mortgage Bankers Association, Carrington Capital Management
Total Housing Units 132,596
Vacant housing units 18,474
Owner occupied housing units a 74,601
Renter occupied housing units 39,521
Occupied housing units b 114,122
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] 61.70
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REO Rental Strategy
Increased rental demand, low vacancies and stable rental rates
Multiple sources to acquire properties
• Auctions, bulk opportunities through banks, MLS, GSEs and NPL loans
Consistent with policy efforts to reduce inventory and reconstitute housing stock
Source: Mortgage Bankers Association, Carrington Capital Management
REO Rental
Potential New Rental Demand/Stock
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Single Family Rental Strategy
“Even the Oracle of Omaha, billionaire Warren Buffett, told CNBC thatdistressed single‐family homes were one of the best investmentopportunities around, asserting, ‘…It’s a leveraged way of owning a verycheap asset now and I think that’s probably as an attractive an investment asyou can make.’” ‐Warren Buffett, Forbes, April 2012
“…rental markets are strengthening in some areas of the country, reflectingin part a decline in the homeownership rate. Reducing some of the barriersto converting foreclosed properties to rental units will help redeploy theexisting stock of houses in a more efficient way. Such conversions might alsoincrease lenders' eventual recoveries on foreclosed and surrenderedproperties.” – Board of Governors of the Federal Reserve System, HousingWhite Paper, January 2012
“The best opportunities for single‐family REO‐to‐rental investors are in Floridaand the Midwest, which boast high cap rates and a large stock of potentialREO properties” – CoreLogic, Market Pulse, April 2012
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REO Rental Strategy
Rent is not linearly correlated with home prices
Net cash flow yield targets drive property price point range
Higher running yield targets generally garner the focus of lower value properties
Average Monthly Rent Payment & Rent YieldProperty Value Distribution
Rent‐to‐Property Value Ratio
Source: Carrington Property Services, LLC
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REO Rental Strategy
Number of Occupants: 3.4 Number of Minors/Property: 1.5 Rent-To-Income: 20% Average Household Income: $6,200/month
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
Typical Property Profile
Source: Carrington Property Services, LLC
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Rental Strategy
Acquire in select markets with significant distressed supply
Acquire, rehabilitate, identify tenants and manage rental portfolio
Investment Approach
Importance of internal operational capabilities and controls
Risks of outsourcing key functions
Ability to manage and control key aspects of rental process is important
Target Properties
Prefer property characteristics conducive to effective rental management
Target square foot range, bed/bath counts and prefer newer/renovated properties
Limit properties with additional maintenance requirements (e.g. swimming pools)
REO Rental Strategy
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REO Rental Strategy
Policy initiatives aimed at GSE REO portfolio is slow to proceed
Operational challenges for new entrants
• Technology, pricing, acquisition, management
Empirical data concerning key pricing variables
Limited historical data exists on single family rentals for non‐operators to accurately explore economics…
Select Variables usedto assess Rental Strategy
Challenges to Strategy
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Carrington: Single Family Rental Platform
Portfolio
34,000+ properties managed
10,000+rental assets managed
13 affiliate operating companies Approx. 1,800+ full-time and contract employees
Vendor management Business analytics Acquisition and disposition tracking
Core portfolio systems Financial results and reporting
National network of field assessors for asset evaluation Manage approx. 5,200 properties, 3,200 in rental Disposed of 34,000 assets and managed 10,000 rental units to date
Established relationships with hundreds of local contractors
Local ContractorsLocal Contractors
RNT Logistics
Over 850 agents and over 40 offices licensed in 22 states
40 employees Two regional offices Nationwide coverage
Over 2,000 real estate professionals in national preferred network
CPS National NetworkCPS National Network
Property Preservation
Technological Infrastructure
Property Sales
Asset Management
Over 35 employees Provide services in 26
states
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Private Label Mortgage Lending
Prior to 2008, US Gov’t provided explicit or implicit support to 50‐60% of loan volume
Recently, Government sponsorship has reached levels approaching 90%
Private label securitization market is extremely limited and economics are challenged
Government versus Private Sector Mortgage Originations
US Mortgage Market –Supplier of Loans
Non‐Agency Mortgage Lending 2.0
Source: Inside Mortgage Finance
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Private Label Mortgage Lending
Thought and action‐oriented leadership in the private label market is required
Must improve upon the market’s past inadequacies
Alignment of interests between the lender and the borrower is critical
All participants in the process must have “skin in the game”
The New Private Label Market
Borrowers must be able to provide documentation for fully underwritten loans
• Borrowers must consent to ongoing credit/income requests of servicers
• Re‐think Gramm‐Leach‐Bliley
Lenders must provide plain‐English disclosure
Borrowers should have complete understanding of loan terms and obligations
Bilateral TransparencyAnd Engagement
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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
Discussion Summary & Themes
Residential Investment Themes