Tag Archives: credit management

The role of the servicer and the new rule of the debt collection

The role of the servicer and the new rule of the debt collection 1

For several weeks, the fear of a legislative decree aimed at helping families and business in difficulties, has been on the table among professionals in the NPE world. Many colleagues and main player/institution have already expressed their thoughts, with which we can only align ourselves: as thought, it is certainly not feasible and the negative effects on the economy in general would be much more than the positive ones.
This dutifully clarified, it is our intension with this article to raise attention on other issues still pertaining to the debtor party, resulting from the development of this new industry. Not theoretical speaking, but practical and already present in our daily work.

There is a lot of talk (rightly, I would add) about sustainability and ESG criteria applied to all areas of business and production. So, it is maturing in worker and the consumer, the awareness, and the need to understand the impact of one’s choices about the environment, understood not only in the “green” sense.
Our young debt collection industry, few months now, has been facing a totally new situation. Most likely the reader is an insider, so I will avoid to going into the economical dynamic of the period (raw material, inflation, raising rates etc.); instead, I would like to focus on a growing dynamic that are having a strong  social and misalignment impact, on real economic.
In a forcibly simple way, this is the summery of what is happening: due to the increase in reference rates and due to the need to support audacious BP, the conditions of repayment for a debtor are becoming unsustainable.

The adjective it is used not by chance: what typically happens is that an instalment that takes into account, the prospects of realization of the servicer/noteholder is rarely compatible with the repayment capacity of the debtor. In these cases, the servicer offers a significant upfront payment to support the numbers, despite the obvious fact that in a situation of financial tension it is unlikely that the debtor has accumulated a significant savings.
However, this is just one side of the coin. The real issue is not represented by the worsening conditions of return, but by the clear and evident disparity/inhomogeneity between different debtors in the same situation. In essence, the debtor’s hope of redeeming his own position depend equally on his ability to restart producing income again and on the luck of having found the right creditor.

The rise in the rates and therefore in the expected returns for investors in this asset class has only highlighted and made extreme a phenomenon that had already begun with the massive sale of non-performing loans.  The consequences of this trend are different, all with transversal and evident social impact:

  • Differences of conditions between debtors of the same institution/originator according on the timing and the condition of the assignment (transfer) of credit.
  • Differences of conditions between debtors of different institution that have contracted the same type of loans.
  • Misalignment of interest and diversity of approach between the various creditors: those who can afford to “grow” the client and support a repayment plan, and those who have no interest to in nurturing the client because they don’t do banking and can do nothing but take legal action.

I am sure that whoever read can perfectly understand that the article doesn’t have moralist or do-gooder content. We and all our colleagues continue, and we will continue to carry out our duties with professionalism, to pursue the objectives of the BPs in compliance with the codes of ethics no more and no less than before. We are also certain that the reader have cleared that the dynamics here described are clearly disconnected from the topic “ Proposta Legge Congedo”, which is certainly not the solution.
Nonetheless, it doesn’t mean that we cannot highlight a significant trend, full of our social fabric, that are going to focus on some of our cultural characteristic traits, such as the property of the first house.

Also evident is that if exist a solution this is found outside of our industry and cannot be left to the autonomy of the player operating the free market.
In our point of view what is need to be initially done, as the bare minimum and quickly, is to spread the culture in this sense. There is a need for greater awareness for the consumer and for companies of how much the credit chain has changed, of what are the needs of the new players and their consequences, starting from the credit disbursement contract.

Quoting a dear friend, we are the country in which to make a PAC of 100 eur/month you need to profile your attitude to risk and families without any financial education freely take out five-figure mortgages. All of this are examples of the current situation, for a change of course it will be necessary to row hard and against the current.

Emanuele Grassi

R as Resolute

R as Resolute 2

Published on 08/10/2021 on Creditvillage.news

Before delivering this editorial to the Credit Village editorial staff, I asked to be able to participate and attend the “A tutta R” event on July 15th focused on Real Estate; I thought that, after months of isolation, it would have been more correct to absorb and in some way become a spokesperson also for the thoughts of colleagues, professionals and, why not, even competitors. Only the good ones of course 😊

I think I did well. In this particular historical moment, participating in these events is already a success in itself, all the more so I was convinced that it would still be satisfying to meet people live and exchange opinions with them in the “old way”. The round table in which I participated was well moderated and attended by very competent and polite colleagues who I take this opportunity to greet and thank.

In addition to this, I was able to listen to interesting ideas, explained with competence and above all… new! I had the impression that after the initial hangover that lasted a few years of technology applied to the material, after a series of important regulatory innovations (perhaps too close to each other), a natural skimming occurred and that at first sight only those useful things and whose usefulness could be easily explained even to non-experts. It is as if, in some way, the pandemic has extended its effects on all of this as well.

Some practical examples:

–Reoco: during the discussion with other colleagues, it became clear about the possibilities of using this tool and how it is now used by the market with extreme awareness. However, some issues remain open, one above all the supposed limitation on the use of the instrument to SPVs that buy directly from other SPVs. In this way, all those mortgage loans securitized with GACS or securitized for different reasons would be excluded, generating a disparity and a prejudice that appears outside the ratio legis. It would be interesting to hear what the legislator thinks of it because after all many other privileges, see for example those of 41 TUB, are transmitted to the SPV without any limitations;

– Real estate securitisations: Compared to a year ago, the perception and awareness of the potential of this tool has completely changed. The audience of first movers, initially restricted to subjects already accustomed to securitization and ABS securities, is also expanding to the “pure” real estate world, involving new points of view and new themes (one above all, the possibility of securitizing building land and build using funds from the issue);

–Big Data: is the theme of the new decade, it involves all areas of our life and could not fail to enter the NPL and Real Estate market as well. In recent years there has been a proliferation of software, open data, spiders applied to all possible and imaginable databases, automatic evaluators, etc. For the first time I was able to hear (and share) that paradoxically an excess of data can generate the opposite effect to the one desired at the outset. Taleb readers will recognize the assumption finally made explicit in public. The ability to recover data with ease has gone far beyond what is necessary and what is due; this is true both for our business and probably for many other contexts. We have to start working on the interpretation of the data, machine learning is the right way and compulsive accumulation certainly cannot be.

–Crowdfunding: the regulatory process of this activity is at an advanced stage; there was talk of an upcoming European regulation that will allow cross-border activity, making the sector more attractive. If at an early stage the topic seemed unsuitable for overly regulated and compliant processes, step by step it has adapted and is gaining significant market shares. It will be interesting to understand if in the near future this type of capital will also be able to enter a system until now dedicated to professional clients or even on request.

I could present other examples, following the same fil rouge. These collateral but complementary initiatives to the core business will mean new capital, enlarged supply chains and greater induced activities.

I The process of transformation, at least from an economic / financial point of view, of a real estate into a movable asset really seems to be in the process of maturing.

We operators just have to take advantage of the lesson by drastically reducing the frills and focusing on effective solutions, here and now. We are facing uncertain times and we must stock up on as many certainties as possible.

Emanuele Grassi 

Coronavirus and NPL: 3 certainties to start from

Coronavirus and NPL: 3 certainties to start from 3

We are experiencing a completely new historical moment.

Any comparison on other experiences of the past does not fit: it is not a war, otherwise we would not be at home in the heat with all the comforts it is not even a normal influence, otherwise we would not have hospitals to the limit of their intervention skills.
We do not know exactly when all this will end, when we will be able to leave the house and how different our daily lives will be in the near future.

Therefore, every forecast reasoning made today has no certain foundation.

Often people are led to think that NPLs are an anti-cyclical economic area; in reality they are only a part of it, because each NPL at the end of its path returns to being a real economy and responding to all the logics connected to it.

Let me explain better: if, for example, we bought a NPL guaranteed by a hotel at a good price and then to recover the investment we had to sell the hotel at auction or on a free market, we would be faced with a zero-sum game.
We believe that at this point it is appropriate to start from the certainties, we have identified three:

  1. The NPL market is a mature market:
    in 2009 following the financial crisis, the banks were overwhelmed by a wave of NPL and were absolutely unprepared to face it. Today the situation is completely different: the NPL market is mature, many players with different specializations and sizes have been born over the years. We are certainly more ready to face the situation and the restart will be faster.
  2. The Legislator understood the centrality of the NPL theme:
    in the last 2/3 years the legislator has made important steps forward by institutionalizing and facilitating some virtuous practices of specialists, such as corporate restructuring and repossess of real estate guarantees (SVA – Reoco). Sometimes it has been argued that there have been many interventions that are close together and not always consistent with each other, but there is the fact that the topic has been fully addressed. In the coming months it will be particularly important to revive this dialogue; It is also important that the servicers represent their experiences and that they consolidate the virtuous practices already adopted, respecting debtors in difficulty and creditors entitled to recover their money.
  3. The specialized servicers are more performing:
    the NPL market has now reached full maturity and as in any mature market, the winning card for performance is specialization. Over the years it has become clear that focusing on specific asset classes has brought positive results both in terms of assessment capacity in purchasing and in terms of maximizing recovery in the sales phase. The difference between the results of the specialists and that of the generalists will be increasingly evident; in two different phases we will need both results to move the market and bring NPLs back to the real economy, that of families and entrepreneurs, as soon as possible.

I wish you to spend these days with serenity and health.

Emanuele Grassi

Reoco: instructions for use

Reoco: instructions for use 4

The Growth Decree dated 30/04/2019, recently converted into Law, will improve the real estate activity relating to the world of NPLs.

A simplified description of the major changes submitted by the legislator is provided below:

  • possibility of establishing a special purpose vehicle (SPV) focusing on the real estate activity necessary for the recovery of the credits of a specific securitization vehicle;
  • transfer to SPVs of the benefits of the asset segregation as well as of the cascade payments, typical of SPVs;
  • possibility of securitising properties instead of credits;

GMA a specific Reoco company, following the principles of the Growth Decree and explicitly connected to our MB Finance securitization vehicle.

What impact will the Growth Decree have once it is enforced? It will be very strong. Especially if the operators are adequately competent.

Initially, it may seem that the Reoco system brings only advantages in this historical context. For example:

  • almost total reduction of repossess tax costs;
  • tax relief extended to the final purchaser resulting in greater price competitiveness compared to the free market supply;
  • greater improvement of the auctions thanks to the lower cost of the properties;

This is true. However, it should be pointed out that the real estate activity connected to mortgage loans is a real estate activity; moreover, Reoco company cannot be managed without a specific department.

Ownership of a property entails honours and obligations on the part of the owner: for example, combined municipal property tax, condominium fees, maintenance costs and use-related depreciation.

This instrument is useful, especially for those who manage credits, and must be used sparingly and smartly. It is necessary to carefully identify the credits able to actually increase their value if they are “converted” into properties and adequately valued.

In GMA we have been managing Reoco for over 10 years. We have developed different strategies to offset the initial legislative vacuum and then to adapt to the regulatory changes introduced by Legislative Decree no. 18 of 14 February 2016, converted into Law no. 49 of 08/04/2016; in particular, the tax benefits referred to in art. 16 paragraph I were applied only until 30 June 2017.

Now we are launching to one of the first (perhaps the first) Special Purpose Vehicle established according to the provisions of the new Growth Decree, hoping that the changes suggested by the legislator will be long-lasting and will allow operators to efficiently work in the long term.

Emanuele Grassi

Guide to the Italian NPL market for foreign investors

Guide to the Italian NPL market for foreign investors 5

Those who attend meetings on NPLs surely know that one of the most common topics is the foreign investors’ opinion on the Italian NPL market.

In line with the stereotypes involving our Country, a special emphasis is given to the fact that the regulatory framework is unstable, the assets are difficult to be assessed, the recovery times are uncertain, etc. Genius and intemperance.

It is commonly believed that this situation is likely to discourage foreign investors, while actually the capital increases every year and the Italian servicers are sold to foreign companies or funds at high prices. Clearly, the capital to be invested is greater than the assets to be purchased, and an apartment in the Italian countryside is not worse than an apartment in the English or German countryside.

Therefore the foreign investors or servicers willing to purchase some Italian NPLs should take into account the 5 following aspects:

– The worst way of calculating the value of an NPL mortgage guarantee is the open market value (OMV) to which a flat-rate percentage is subtracted. In Italy, in fact, the open market and the judicial auction market are completely different.

Distrust the reports which calculate the value through the application of this method: the uncertain property release time and the poor access to the actual situation are too decisive.

The only element comparable to an auctioned property is another auctioned property under the same conditions;

– It is true that the land loans are collected faster than the mortgage ones, but do not consider this to be truthful: law, in fact, is implemented in different ways depending on the competent court; someone will send 90% of the money to your account directly from the contractor, while others will not apply Article 41 of the Consolidated Banking Act (relevant legislation), in addition to various intermediate scenarios;

– If you invest in collective procedures, make sure that the servicer to whom you are entrusting your money is aware of the fact that one or more people should be appointed exclusively to call the professionals and ask for urgent replies;

– If you do not want to wait far too long for the court decision at each stage and want to avoid any annoyance, enter 30% higher data into the algorithm. In Italy challenges, postponements and new hearings are very common. It averagely works after 100 loans;

– Invest only in one asset class at a time and apply to a servicer who specifically manages that asset class.

Note: Recently we have created a Twitter account: @GMAsrl1

Emanuele Grassi

The management of NPLs as a Reoco

The management of NPLs as a Reoco 6

We have welcomed the provisions issued by the Bank of Italy on 16 March. When we started our activity 10 years ago, we suggested a business model which was unusual then, since it included a special purpose vehicle (SPV) for the purchase of secured loans backed up by an active real estate company. Till then (except for some cases), most of the market players followed an unbalanced model: either real estate companies that purchased targeted mortgage loans or financial companies relying on a Reoco established for a specific purpose and managed in the spare time.

These provisions establish a model as a common practice and submit it to the originators. Then we were right, weren’t we?

Yes, we were right on the buyers’ side, while as for the originators/banks, everything is yet to be proven. The buyers’ side, in fact, offers some advantages: it is possible to focus on some asset classes, select the best, or implement the structure according to the task to be performed as well to the loan type.

The difference lies in the core business: the management of assets and loans is our core business, it does not rest with banks. Not yet, at least.

In order to meet the provisions of the Bank of Italy and seize the opportunity resulting from authorisations and derogations, the Credit Institutes will have to adapt themselves or assign this task to experts. Otherwise, it will have a boomerang effect.

After 10 years, we have realised that there are 3 main aspects governing the management of mortgage loans through a Reoco, which we constantly take into account:

– different approaches according to the asset classes: the enhancement of a villa or of an industrial complex are not the same thing. Sometimes, even within the same asset class, it is necessary to enact different approaches (for ex. apartments/villas, or hotels/tourist accommodations.) The business model varies at the business plan and design stage (software) as well as upon the following application and territorial management (hardware);

– dedicated structure: those who manage properties cannot deal with loans at the same time, and vice versa. It is necessary to create a flexible and osmotic organization, with well-defined tasks and responsibilities. Asking an asset manager expert on legal and out-of-court issues to develop the marketing plan for the sale of a property may be the simplest solution, but not the most effective;

– cash flow and tax planning: actually, they are two distinct business branches which closely cooperate with each other, each with its own liquidity and tax rules. Therefore the development of a business plan, including all the variables and ways out, is crucial.
Eventually, let us consider two examples: the planning of participations in auctions and the definition of the limit price; the calculation of the property management costs as well as of the expenses, with reference to the pro rata basis and the fiscal impact.

Emanuele Grassi

 

 

NPLs in Milan

NPLs in Milan 7

When it comes to non-performing mortgage loans, we tend to mix the good with the bad, with reference not only to the different types of mortgaged assets (see also “Very special servicing”, this issue will be deepened detail in the next posts), but also – and especially – to the position of these properties.

Those who consider the so-called “special situations” and examine individual operations instead of large areas are inevitably looking for opportunities. Considering 100 NPLs 50 are granted by properties located in the provincial territory, 40 in the hinterland, 10 in the centre of Milan: well, all (or almost all) bet on the latter.

This results is a “professional synecdoche”, which means that in the long run the players will identify the NPL market with residential properties situated in the centre of Milan, which represent, for example, all the properties located in dynamic and attractive locations.

Then, what happens to the remaining 90%?

Based on the updated data (source: BKIT) 75% of the gross distress is associated with companies, 75% of which is linked to non-residential properties.

In short and simple terms, about 60% of NPLs comes from sheds and shopping centres. Evidently, this problem is far from the centre of Milan.

The remaining 90% of non-performing mortgage loans will probably take one of these paths:

– it will be included in a multi-billion securitisation and will be recovered through judicial action at 30% – 40% (on average) of its nominal value;
– it will be redeemed by the owner or the user of the property;
-it will be purchased or transferred by virtuous companies looking for opportunities in places not explored yet;
– it will be refurbished or converted by credit managers, with the purpose of enhancing and selling it more quickly at a higher price, although in Italy the earnings capacity is not recovering yet.

Emanuele Grassi

 

The mortgage credit markets

The mortgage credit markets 8

Generally speaking, the Italian mortgage market is finding it difficult to get moving again.

In fact, a mismatch between supply and demand has been observed for various reasons (see also the “Non-performing loans: the opinion of the subjects directly involved/1”.article.) This may be due to the decisions of the institutions to avoid any excessive depreciation of their assets, while others emphasise the fact that real estate loans have been put aside in the budgets only to a very small extent, and now the creation of provisions is even harder due to lower earnings; moreover, some believe that the offerings of the major acquiring funds/companies are too low. Probably, there is some truth in all these assumptions.

However, the number of the servicers dealing with these loans is increasing.

Maybe they are arranging the future massive sale or introducing some diversifications. Actually, many servicers of unsecured loans have focused on the IPO system, always applying the same business model.

The same applies to lawyers, real estate appraisal companies, appraisers, real estate funds and the like are all pursuing their profits.

Sometimes, we bump into these professionals/companies coming from other areas, and we understand their intentions straight away, because of their different business models and points of view or lack of experience. The mortgage credit market is extremely multi-faceted and requires a specific training.

Far from extending this judgment to the entire categories, a list of the indispensable requirements for mortgage servicers is provided below:

– ability to properly identify the credits: “mortgage credits” are different from the other kinds of “credits.” Mortgage security, in fact, once combined with executive and/or collective procedures, implies certain calculation and assessment rules. However, in spite of the applicable regulations, every court follows different calculation criteria.

– ability to identify third-party expenses: it is quite easy to assess the internal costs to be borne, while it is hard to anticipate the external ones. For example, within a collective procedure, this ability can exert a significant impact on the outcome of the deal. The development of the exit strategies should also consider this aspect: a suitable planning of the expenses and predeductions provides a more accurate numerical analysis. In this case, too, each court applies its own customs and rules.

– local connections/ networks: through the performance of advanced analyses and works, the local verification acts as a confirmation. In some cases, it plays a crucial role, since the real estates in Italy are extremely various, even the adjoining one, just like the Italians.

– right approach to real estates: mortgage credits which are destined to remain credits represent an opportunity lost; the valuation results to a large extent from the interventions on the property covered by a guarantee. This implies a dramatic change, since the real estate mechanisms are different and must coexist with the financial ones. The establishment of a Reoco is not enough; in order to be successful, the Reoco must be an actual and independent company.

 

Emanuele Grassi

 

 

 

 

The (odd) run to real estate auctions: 3 reasons to doubt.

The (odd) run to real estate auctions: 3 reasons to doubt. 9Indeed, the insiders will have noticed an increase of the participation to real estate auctions in the last 12 months. Probably, the vision of the most farsighted experts of the field is taking place. For some years now, they have worked to bring private citizens to the auctions and to try to equalize the judicial sales to the sales in the free market.

The times where auctions were considered a thing for few, and the existence of murky deals behind the curtain was taken for granted.

The recent regulatory adjustments (LD 83/2015 and LD 59/2016) did the rest, accelerating the times of the process and proposing more desirable prices for the assets.

But is it really all in sloping? It is possible that this is a positive trend in the long run?

We have some doubts. Our opinion is that real estate auctions is “odd” for at least three reasons:

1. The number of sold assets is essentially unaltered:

those who thing that a larger participation to the auctions will be the panacea for all evils are wrong. If it is true that people determine higher prices and (perhaps) higher speed in sales, the fact that on the 25% increase of the deposited envelopes there was a 5% increase of the sold assets with regard to the total of the sales encourages a reflection. It means that there are a lot of dogs looking for the same bone, which does not mean many bones are sold…

2. The selling price, in some cases, are higher that the values of the free market:

some weeks ago a realtor told us: “Right now, it makes more sense to sell a property in an auction than putting it in my window”.

The “trend” of auctions and the irrational mechanism that characterizes them (casino effect) induces the selling price of some assets to be higher than the selling price on the free market. This phenomenon is not logical nor can it be considered a trend: actions selling implies risks and compromises that physiologically have to reduce a price, compared to free sales. Sooner or later this effect is going to burn out, it is clear.

3. We don’t have signals of recovery of the economy:

the real estate market has followed, since always and with direct proportionality, the economy of the country. It tows and it is towed. In the last 12 months there were no signals nor evidence of data that anticipated a growth of real estate prices. The salaries have been unaltered and the credit-worthiness per capita has decreased. In this scenario, an increase of the prices has to be considered as merely episodic and connected to the niche market.

For these and other related reasons, we maintain that this trend should be interpreted as a relocation of liquidity and not as a long-lasting trend. Our evaluation of the asset will continue to focus on longer and more foreseeable assumptions.

Regardless to this, it is still undeniable that the growing attention towards the NPLs market brought more liquidity in this microcosm; on the other hand, the risk is, this way, to create a paradoxical situation where half the market is productive and the other half is in crisis.

Let us not be blinded, or our NPLs will become NPLs again!

 

Emanuele Grassi

 

 

NPL best practice/the 3 credit assessment traps

NPL best practice/the 3 credit assessment traps 10

There is a substantial difference between credits and mortgage credits, which goes well beyond guarantees.

Mortgage credits refer to credits to which an executive or insolvency privilege is granted at a certain degree.

However, everyone (including some insiders) should know that a credit resulting from a mortgage loan is not necessarily a mortgage credit.

Or rather, it can be regarded as such with reference to principal, interests and any additional sum according to the applicable legal provisions (in short as described in art. 2855 of the Italian Civil Code.)

The assessment of the credit principal may be full of pitfalls, as indicated below:

1. Difference between credit gross value and mortgage credit

As already mentioned, these two values do not necessarily ​​coincide. In this case, operators often make mistakes, since the selling party tends to submit the gross value (the so-called GBV, “Gross Book Value”) in the first instance.

Moreover, considering also the complexity of the calculation and the poor availability of documents, most of the servicers do not assess the mortgage value and are hold harmless for all the credit features, except for the actual existence of the credit.

Furthermore: the applicable law is interpreted in different ways by the Courts, with special reference to the calculation period compared to conventional interests as well to the allocation of default interests to unsecured loans or to the privilege. Sometimes, as happened in the Milan case, some guidelines are internally provided and all the specialist operators must know them.

2.Difference between mortgage privilege in executive and insolvency procedures

Mortgage is surely considered a privilege, however, it may take on a different value depending on the procedure type.

In this case, the most important aspect is not the credit assessment, but rather its proper placement (and expectation) within the allocation plan.

As for executive procedures, it is easier to outline the privilege degrees and any credits to be submitted to the mortgagee, while insolvency procedures are more complex, due to a higher number of privilege categories, complex calculations and collection forecasts.

3.Difference between mortgage and real estate credits

The fact that a mortgage credit may have a real estate nature deeply influences its collection. In this case, too, the most important aspect is not a different credit assessment, but rather a greater privilege (in some cases), a greater ease of collection and shorter credit collection times.

Without wishing to go into a detailed analysis of the relevant technical aspects (for further information see the judgment of the Court of Cassation, Third Civil Division, 12 September 2014 n.19282) it is striking to note that the two instruments can be used for the same purpose but with different outcome in terms of collection actions.

Some differences are provided by way of example: the land owner may complete an executive procedure even in case of bankruptcy of the execution debtor; the land owner shall receive the execution revenues in advance of the final allocation.

This issue is complicated and should be further investigated, however NPL operators face situations which have been already outlined, i.e. they will afterwards discover whether the credits are mortgage or real estate ones and will act accordingly.

Emanuele Grassi