When Howard Bluver took over as CEO and director of Suffolk Bancorp in January 2012, the bank had a total book value of $81 million in nonperforming loans. So he had to decide whether to hold onto these assets for approximately four years, the length of time it takes to go through the foreclosure process in New York, or sell them immediately.
At SourceMedia's Buying & Selling Distressed Mortgage Portfolios Forum in New York, Bluver said he knew the bank had the capital capacity to absorb discounts and sell the loans quickly by getting close to 100 cents on the dollar, but the important issue was to determine which loans to sell and what to hold onto.
In order to determine the value of each loan portfolio, Bluver ordered appraisals for every loan that was over $100 million in principal. The bank also verified that all documents were current on a loan-by-loan basis.
As part of determining what to hold or sell, Suffolk Bancorp crafted an engagement letter with their broker—which was approved by federal regulators—that did not force them to sell any loans it was not interested in selling.
The terms of the engagement letter required the financial institution to build a large data room that made sure all loans and documents are there in case the bank did sell the loan. Also, the broker had the responsibility to underwrite all the loans.
Bluver said all of this was done with no marketing to potential buyers.
"The key component of this engagement letter was that there was no obligation to sell loans," Bluver said during his presentation.
By executing this engagement letter strategy, Bluver said he was able to get 65 to 70 cents on the dollar for the entire portfolio, which helped decrease the bank's total portfolio of nonperforming loans from 9% to under 2%.
However, he did mention several issues that the bank encountered when building the data room that sellers should be aware of if they have to dispose nonperforming loans.
First, it is important to determine who is responsible to sell back-taxes. If you put back-taxes on buyers, discounts will be greater because of uncertainty, Bluver added.
"We decided to be responsible for all back-taxes and we knew exactly what the number owed was, that is why we got the price we did for the loan portfolio," Bluver said.
Another main issue that sellers should be aware of is if any litigation matters are included within a loan portfolio and whether there are advancements that potential purchasers will need to make.
"When building a data room, it is necessary to understand all of the intricacies for all of your loans," Bluver said. "If you are missing documents, this needs to be disclosed to the buyer. At the end of the day, it is easier to close a sale if you understand all of the facts of what you're talking about."