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63 » VISIT US ONLINE @ DSNEWS.COM NPL AND RPL MARKETS THE KEY TO INVESTOR GROWTH A new report by Semper argues that the U.S. economy is transitioning from a post- crisis, recovering market back into a normalized market, and that NPL/RPL investments "should disproportionally benefit from the increases in credit availability and home price increases that typically occur during these transitions due to the embedded structural leverage to these factors." According to Semper, the housing crisis and its immediate aftermath turned portfolios of clean, current-pay loans into "mixed bags of underwater, non-performing assets." But this environment in the NPL/RPL market in turn allowed for the mortgage holders who preferred performing assets to transfer impaired mortgages to investors who saw opportunities through active loan servicing. Consequently, post-crisis changes in banking capital requirements compelled many NPL and RPL holders to reduce holdings of their assets on their balance sheets. is, Semper argues, created excess supply in the market, and that led to varied investment approaches‒‒private equity, hedge funds, and REITs, for example‒‒ being set up to absorb that supply. "Today, we estimate an NPL inventory of [roughly] $105 billion, compared to estimates of $35 billion prior to the financial crisis," Semper reported. "However, not only is the supply of NPLs still well above pre-crisis levels, NPLs are still well over double historical levels, and the market continues to draw new supply from a steady stream of ongoing loan defaults within the outstanding universe of pre-crisis mortgages, as well as post-crisis origination." Semper argues that despite a recovering economy on its way back to normal, the need to effectively work out the NPL borrower base has not changed. Further, the company reported, these borrowers are being liquidated in a much more stable and functional credit environment than what we saw in the period immediately following the financial crisis. "As certain players have exited the trade, the supply and risk reward profile remains," the report stated, "but it is now combined with our positive outlook on housing technical and fundamentals." Semper recommends several approaches: NPL securitization senior tranches featuring 40 to 50 percent credit enhancement, coupon step- ups that limit the extension of securitizations (and, thereby, encouraging issuers to exercise optional redemptions); RPL shifting interest securitizations that center on heavily seasoned underlying loans that boast strong credit profiles; and NPL whole loans that allow opportunities to invest directly into an active asset management strategy based on the underlying credit, and allow investors to either highlight or reduce exposure to certain sectors or loan characteristics such as legal jurisdiction or property type. "We remain focused on investments and liquidity within the NPL and RPL sectors and remain constructive on the fundamental outlook of the assets and within the investment strategies above," Semper concluded. HUD: ENOUGH IS ENOUGH e number of Americans paying more to live in substandard conditions increased between 2013 and 2015, according to a new report released Wednesday by the U.S. Department of Housing and Urban Development. In fact, in 2015, HUD found that 8.3 million very-low-income unassisted families paid more than half their monthly income for rent, lived in severely substandard housing, or both. e agency referred to such residents as "worst-case needs" residents. e rise in worst-case needs residents follows a dip from the prior "Worst Case Needs" report, which studied patterns between 2011 and 2013. e latest number of worst-case needs households, according to HUD, is the second highest on record and signals a 66 percent increase since 2001. e South and West reported the most very-low-income renters. Miami, Memphis, Dallas-Fort Worth, and Los Angeles reported between 49 and 61 percent of their poorest renters were paying more to live in worse conditions. ese renters also had the highest prevalence of worst-case needs and the lowest likelihood of receiving housing assistance, HUD reported. But the number of households with worst- case needs divided fairly evenly across racial and ethnic groups. e prevalence of worst- case needs during 2015 was 47 percent for Hispanic renters, 45 percent for non-Hispanic white renters, 37 percent for non-Hispanic black renters, and 41 percent for others. While incomes rose between 2013 and 2015, rents also increased nearly as fast, HUD reported. But for the poorest renters, rent hikes outpaced income gains; and though the production of rental housing is strong, "the rapidly growing renter population is putting increasing pressure on the rental market, particularly on the inventory of affordable rental housing," HUD reported. HUD Secretary Ben Carson quickly advocated for "a more business-like approach" focused on reducing regulatory barriers that would allow private markets to produce more housing for more families. "Two years ago, our nation was still feeling the aftershocks of our housing recession with rents growing faster than many families' incomes," Carson said. "After years of trying to keep up with rising rents, it's time we take a more holistic look at how government at every level, working with the private market and others, can ease the pressure being felt by too many un-assisted renters." Carson added that by pursuing housing finance reform, the Trump administration seeks to "unwind the federal government's role in the private mortgage market and ease the stress on rental markets."

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