Realization of Immediate Cash Flow
Residential construction loans are typically not eligible for sale to standard secondary marketing outlets. With initial construction periods, ranging from 6 months for consumer notes up to as long as 5 years for commercial/development loans, now exacerbated by non-performance the opportunity for the Lender to recognize cash flow from the sale of these loans is significantly delayed.
Lenders who choose to sell the non-performing construction loan segments of their portfolio benefit from the opportunity for immediate cash flow.
Equally important, these Lenders eliminate the liability of future cash outflows for contractually required borrower construction disbursements or their own funds for construction to complete the collateral. Given the non-performing nature of these loans, the timing of any future funding exposures or construction disbursements is often difficult to project.
As with the sale of any non-performing loan, Lenders benefit from a reduction in their Loan Loss Reserve requirements. Sale of these assets also provides Lenders with control over the timing of any required write-offs.
Free up Valuable Servicing and Loss Mitigation Resources
The Servicing and Loss Mitigation activities required on a residential construction loan portfolio, particularly one that is non-performing, are much more labor-intensive and, as a result, much more expensive to maintain than a non-construction or whole loan portfolio. Because the collateral for construction loan portfolios is typically partially completed multi unit or single family residences, they require the performance of unique Servicing functions such as draw administration, loan in process account maintenance, inspections, mechanic lien oversight, unique property preservation and security challenges, etc. The Loss Mitigation activities required are also much more involved and may even result in the need for construction management to complete the construction of the collateral residence(s).
Should the properties become REO, the market for the sale of partially completed homes or residential developments is very limited. Further, should the lenders opt to complete the construction themselves, the process of identifying, vetting and overseeing vendor contractors is extremely time-consuming and expensive. Expenses are exacerbated for single properties that are geographically diverse.
Lenders who opt to sell the non-performing construction loan segment of their portfolio benefit from the ability to reallocate significant Servicing and Loss Mitigation resources back to their whole loan portfolio.
Improved Execution on other Loan Portfolios
The market for construction loans is limited, especially for the non-performing segment. Many buyers of whole loan pools lack the experience or ability to manage these unique assets and will significantly reduce their bid pricing or even decline to bid on a loan portfolio that includes non-performing consumer or commercial construction loans.
Lenders who segregate for separate sale the non-performing consumer and commercial construction assets from their portfolio offerings typically improve their overall marketability and execution.
Mitigate Reputational Risk
Increased press coverage of the negative impact of abandoned properties on local communities has led to increased scrutiny of the manner in which Lenders manage Lender-owned or serviced properties. Partially completed residences may pose even greater safety and devaluation concerns in their respective communities.
Local realtor and builder relationships may also be at risk depending on the Loss Mitigation and disposition strategies employed by the Lender for non-performing construction loans. Sale of these assets to Restoration Capital relieves the lender of these reputational risks as Restoration Capital becomes the lender of record. Because Restoration Capital is dedicated exclusively to its portfolio of non-performing residential construction loans, its disposition and collateral preservation activities are typically handled in a manner more expedient than that of other purchasers, often to the benefit of the local communities in which the collateral resides.
Lenders benefit from an overall reduction in their reputational risk.
Limited Requirements for Seller Representations and Warranties
Compared to other purchasers, Restoration Capital can significantly reduce its requirements for Seller representations and warranties because of its familiarity and experience with these types of assets.
Compared to other purchasers of like assets, lenders who sell to Restoration Capital typically have fewer seller representation and warranty obligations.