Proficient Note Buyers
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August 04, 2008
The Only Constant is Change
It's ugly out there.

I started hearing that in February 2007 as the subprime giant New Century was teetering on the edge of bankruptcy, shortly before it plunged right in. If things were ugly back then, things today are downright hideous.

I entered the world of seller-financed notes in 1993 as an accounts receivable clerk for Metropolitan Mortgage. At the time, Metro was the largest buyer of notes in the country. As the years progressed and Metro decided to chase even higher yields (read: riskier products), their seller-financed division gave way to The Associates. Much later (2004), Metropolitan's risky gambles in commercial lending pushed them into bankruptcy, and the company that gave birth to the industry was gone.

The Associates was a large financial services company HQ'd in Iriving, TX. Entirely yield-driven, they would buy almost any note for a certain price. From the late '90's until 2001, Associates was the King of the Hill. Then Citigroup bought them, and within a couple months, the seller-financed division was scrapped and the "Top Dog" position once again had a vacancy. Around the same time, an agressive group out of Miami called Bayview Financial started to dabble in seller-financed, liked the profits, and started a branch in Grapevine, TX in February 2001.

Bayview (aka InterBay) quickly climbed to the top of the heap. With large amounts of inexpensive cash at its disposal, they had purchasing power none of the smaller investors in the business could match. Securitization was their exit strategy, and the rewards were handsome. From 2002 until 2007, roughly three out of every four notes sold in the seller-financed secdonary market went to Bayview. Then, as Toby Keith would say, a sucker punch came flyin' in from somewhere in the back...

This sucker punch came in the form of defaulting subprime mortgages. These subprime mortgages were wreaking havoc on the RMBS (residential mortgage backed securities), the same vehicle used to capitalize seller-financed mortgages for the likes of Bayview and, to a lesser degree, CBASS and its affiliate Note One. When investors began to flee from RMBS, the faucet that had been gushing out all that cheap money got turned off, and hasn't been turned on again since.

Last week Bayview regrettably decided to shutter its seller-financed division, saying it was no longer profitable. A sad day for our industry and for me personally. Many of my close friends are out of work, and a company that did so much for our industry has given up on it. And so, the search for the next industry leader begins in earnest once again. We have a lot of niche players - will any of them step up to the plate? History certainly seems to be working against them, but I maintain that the product hasn't been the problem with any of the aforementioned companies. The problems have been ancillary, but influential enough to throw the baby out with the bathwater, as they say.

So there you have it...a history of the last 15 years of the seller-financed business. The image of a constantly revolving door comes to mind. Who will be the next to walk through it? For the sake of our industry, I hope we don't have to wait too long to find out.

Make it a great day.


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