Portugal 
Spain 
Greece 
A two-room apartment for the Reoco
14 October, Milano Finanza
Since the beginning of the year, there have been 700 thousand people involved in auctions for small apartments. To avoid the social time bomb, the Parliament is thinking about a house-saver fund. In the meanwhile, banks are doing it by themselves.
In the books of banks, the non-performing loans secured by real estate sold so far have been those with the best exposures, with the best collection possibilities, or composed of a few properties of great value. But there are hundreds of thousands of positions represented by residential properties put as guarantee of mortgages on which many families and small business defaulted, without considering all the industrial and commercial properties in economically depressed areas. Such properties are not in the portfolios to be sold to specialised investors, but they follow the same judicial procedure and they end up auctioned.
The secured credits, hence guaranteed, represent little less than half of the stock of non-performing loans managed by banks. In fact, 70% of the stock is constituted by credits towards big companies or Sme, as illustrated in the above chart. The remaining quota is split among several subjects, between physical persons and micro enterprises. For this reason, somebody has started thinking on using Reoco also in these cases, not only for big exclusive properties. Reoco (Real Estate Owned Company) are ad hoc companies established by the creditors to participate in auctions, they propose themselves as buyers to guarantee the defaulting credits on their books, with the intention of appreciating and selling them later.
The prices of the sold portfolios
On average, the prices of the sold residential NPL portfolios have been around 43%, according to the latest Market Watch Npl by Banca Ifis. Whereas commercial properties portfolios are valued around 35% of their gross value, and the other secured NPLs are around 33%. This is practically the same evaluation of the securitisation (through Gacs) for a value of 938 million finalised on the market by Carige last July with a 70% secured, far from the 30% achieved with the first securitisation through Gacs, which was structured on a portfolio originated from Banca Popolare di Bari, with a good share of investment grade notes and hence with Gacs.
This is because, explained Riccardo Serrini, Prelios General Director during a BeBeez ( the online magazine and media partner of Milano Finanza ) meeting organised recently on the real estate NPLs, “It’s up to the banks to choose the credits to securitise with Gacs, therefore they tend to choose the best credits, those with the smallest gap between book value and selling price. From our side, we can show line by line the selling price based on our recovery curves”. Prelios has acquired some experience in Gacs since it acted as servicer for both operations put on the market so far and it’s currently working at the one on behalf of Banco Bpm.
For banks, the alternative to selling the portfolios would be participating in an auction as Reoco, buying the property, appreciating, and selling it. In any case, this is not an easy job, even for attractive properties, there are many obstacles. “Prelios has been active in the Reoco sector since 1997, but it’s not an easy choice, the last Reoco of the nineties closed only one year ago”, notes Serrini, “having a property to sell is not like having a credit, because in the worst-case scenario with the credit you lose everything, but if you can’t sell the property, you’ll have to continue paying taxes and expenses. At an auction there is little chance to do due diligence, there is a limited access to files and often there are irregularities from the Land Registry. It’s much better to solve it outside the judicial system”. But if getting to an agreement regarding an important property may be an easy task for a bank, having to deal with many small defaulted homeowners is a different story.
The numbers of real estate auctions
As anticipated in the past weeks by Milano Finanza, according to the last report by Astay, a consulting firm specialised in property executions headed by Mirko Frigerio, the total of the auctions properties since the beginning of the year has been over 177 thousand (after the 267 thousand in 2016). 140,056 of these properties are for auction due to foreclosure and most of them are small apartments, usually two-room apartments, the typical first house of an Italian family. Frigerio stressed how these figures represent a social time bomb. If we consider that behind each of these 140,056 auctioned properties there is a family, formed at least by two people and with at least one child, with the presence in many cases of parents as a guarantee of the mortgage, it’s easy to conclude that the defaulting mortgage has impacted around 700 thousand people from the beginning of the year to the end of August, without counting the properties not published yet and those whose procedures have just started. According to Astray, the cautionary assessment sees approximately 1.5 million people impacted. It’s necessary to find a solution and, for this purpose, the Reoco seems a viable solution both for the Parliament and for the single banks.
“We’ve been assisting for the last 12 months a retail bank that is focusing its Reoco on small residential properties”, said Andrea Mignanelli, Cerved Credit Management Ceo, speaking at a conference in Rome about the new bill concerning the launch of a public Reoco, a possible solution to the real estate NPLs weighting on the books of the Italian banks struggling and needing State’s intervention.
“A Reoco dedicated to all the small residential investments spread all over Italy is certainly not easy to manage and requires servicers’ participation. But if this activity is well managed, it can bring a gross return between 3 and 5%”, said Mignanelli. The return comes from renting the properties, that can be paid directly by the former owners for an amount equal to a fraction of the mortgage, perhaps with the hope to redeem the property one day. Besides, we must keep in mind that the Reoco bought the property at the auction at a discounted price, hence even a rent lower than the mortgage quota will grant an interesting return. In conclusion, if it was possible to create a big Reoco Italia with public participation with the task of buying at market price at judiciary auctions the properties put as guarantees to the NPL portfolios of the various banks, the whole project would grant a considerable income, as well as having a positive social impact and without engaging additional public resources already allocated to bail banks.
Milano Finanza has already anticipated that the terms of the bill, whose first supporter is Fabrizio di Stefano, deputy and member of the Finance Committee of the Chamber of Deputies, with the technical assistance of Ubaldo Palmidoro, founder of Centaurus Credit Management, a Rome-based servicer. The proposal is also supported by Alberto Giorgetti, member of the Budget Committee at the Chamber, and by Pietro Laffranco, another member of the Finance Committee. All of them stated that there is widespread interest in the project, that got the attention also of the President of the Finance Committee Maurizio Bernardo. The bill should be turned into an amendment to insert in the Budget when it will come to be examined by the Finance and Budget Committees of the Chamber of Deputies.
Source: Milano Finanza (by Stefania Peveraro)
Translator: Cristina Ambrosi