After issuing its first securitization last month, New York-based Greenthal Realty Partners is ready to take on a relatively untapped market in the asset-backed world: nonperforming and subperforming loans.

For the past four years, the 42-employee strong Greenthal was busy acquiring subperforming, nonperforming and real-estate owned (REO) residential assets, primarily in the one-to-four family range. It issued $145 million in notes, rated single-A by all three rating agencies.

Natalie Bowden, chief operating officer for Greenthal, says more securitizations are likely. "It went fairly well, it was fairly well received, so my guess is we're going to continue to pursue recycling and liquidity through these securitizations," she said.

This type of transaction has not been seen in the market for at least five years, and Bowden said that the market was just not ready, even though she sees this as a great vehicle for liquidity.

"Not everybody sees this as the most efficient way since the actual durations on these assets is relatively short, because most of the resolution is through foreclosure and REO sale," she said. "So I don't know if everybody would have an appetite to finance their deals this way, because it does have relatively short duration and there are costs associated with shorter duration paper."

Greenthal, a privately held company, issued the notes in accordance with Rule 144A, and future securitizations will likely be done in that manner as well. "I'm not so sure how receptive the public would be to this kind of asset class, although with having three rating agencies rate the deal... I'm sure that would give more comfort," Bowden said.

Greenthal's next securitization will likely be in the second quarter of 2001, with the time until then being spent acquiring assets to securitize. "The program is to acquire assets in a measured manner so that we don't overtax the special servicing operation and then every six months come out with a $150 million approximate transaction," Bowden said.

Greenthal's Strategy

On the acquisition side of the company, Greenthal competes with institutions such as C-Bass, Ocwen Financial Corp. and Residential Funding Corp. Greenthal also does some third party servicing, but has a specific focus to manage the products it buys for its own account.

Bowden also pointed out that all special servicing for Greenthal is done from its New York headquarters, but has a subservicer off-site to handle subservicing activities, payment processing and escrow activities.

The company itself has evolved significantly since its inception in 1992 as a response to the Resolution Trust Corp. Greenthal's first contract was to manage $325 million of primarily co-op and condo assets.

"Once we were able to get through that contract, we developed both valuation and default management monitoring systems, proprietary systems on our own," Bowden said. "And once we got through the RTC contract, we started to market those services to the guys on Wall Street who are buying a lot of this product and did a number of third-party both valuation and servicing contracts for the who's who of Wall Street."

The company spent three years doing that alongside about $2 billion worth of multifamily and commercial asset management, default management and valuation. Greenthal did not start acquiring reperforming and nonperforming loans until 1997.

Jo Ann DiNardi serves as Greenthal's chief investment officer, who is responsible for all acquisition activity. She also assists Bowden in the administration of defaults management.

Greenthal has maintained a real estate focus, specializing more in nonperforming product more so than subperforming product.

"We're much more aggressive in the nonperforming market and that's because we're really very real-estate oriented, very collateral-value oriented, not as credit-oriented," Bowden said. "The actual resolution of these assets is often to create a subperforming loan or some kind of resolution through the bankruptcy process, through which you can create a reperforming loan."

Where the Market Is Going

Going forward, Bowden said this is a market that will be appealing to investors because of attractive spreads.

She added that even though the economy is strong, there still is a huge subperforming/nonperforming market. According to Bowden there is about $2.5 trillion of non-agency paper outstanding, and with 1% of that having a default of over 60 days, it leaves a $29 billion to $30 billion market consisting of subprime-generated, prime-generated and consumer-finance generated paper.

"If you have a slight downtick in the economy, that $29 billion could easily double in a fairly short period of time," she said, noting that there are expensive barriers to entry in terms of developing human capital. "So we feel this is a niche we'll be in for awhile. There's enough product to sort of keep everybody happy."

For the year ahead, Bowden predicts a slight slowdown in the economy, which would produce a moderate uptick in default rates and create more product, especially if oil prices do not come down. "The biggest risk is if that happens, the collateral values may not hold up as well," she said.

Greenthal, however, maintains a geographic and originator-diverse product spectrum, and maintains assets that have a balance of less than $100,000. "So we sought to mitigate our exposure to value changes by having a diverse mix of products, and given the smaller average balance of the assets, we're a little less exposed to significant value changes," Bowden said. "Whereas if I had much larger balance assets, I think those assets are much more susceptible to changes in value, with changes in the economy."

This could provide an opportunity to acquire more properties at a more attractive level, she said.

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