PROJECT TIMELINE
1995 1996
Oct. Nov. Dec. Jan. Feb. Mar. April.
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| Structuring |
(11/1-1/15)
1. DESCRIPTION OF STRUCTURE/BID PROCEDURES
The goals of the structure/bid procedures are to:
- Maximize sale proceeds;
- Maximize the number of bidders and therefore the competitiveness
of the sale;
- Ensure a fair and equitable sale by FHA;
- Foster a positive image for FHA in the marketplace.
To achieve the preceding goals, the CT recommends the following:
- Mortgage Loan Blocks. The FHA Single Family Mortgage
Loan Sale #2 consists of 16,231 loans with an aggregate unpaid
principal balance of approximately $750 million. To achieve the
goal of making the sale accessible to large and small bidders
alike, mortgage loan blocks of approximately $1 million per block
were structured. The idea is to create a retail market, the presence
of which should force larger bidders to increase their bids.
- Stratification Criteria. For most bidders, either
large or small, performance is the preferred stratification criterion.
However, small bidders generally prefer to bid either performing
or nonperforming loans in their geographic area. For these reasons
it was recommended that the loans be stratified by performance
and geography. For example, assuming there are 50 blocks in a
geographic area, there may be five that are performing and 45
that are in various stages of nonperformance.
- Minimum Bid. To encourage participation of small
local and regional investors, a minimum bid for a single million
dollar loan block was recommended in this sale. (By contrast,
the minimum bid in FHA's Single Family Mortgage Loan Sale #1 was
for five million dollar blocks.) The larger number in the Single
Family Sale #1 was intended to limit the number of potential closings;
however, the number of bidders was low. Even if the number of
bidders increases dramatically, it is still likely that there
will be fewer than 20 winners.
- Number of Bids Per Bidder. Each bidder should
be permitted 10 bids and should be encouraged to be as creative
as possible when submitting bids. In an optimization format,
the greater the number of bids submitted on different parts of
the portfolio, the better chance that there will be multiple winners.
While the number one objective is to maximize sale proceeds, it
is believed that large bidders will bid higher if there is a vigorous
retail market presence. To the extent that due diligence costs
are low, and small bidders perceive they have a chance to win,
such a market can be created and sustained.
- Minimum Post Sale Servicing Requirements. The
loans being sold in FHA Single Family Mortgage Loan Sale #2 are
past the "reduced and suspended payment period." Traditionally,
FHA has expressed a willingness to protect borrowers by requiring
that loans be serviced post-sale as if they were still being serviced
by FHA. However, even though these loans are beyond the reduced
and suspended servicing period and are therefore generally subject
to foreclosure if delinquent, there are a number of other servicing
requirements outlined in the servicing handbook that would prove
burdensome to potential bidders. Therefore, it is recommended
that only the most important post-sale servicing requirements
should be maintained. These basic remaining requirements should
be: (i) post-sale servicer must be HUD-approved; (ii) the purchaser
must abide by borrower payment plans; (iii) if a borrower falls
behind on a payment plan, he should be able to reinstate himself
if he makes a "substantial payment"; and (iv) the purchaser
must extend the term of the mortgage up to ten additional years
if the borrower is current but there is still an accumulated delinquency
at the end of the original term. It is recommended that these
remaining provisions not be included in an abridged handbook,
but be incorporated in the loan sale agreement.
- CRA Eligibility. Recent revisions to the Community
Reinvestment Act (12 U.S.C. 2901 et seq., "CRA") effective
July 1, 1995, are likely to create both needs and opportunities
in the lending and investment communities. As is consistent with
prior regulations, an institution's rating will reflect its record
of helping to meet the credit needs of its entire community, including
low- and moderate-income neighborhoods. Under CRA's new regulations,
banks will continue to be evaluated with respect to their record
of helping to meet the credit needs of their assessment area(s)
through, among other categories, their home mortgage servicing
portfolios.
The loans included in the FHA Single Family Mortgage Loan Sale
#2 have been identified as potentially CRA-eligible by all four
federal regulators: the Office of Thrift Supervision (OTS), Office
of the Controller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), and the Federal Reserve. Letters from these
four regulators are included in Exhibit 5-A.
- Placed-Based Survey. FHA believes that overall
return to the taxpayers could be enhanced through placed-based
bidding, but this notion has yet to be tested. In an attempt
to obtain market feedback, bidders in FHA Single Family Mortgage
Loan Sale #2 were asked to think about placed-based disposition
strategies and provide their thoughts about how such a program
could be structured, i.e., the Placed-Based Survey (Exhibit
5-B).
- Financing. The contracting team should solicit
expressions of interest from financial institutions potentially
interested in providing financing to winning bidders. An advertisement
describing the Single Family Mortgage Loan Sale #2 was placed
in the Wall Street Journal inviting interested firms
to respond for inclusion in a list that was forwarded to all sale
bidders. Simultaneously, certain large warehouse lending institutions
will be mailed a financing package soliciting their interest
(Exhibit 5-C).
- Sale Termination. FHA reserves the right to terminate
the sale in whole or in part prior to the bid date.
- Bid Evaluation. FHA retains the right, at its
sole discretion, to reject any and all bids.
- Best and Final Rounds and Reofferings. FHA should
reserve the right, at its sole discretion, to conduct a "best
and final" round among the top bidders (any bidder within
five percent of the highest bid(s) for mortgage loan blocks and/or
mortgage loan pools selected). In addition, FHA should reserve
the right, again at its sole discretion, to re-offer selected
mortgage loan blocks and/or mortgage loan pools to all bidders.
It should be made clear that conducting a "best and final"
or a re-offering should not be construed as a rejection of any
bid made by a bidder or preclude FHA from thereafter accepting
any bid made by a bidder.
2. OPTIMIZATION
The optimization model used for the purposes of bid award was
created by Bell Laboratories. In brief, the model analyzes all
bids and finds the exact bid or combination of bids that maximizes
total revenue to the seller.
In this instance, there are 750 mortgage loan blocks, and each
bidder can submit up to 10 bids consisting of one or more mortgage
loan blocks. All bids will be entered into the model, and the
model will find the combination that maximizes total revenue.
The following example illustrates how the model works:
HUD's Southeast Sale:
- 174 non-performing multifamily mortgages were offered to the
public for bid.
- A bid consisted of any subset of the 174 mortgages
- Objective - maximize total revenue
- Constraint - award each mortgage to no more than one bidder
Approach and Optimization Model:
- Bid Screening
- eliminate lower price bids for the same mortgage
- identify and mark tie bids
Bid Optimization
- multidimensional knapsack problem
- integer linear programming solution methodology
- alternative optimal solutions
Example:
Bid 1 2 3 4 5
------------ ------ ------- ------- ------ -------
Price $60 $20 $71 $40 $50
------------ ------ ------- ------- ------ -------
Mortgage 1 0 0 0 1 0
Mortgage 2 1 0 1 0 0
Mortgage 3 1 0 1 0 1
Mortgage 4 0 1 1 0 1
Mortgage 5 0 0 0 1 0
Maximize: Z = 60x1 + 20x2 + 71x3 + 40x4 +50x5
| Subject to: |
0x1 + 0x2 + 0x3 + 1x4 + 0x5 1
1x1 + 0x2 + 1x3 + 0x4 + 0x5 1
1x1 + 0x2 + 1x3 + 0x4 + 1x5 1
0x1 + 1x2 + 1x3 + 0x4 + 1x5 1
0x1 + 0x2 + 0x3 + 1x4 + 0x5 1
xj = 0 or 1 for all xj in x
|
Knapsack Problem Formulation:
| Maximize: | ptx |
| Such that: | Ax <= e |
| xj = 0 or 1 for all xj in x |
| p = (p1, p2, ..., pn): | Represents a Price Vector |
| x = (x1, x2, ..., xn): | Represents a Bid Vector |
| e = (1, 1, ..., 1n): | Represents a Unit Vector |
|
|
1 if Mortgage I is selected by bid j |
| Each entry aj = | |
| 0 otherwise |
| (where each row A represents a mortgage and each column
in A represents a bid).
|
Southeast Auction Statistics:
Winning bids
- there were 15 winning bids from 13 unique bidders
- one winning bid covered 160 mortgages, the remaining winning
bids covered one mortgage each
- UPB was $907 million
- sales revenue was $710 million
- recovery per dollar was $0.78
Southeast Auction Bidding Data:
Number of Percentage (%) # of Bids
Mortgages
Covered
1 69.50355 490
2 5.67375 40
3 2.69503 19
4 1.13475 8
5 0.85106 6
6-10 3.82979 27
11-20 4.82270 34
21-30 4.11348 29
31-40 0.99291 7
41-50 0.70922 5
51-60 1.13475 8
61-70 0.42553 3
71-80 0.56738 4
81-90 0.85106 6
91-100 0.56738 4
101-110 0.14184 1
111-120 0.14184 1
121-140 0.00000 0
141-150 0.14184 1
151-160 0.28369 2
161-170 0.85106 6
171-174 0.56738 4
Exhibit 5-A. "MAP" - CRA Eligible Letters
Exhibit 5-B. Placed-Based Survey
Exhibit 5-C. Financing Package
