In note investing, large entities such as Fannie Mae (OTC: FNMA) will, from time to time, offer nonperforming loans for sale as part of a community impact pool (CIP).
This designation means the group or pool of loans being sold is in a targeted geographic area, making it an ideal investment from which a singular entity -- such as a nonprofit organization, minority- or women-owned business (MWOB), or smaller investor -- can acquire assets, provided the investment positively impacts the community.
Community impact pools are a form of positive impact investing that requires the winning bidder to implement borrower-retention and foreclosure-prevention strategies into the management and workouts of the loans. Borrower retention keeps homeowners in their homes, allows them to retain any equity built (a pillar for building wealth), and helps them achieve stability in housing while reducing the risk for increased vacancies or distress for the local housing community.
In many ways, it's a win-win-win. Many borrowers can stay in their homes if desired, the buying entity can purchase loans at a discount while earning a return and impacting the community positively, and Fannie Mae can align their portfolio management with a positive social impact.
Only qualified bidders can purchase nonperforming loans from Fannie Mae. These are primarily large, well-funded investment firms or hedge funds with experience in this field. Nonperforming notes are usually sold at a significant discount from the broker's price opinion (BPO) and unpaid loan balance.
This allows the purchasing entity the flexibility to earn a return while accounting for the expensive cost associated with the management of nonperforming assets. But competition in this industry has become fierce over the past few years.
This has led to many of these same firms creating spinoff nonprofit organizations to access more exclusive inventory. Because Fannie Mae considers who the buying entity is and what their plan is for making a lasting impact on the community, there is an increased likelihood of less competition as fewer bidders qualify for the pool purchase.
Fannie Mae recently announced its 18th community impact pool sale, which is one of four pools having a total of 11,400 nonperforming loans (NPLs) with an aggregate unpaid balance of $1.7 billion when grouped together. The loans are located in the New York area, with CIP final bids due by October 19.
The winning bidder for Fannie Mae's 17th CIP sale in May of 2021 was real estate investment trust (REIT) Great Ajax Operating Partnership, L.P. (Aspen). The last sale prior to that was in September 2019 and sold to private investment firm Matawin Ventures XXIX, LLC.
The Millionacres bottom line
Community impact pool investing isn't something most real estate investors will be able to access. Because of the large capital requirements and the experience and expertise needed to meet Fannie Mae's expectations and impact requirements, it's really an investment opportunity available to large investment firms.
Everyday investors can, however, gain access by investing in REITs or other investment funds actively purchasing and managing these assets. But as with any investment, it's important to understand the risk of investing in nonperforming notes, directly or indirectly, and conduct your own due diligence on the managing firm or REIT.