Boom or Bust for 4Q NPL Sales?

The fourth quarter is typically the time of year when mortgage bankers sell anything that isn't nailed down so they can "make their numbers." This can include anything from servicing rights to MBS, and loans with imbedded gains.

Then again, making money on loan or servicing sales isn't a common occurrence these days. Most firms that are raking in the dough are originators benefiting from the huge spread between their cost of funds and the note rate on what they are producing. Add in all the fees they can now charge because of a lack of competition and the business looks pretty good.

Of course, interest rates aren't going to stay this low forever. And with some firms (JPMorgan Chase, among others) earning money hand-over-fist there is increasing speculation that between now and yearend a plethora of nonperforming loan auctions - both first and second liens - that aren't tied to the Federal Deposit Insurance Corp. might actually happen. And these loan sales might even be announced publicly, a rare occurrence these days. (See my column of a few weeks ago.) "We're more optimistic that sellers will finally realize that the improvements we're seeing in the housing market are really ephemeral and that they'll finally decide to sell something," said Jon Daurio, chief executive of Kondaur Capital, an Orange, Calif.-based vulture fund. "I thought this way back in 2007 and it didn't happen. In 2008 it did." (Kondaur is actively bidding on deals.)

One Midwest-based vulture fund executive reasoned that strong earnings can offset losses that will be taken when nonperforming loans are actually sold and taken off the books of an institution. "If a bank has a big fourth quarter they can afford to take the NPL hit," said the executive, requesting anonymity.

He and others that play in the market are clear on one point: there is no lack of bidders for NPL portfolios. On a recent a deal where Deutsche Bank offered $100 million in troubled loans there were 18 bidders, he said. "Eighteen bidders is great. It's out of this world." (Deutsche Bank's public relations official declined to comment.)

Don Curtis, national sales manager for Franklin Credit, Jersey City, said despite all the interest in the NPL market "things have been quiet lately" even though "there are plenty of equity funds out there looking to buy." He noted that one strange thing is happening in the market: "Some of these equity funds are handing the money back to their investors because they can't get any deals done."

But he, too, believes that during the fourth quarter (which is just a few weeks old) there could be an increase in NPL transactions, including the sale of both first and second liens. "This time of year there is always balance sheet cleanups going on," he said. "At least that's what we're hoping for."

He also lamented the lack of transparency in the market. "There doesn't seem to be much publicity on deals," he said. "I guess everyone is just trying to keep their heads down. They don't want to attract any attention."

However, late last week sources close to the situation confirmed at least one transaction: Dreambuilder Investment LLC, New York, bought a $400 million portfolio of nonperforming second liens from PNC Financial Services, Pittsburgh. The deeply discounted HELOCs belonged to National City, Cleveland, which PNC bought late last year. Both parties, of course, declined to comment for the record.

Paul Muolo can be e-mailed at Paul.Muolo@SourceMedia.com.