Scratch & Dent Buyers Await Bailout Details

Washington-The sale of large scratch-and-dent loan packages has just about dried up as the mortgage industry waits to see how the government will implement a $700 billion rescue package for the capital markets.

According to interviews with market participants, small scratch-and-dent portfolios ($50 million or less) are still being circulated to potential investors but large deals are - for now - becoming scarce.

"Guys with large inventories - JPM, Morgan, Lehman - aren't selling," said one investor. "They're waiting to see what happens with the Treasury deal."

The only exception in the large deal landscape is a $14 billion package of whole loans the government is selling on behalf of IndyMac Bancorp but it appears that package is tied to a "whole bank" transaction which may or may not come off. Last week the Federal Deposit Insurance Corp. once again declined to give any guidance on the sale of IndyMac.

Meanwhile, prices offered for subperforming and nonperforming loans have hit rock bottom.

One West Coast bidder, requesting anonymity, said bids on first-lien portfolios are starting out in the mid-70s (cents on the dollar) and settling at 55 cents. He said this is the price paid for delinquent or what he called "subperforming" mortgages.

The market for scratch-and-dent second liens is much worse, he said. Nonperforming seconds are selling at one-tenth of a penny and performing seconds for just 8 cents to 10 cents on the dollar.

A year ago, nonperforming firsts - depending on where the collateral was located - were selling for 70 to 80 cents on the dollar with nonperforming seconds going for 5 cents to 15 cents.

Jeff Goldware of Terpsichore Financial, Orlando, Fla., fears that once the Treasury starts buying troubled subprime bonds and loan pools it could actually drive down prices in the scratch-and-dent market.

"If more product comes to market that means prices will come down," he said.

Mr. Goldware said this past week he saw a handful of smaller loan packages ranging in size from $15 million to $50 million. The sellers, he said, were banks and thrifts. He added that many buyers of large packages "are waiting to see what happens with Treasury." In the weeks ahead the Treasury Department will begin setting up a structure to buy troubled mortgages and MBS (it's anticipated that subprime will account for a majority of Treasury's purchases) from depositories, investment banks, thrifts and other financial institutions.

Mr. Goldware predicted that if the government links executive compensation (in particular "golden parachutes") to participation, some sellers "will not participate unless they are in dire straits."

Meanwhile, scratch-and-dent investors told Mortgage Servicing News that they are beginning to see credit unions and homebuilders enter the market. "We're beginning to see credit union pools," noted one buyer.

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