Purchasing Nonperforming Loans

These days, most people in the mortgage industry are more interested in selling nonperforming and subperforming assets than in buying them. Yet an industrywide fire sale may be setting the stage for a comeback in the subprime mortgage arena.

Already, numerous hedge and private equity funds have been formed to buy the mortgage assets that nobody else seems to want. And some private equity groups are even raising funds to originate subprime mortgage loans, betting that this segment of the industry will eventually make a comeback.

Most people you talk to think that someday, some of the smart bottom fishers are going to make the rest of us look like fools. They'll buy the loans and mortgage securities that everyone else is shunning, and then sell them once the industry has regained its footing and subprime credit quality borrowers don't look so toxic anymore. Or they'll just keep the assets and reap profits from the continuing cash flow. Either way, people on the sidelines will be left wondering, "Why didn't I think of that?"

Of course, being a successful buyer in today's market requires a strong stomach for risk. Most experts think the market is far from finished working through its problems. In fact, some are projecting that potentially hundreds of billions of dollars of writedowns related to subprime mortgage assets remain to be realized.

And then there's the debate over housing prices. After rosily predicting at worst a "soft landing" for the once-flying sector, economists are now sharply divided on the prospects for home prices. Some say prices - especially in high-cost areas - need to drop much further to be in line with historical parameters. Others point out that in most markets, housing prices never did get severely out of whack and steep losses are still unusual.

The only thing that's certain is that for the subprime mortgage market to feel a bottom and begin recovering, home prices will have to stabilize. And the people who make the right call on that issue will be the ones who profit from today's turmoil. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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