More Stable NPL Market Emerging

St. Louis-The mortgage industry is seeing a new marketplace emerge for nonperforming loans.

Buyers of these loans have a much better handle on the risk adherent in different loan categories today and can better value them, says Scott Stern, CEO of Lenders One, an alliance of 150 mortgage bankers.

"We have seen the market for nonperforming loans go from 90 to 95 cents on the dollar, which was probably a little overexuberant, to markets where literally it was zero to 10 cents on the dollar, which was overly pessimistic," said Mr. Stern. "Today, we are seeing a marketplace where buyers have a more analytical approach to value."

Right now less than a handful of lender members in his network are dealing with repurchase. "Over the past two years, there would have been less than 20 of our members who worked through the issue of underperforming loans. They did work through those issues and now most of those loans have 'gone through the system,'" he said.

"We're fortunate that as of October 2009, it's a greatly reduced problem compared to a year ago, because there were a lot more subprime and alt-A lenders. Many of those loans have been worked out, refinanced or converted to FHA or conventional."

While the environment appears to be much more stable these days, there continues to be a market for nonperforming assets. There is a significant pool of buyers and, unfortunately, there are plenty of sellers.

"We have seen the emergence of a marketplace with price stabilization and I think that's good for the industry," said Mr. Stern.

"Without price stabilization and wide fluctuations in the value of nonperforming assets, you would always hear the question, 'Where's the bottom?' And when nobody knew where bottom was, the market tended to freefall. But now we tend to have a stabilizing market in the nonperforming world and I think that has given some price confidence to the whole industry."

Yes, things are better, but Mr. Stern says the problems are not over because like so many others out there, he is hearing about the next wave of pay-option ARMs, and the next wave of subprime 2/28s and 3/27s.

"But I think the market has achieved a certain level of equilibrium. It's not freefalling anymore. And there's more price confidence or price stabilization. I'm not suggesting that the worst is over, but I am suggesting that there's been some market stabilization," he adds.

On a very positive note, there is a significant network of specialty servicers who are working with distressed buyers to try and convert these nonperforming loans to get them to perform.

Specialty servicers have become quite sophisticated. "They are quite adept at problem solving, helping borrowers modify and refinance loans. "They are reaching out to borrowers in ways the traditional servicer couldn't do. And so, the specialty subservicer community has really helped as well."

The subservicing community has incredible tools and resources at their disposal.

"They commit those resources to helping the loans perform, to working with buyers and their situation, to working with the loans and the issues which are responsible for the loan not performing. They have done a lot to help stabilize the market."

When a Lenders One member has to repurchase nonperforming loans, the company works with its members and the members network with each other to help with the disposition of those loans. They work together to help find buyers, to help train specialty servicers, and in some cases, members have actually helped purchase nonperforming loans of other members.

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