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NPL and 'SnD' Auctions Gathering Steam

Investors that play in the nonperforming and "scratch and dent" loan market are reporting robust activity this spring, anticipating that offerings will continue strong for the rest of the year.

In particular, the sale of performing scratch-and-dent product kicked back to originators by Fannie Mae and Freddie Mac is catching the eye of new entrants.

"Right now I'm seeing trades in the low 90s (90 cents on the dollar) for this stuff," said one West Coast-based buyer.

"There are definitely more buyers now-and a whole lot more than there were six months ago." Last year such loans were selling in the low 80s.

The scratch-and-dent market is difficult to track or quantify. Investors and sellers of these performing but "underwriting challenged" loans are loath to identify themselves on-the-record, though both Fannie and Freddie have acknowledged they indeed ask certain seller/servicers to repurchase performing loans because of fears that newly unearthed underwriting flaws will eventually result in defaults.

As for the nonperforming loan market, it appears that smaller auctions ($50 million and under) are more plentiful than larger ones.

One reason activity is picking up is that with banks, thrifts and Wall Street firms posting improved earnings the past few quarters, many institutions can now afford to let go of their NPLs.

"In the first quarter we saw billions (worth of loans) that were for sale," said Jon Daurio, CEO of Kondaur Capital, a West Coast-based vulture fund. "We expect the second quarter to be even better."

Daurio and his competitors in the nonperforming loan market are the most optimistic they've been since the credit crisis began in 2008.

Thanks to the housing bust, plenty of troubled whole loans have been available for purchase in the secondary market, but until the past few months there was a wide disparity between the "bid" and "ask" price on these notes.

Often, portfolios were offered only to be withdrawn when the bids did not meet expectations.

Under new accounting rules meant to ease some of the pain of the crisis, holders of problem assets were not forced to mark down troubled loans as aggressively as they had in the past.

This created a situation where some banks delayed selling NPLs with the hope if they waited, they could get a better price as real estate conditions improved.

But with earnings strong the past two quarters, investors say this is allowing some bank sellers to accept lower prices for their NPLs because now they have more cash to weather the writedown blow.

However, many of these auctions or resulting sales are kept quiet unless the Federal Deposit Insurance Corp. is involved.

"The bid/ask has definitely improved," said Jeff Freud, a principal in LoanMarket.net, a website that tries to match buyers with sellers.

Freud also noted that some large sellers of problem loans are breaking their larger NPL portfolios into smaller pieces.

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