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Bank Profits Spur an Increase in NPL Auctions

With banks and thrifts posting improved earnings the past few quarters, many institutions can now afford to let go of their problem residential loans, leading to an anticipated boom in auctions-with deals actually closing. "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."

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 Also, oftentimes portfolios were offered only to be withdrawn when the bids did not meet expectations.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

Mr. Freud also noted that some large sellers of problem loans are breaking their larger NPL portfolios into smaller pieces. "They can get a better price on certain assets," he said, "instead of accepting an 'all-or-nothing' bid."

Another West Coast investor described the NPL market as "exploding." This source did not want to be identified because he is working on several deals valued at $27 million.

He noted that if the market continues at this activity level he will raise additional money from private equity backers next year.

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