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On the Cusp

Think the market for distressed asset sales isn't huge? Attendees of SourceMedia's Buying and Selling Distressed Mortgage Portfolios conference in New York last month heard numbers like this: there are 775 institutions on the Federal Deposit Insurance Corp.'s problem list. Underwater mortgages are now 24% of all loans, with 30% of defaults being strategic ones where the owners walk away from underwater mortgages. More distressed product has been on he market in the first quarter than has been seen for years.

Members of a panel on distressed assets at the recent Mortgage Bankers Association's National Secondary Market Conference were all agreed about the huge potential for sales of these kinds of assets.

James Lockhart, vice chairman of WL Ross & Co., said his firm has a $1.5 billion mortgage recovery program in place. Jon Daurio, chairman of Kondaur Capital, said investors have been paying 70% of the true underlying value of loans in the nonperforming loan market (though obviously that would be a lower percentage on the face value).

Daurio said that there has been $10 billion in distressed product on the market this year, and that at least 30% of it has traded. Of course, that suggests that for the other 70%, there is still a wide disparity between ask and bid prices.

He also said he saw an opportunity currently "for smaller participants to enter this market."

Lockhart agreed that more packages are being offered now. "Banks have capital and they are getting pushed by regulators" to get these assets off their balance sheets, he said. "We need to clear the market." And he said servicers are being "overwhelmed" by a significant number of troubled loans.

Panelist Thomas Goodwin agreed that the business "is on the cusp of a very active market." But he wondered what the prices are going to be, and Lockhart wondered what the secondary market for distressed loans is going to look like.

You can add in numbers like 4 million mortgages 90 days or more delinquent and a total of 7.3 million loans in noncurrent status (numbers courtesy of LPS) and the evidence is overwhelming that this market is about to take off.

Why it isn't more robust now is that financial institutions have been reluctant to move assets off their balance sheets at what they think are lowball prices (this explains the 70% of trades that don't happen because ask and bid prices are so disparate). But that will change, and when reasonable pricing exists, this will be a hot, hot market.

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