Lousy Loans Are Good for Some

The sale of distressed assets has become one of the largest segments of the secondary market, a panelist of experts said last week at the Mortgage Bankers Association’s National Secondary Market Conference in New York.

John Daurio, chairman of Kondaur Capital, Orange, Calif., told a standing-room-only session that roughly $10 billion worth of nonperforming mortgages has been put up for sale in the first quarter alone, “more than we’ve seen cumulatively over the last couple of years.”

Only 30% of that total has actually changed hands because many sellers are simply feeling the market, he added. But even at that, far more has traded than in previous years.

Buyers are even showing an increased interest in second liens, according to Gagan Sharma, president of BSI Financial Services, an Irving, Texas-based provider of subservicing technology and default solutions. “A distinct group of people are comfortable with buying seconds,” Sharma said. James Lockhart, the former director of the Federal Housing Finance Agency, who is now vice chairman at WL Ross & Co., New York, a firm which has built a $1.5 billion mortgage recovery fund to buy bad loans on a bulk basis, said pressure from regulators is forcing lenders to put a lot more bulk packages on the market.

And Lockhart expects far more distressed asset sales to hit the market in the future. We still have a year or so to go to work our way through the huge number of distressed assets, he ventured. The former regulator said the best thing that can happen going forward is to move bad loans into the hands of investors who are willing to work them out one way or another.

“We need to clear the market,” he said. “Too many mortgages are still sitting on balance sheets in need of being resolved.”

Kondaur Capital is one of the nation’s largest buyers of loans gone bad, buying nonperforming assets at about 70% of what the firm determines to be their true economic value.

Daurio said that while the firm’s goal is to keep people in their homes, only 10% are able to remain. The majority end up taking a significant amount of cash in return for handing over the deeds to their homes, while 20% wind up in foreclosure because they have either skipped and can’t be found or the junior lien holder is being unreasonable.

He said it takes an average of six months for the company to resell a property once it takes title. Daurio also reported that he’s been approached by a lot of entities interested in securitizing nonperforming assets, and predicted that at least one bond backed by lousy loans will hit the market by midsummer.