Daily Briefing Weekend Edition

Pricing Gap Remains Wide

By Bonnie Sinnock

When it comes to purchases of nonperforming loans, "pricing between buyers and sellers is still far apart," said Jim Beatty, senior vice president and chief valuation officer at Fiserv.

Nevertheless, there is a fair amount of interest in such deals, if the volume of due diligence work in the scratch and dent/nonperforming area is any indication, he said. "There's not a lot of activity going on in the regular-type or performing-type diligence world," Mr. Beatty said, noting that the majority of work involves loans that have "some scratch or blemish."

This is, of course, a product of the current market as reflected by statistics that show it is getting increasingly difficult to get a loan to perform, he said.

Some banks and servicers have been freezing or reducing lines of credit by 25% as underwriting standards tighten, reducing borrowers' ability to pay as the home equity needed to secure borrowings dwindles, he noted. U.S. home equity recently has been pegged at $9.12 trillion, an amount that is lower that than country's total mortgage debt - $10.6 trillion, Mr. Beatty said. This is the lowest level of U.S. home equity since the end of World War II, he said.

Fiserv helps buyers conduct initial analysis of portfolios and possibly close deals through services that support each of the three steps purchasers might take, he said.

The company can provide a cascading automation valuation model assessment and also a more in-depth appraiser-assisted product that might be preferred for loans beyond a certain confidence threshold. The latter at Fiserv is called Prop Score Plus and involves appraisers, several of which have the residential business' highest industry designation, and who determine if a property is overvalued and explain why, Mr. Beatty said.

Buyers have been focusing hard on the home value because of the extent of depreciation in the market; particularly given how quickly housing prices have been changing.

Values have been changing "on a daily basis," he said.

Fiserv uses data from both the well-known Case-Shiller indices and Moody's Investors Service's Economy.com that produce "a true gauge" of depreciation/appreciation.

If even after an appraiser-assisted product is used to assess loan confidence the property value remains outside a buyer's tolerance threshold for errors (this has averaged about 15% recently but varies), buyers may prefer a broker price opinion, Mr. Beatty said.

He said that, given the volatile home values seen in the market, some have been directly getting a broker price opinion and skipping the first two steps, feeling that in today's market it is important to know what the property looks like today.

In many cases, with a scratch and dent or nonperforming loan portfolio, mortgages could have been originated as recently as six months to two years ago and be considered to have a "very old" appraisal that is not representative of current prices, Mr. Beatty said.

Fiserv's BPOs also help shed light on other elements of a sub- or nonperforming loan's context that may affect its value and the price a borrower may want to agree to, he said.

A borrower, for example, may not be maintaining the property, making it important to have "another set of eyes" looking at it, Mr. Beatty said.

Real estate agents working with Fiserv in providing broker price opinions can provide a marketing/listing strategy for the property as well as a breakdown on repairs it may need and whether they are structural or cosmetic, he said.

They also may provide address verifications by means of a photo of house numbers or mailboxes and/or interior shots if needed, the Fiserv senior vice president added.

When both the broker price opinion and appraisal steps have been taken there can be a reconciliation of the two, he said.

Since time can be a factor in nonperforming loan deals, Mr. Beatty notes that it generally provides Prop Score Plus as a "same day/next day" service.

Fiserv's broker price opinions typically can be delivered within five days, although one- or two-day rushes also may be available.

Buyers also may want to keep in mind servicing factors that may influence the value of nonperforming loans in a transfer, said Karen Smith, executive business consultant for Fiserv's loan servicing platform.

Clients who purchase a portfolio generally want to "make sure data points are available" once they make the purchase, she said, noting Fiserv can assist in a transfer. This is a period in which value can be lost as maintaining contact with a borrower, even one who ultimately cannot or will not pay, can be crucial.

Fiserv's competitive edge lies largely in that it has a broad range of technology-assisted services for managing nonperforming loan assets beyond purchase, she said.

For example, Fiserv can assist in boarding loan portfolio information onto a system, if needed, whether it is brought in from an Excel spreadsheet or from one mainframe computer to another, she said.

Also, Fiserv can provide outsourcing to help manage servicing/loan workout workloads, Ms. Smith said. These have been notoriously hard to handle recently given that the spike in sub- and nonperforming products has taxed industry resources.