What will happen to all the problem real estate loans that have multiplied exponentially it seems, in the past few years? That’s a topic as hot as today’s headlines. We’ve just reported that Ally Financial sold off $596 million in nonperforming loans during the fourth quarter. Citigroup was not far behind, at $517 million in NPL sales during this quarter. Bank of America has just started a toxic mortgage unit to handle 1.3 million troubled loans.
There is a massive amount of troubled mortgages to be bought and sold out there, and as banks become more ready to get them off their balance sheets and free up capital that can be used for lending, there will be more and more of them over the next several years.
And it’s not just residential mortgages. Commercial mortgages have crashed as spectacularly as residential, creating another pool of distressed assets that will have to be resolved by lenders.
The only thing that has kept this market from absolutely booming is a discrepancy between many bid and ask prices, as financial institutions are unwilling to let them go at prices they deem too bargain basement.
There is plenty of money to be made in these waters, as long as the metaphor “bottom fishing” doesn’t scare you away (or the more lofty, at least in terms of geography, “vulture fund”). Buying something at 40 cents on the dollar and selling it for 60 cents on the dollar will make investors wealthy in short order.
One good result of the government’s efforts to sell off bad assets from failed savings and loans back in the 1990s was that the market was active enough to establish prices. “Junk bonds” were an important part of the crash and were initially thought to be worthless. But they weren’t worthless. The Resolution Trust Corp. sold many billions of them. Certainly, they were deeply discounted. But they weren’t worthless.
The RTC also firmed up prices for bad commercial mortgages and by packaging them as securities helped create the CMBS market as we know it today.
Many investors made a lot of money back then by buying low and reselling for a profit. In some cases, loans were sold as nonperforming when, in fact, the government had not tried to collect monthly payments from borrowers. So investors got a performing loan (in many cases) for the price of a nonperforming one.
