There’s an awful lot of distressed mortgage product out there. Using the MBA’s most recent nationwide foreclosure percentage of 4.5% and applied to a universe of $9.5 trillion in residential holdings, that’s $374 billion in distressed loans right there. And that doesn’t even take in account commercial mortgages, which went through their own crash a year or two after residential did.
Take the MBA’s most recent overdue rate of 8.32% of all residential mortgages, and that’s another $400 billion of mortgages in danger of default. Yet, this is a market which has yet to see its full potential. We polled our online community at nationalmortgagenews.com and asked: “Will the market for distressed mortgage sales take off this year?” According to the most recent tabulation of the responses, 19% think yes, while 81% think no.
So, what is going on that is hindering the rollout of this enormous market? There seem to be big differences in ask and bid prices, for one thing. Financial institutions seem to be sitting on their capital and waiting for what they feel is a more benign atmosphere before they sell their distressed portfolios. And a lingering liquidity squeeze is preventing the redevelopment of a nonconforming secondary market.
The two jumbo MBS put out by Redwood Trust in the last couple of years, for instance, are probably the most analyzed and scrutinized mortgage securities in history. Not that they are distressed loans. The collateral backing the securities is practically pristine.
But NPL investors are looking at them closely to see if they can get the stalled nonconforming mortgage off the dime.
So far, no takers. Of course, there have been whole loan sales of jumbos and nonperforming, but it is a vibrant secondary market that really sets the table for this kind of business.
Back a generation ago, the Resolution Trust Corp. made markets for distressed mortgage assets, both residential and commercial, and established market prices that moved hundreds of billions of dollars of mortgages off government books. In addition, it created the commercial mortgage backed securities market more or less by itself. This time around, the government has not done a comparable federal agency to dispose of assets, though individual agencies are marketing their bad debt.
But, the private market is stuck, currently. Government efforts currently are focused on turning nonperforming mortgages back into performing ones through loan modification. Maybe Uncle Sam needs to look at the other end of the equation as well.
