In the early days of the financial crisis investors were lining up for the mother of all loan auctions. It was thought to be the best buying opportunity for bad debt since the S&L crisis. And then a funny thing happened: banks and investment bankers decided not to dump their nonperforming loans, at least not in large numbers—or at fire-sale prices.
In time, the reasons became apparent: selling at severely depressed levels meant that financial institutions would have to take larger hits than their established reserves, causing a potential blood bath in earnings. To boot, the ensuing robo-singing scandal and numerous state and federal probes of alleged corporate lending/servicing malfeasance caused both buyers and sellers to freeze in their tracks.
Investment money that had been plowed into special NPL private equity funds slowed. In some cases firms closed or scaled back their goals significantly. (Remember Kondaur Capital?)
But since last fall investors in NPLs have noticed a considerable pickup in activity with banks dropping their reserve bids, and sellers increasing their offering prices. In short, some players believe that a bottom has already been reached, which means hundreds of billions of dollars in NPLs could change hands over the next two years.
“The biggest change in the market since October has been the bid/ask,” said one West Coast-based bidder. “Some of the bids have been too high for me which is why we've been on the sidelines lately.”
Of course, the market continues to be secretive with both buyers and sellers continuing to talk about deals but without attribution.
Over the past six months the most active sellers are firms that you might expect: Ally Financial, Aurora Loan Services, Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo. (Note: The biggest potential sellers continue to be Fannie Mae and Freddie Mac, but don't hold your breath on that one.)
The winning bidders have been identified to National Mortgage News as Bayview Financial, Fortress Investment Group, Lone Star, PennyMac, Residential Credit Solutions and many others. This group is considered the “household” names of the sector while there have been plenty of buyers whose names aren't recognizable to the rank-and-file mortgage worker.
Firms that have been brokering deals run the gambit: everyone from the biggest on the Street like JPMorgan and Wells to Citigroup, but there have been smaller trading firms as well, including MountainView Capital and Interactive Mortgage Advisors.
As for pricing, several recent national pools have sold at 40% of the unpaid principal balance. According to on analytics report provided to NMN, “Final pricing ultimately depends on the profile of the assets and the financial wherewithal of the seller.” The report notes, “Wells Fargo still provides MI reps and thus buyers pay a premium for that.”
Going forward, the key to the market will be the bidders and what they're willing to pay. But some caution the recent activity could be ephemeral. “There are also significant fund-to-fund retrades as well as off-the-radar reverse inquiry trades that are taking place between accounts,” writes one analyst. “Essentially, there is unlimited product in the market that can be purchased by anyone with an above-market bid.”
