Recently as I chaired the SourceMedia Buying and Selling Distressed Mortgage Portfolios Forum in New York City, I was thinking about this huge market and how it hasn't quite opened up wide yet. But surely it is in the process of doing so.
Here's what I told attendees:
Anything interesting happen since we met here a year ago? Well, for one thing, there's still an awful lot of distressed mortgage product out there.
Using the Mortgage Bankers Association's most recent nationwide foreclosure percentage of 4.5% and applied to a universe of our own estimate of $9.5 trillion in residential holdings, that's $374 billion in distressed loans right there. And that doesn't even take into 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.
There are deals being done out there. Citigroup has a lot of bad real estate and has been offering it for sale, as have Ally Financial, JPMorgan Chase, and Wells Fargo. And NPL deals are getting done on the commercial side as well. We recently reported the sale of a $2.7 million mortgage on a multifamily property here in New York City, brokered by a company which has done $50 million in commercial NPLS.
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, 20% think yes, while 80% think no.
So, what is going on that is hindering the rollout of this enormous market? There seem to be sizeable differences in ask and bid prices, for one thing. Many 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 vigorous 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 market (which would include distressed assets) off the dime.
So far, few takers. Of course, there have been whole loan sales of jumbos and nonperforming loans, 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 bad 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. Existing agencies like the GSEs, FHA and FDIC are mounting their own NPL efforts, and the list of troubled institutions with FDIC insurance seems to grow by the day.
But, the private market is having some trouble getting unstuck. 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.
