Photo: Bloomberg News
Photo: Bloomberg News

Millions of distressed mortgage assets have been resolved. But millions remain unresolved, enough to fuel sales of nonperforming loans for at least three years.

At the height (or trough) of the market there were about 6.6 million overdue mortgages at the end of 2009, according to the Mortgage Bankers Association. Now, there are some 4.4 million, meaning more than 2 million have been cured, modified, liquidated through short sales, or gone through foreclosure. So, how long will it take to process the remaining volume?

Three years, says Rick Sharga, executive vice president at Auction.com. Three to five years, says Chris Whalen, senior managing director of Kroll Bond Rating.

Estimates like these are more than academic exercises. "Returns to normal" are nowhere close to be had in mortgage servicing, the (almost nonexistent) nonconforming secondary market, or the operations of Freddie Mac and Fannie Mae. The continuing logjam of distressed mortgages adds to the continuing distress of mortgage executives.

How many of those 4.4 million will become foreclosures? "It's hard to say," says Whalen. "They haven't been moving very fast."

What's worrying him at least as much is the 8 million to 10 million borrowers whose homes have negative equity or close to it.

"If they can't sell, some will be future defaults," he says. "You still have a pretty substantial block of assets."

Whalen points to commercial banks, saying that they have $160 billion to $170 billion of single-family distressed assets on their books. Add in at least as much for Federal Housing Administration loans, and "the opportunity is still pretty large. You'll see investors continue to focus on it."

Another stat he points to is also from MBA, that more than 6% of mortgages are overdue. "That's very, very high historically," he says. MBA says a more normal amount is 5%.

Defaults on more recent books of business are very low, as stricter underwriting standards have been applied. "But don't be lulled into a sense of false security," Whalen warns.

NPLs are a better buy than real estate owned for investors, he argues, saying the spread between an REO property and a non-REO one "is gone." REO prices have moved up to the same range as voluntary sales because inventory has tightened, he claims.

NPLs, though, can be bought for 50 cents on the dollar. "NPLs are easily the best strategy for investors," says Whalen, who will be a speaker at SourceMedia's upcoming Distressed Residential Mortgage Summit in New York. Second-best is to buy an excess servicing strip, while turning the properties into rentals is "a distant third."

Sharga feels the market will be "back to normal by 2017." He too thinks that recent books of business, dating back to the second half of 2012, are performing solidly. "Credit standards have been tightened, and marginal people aren't getting loans," he says.

NPLs remain hot, Sharga agrees. "There’s still a lot of appetite for that, but there are a finite number of those loans out there. NPLs [trades] may well peak this year" and there could be pressure on supply.

Sharga sees an opportunity for investors in the trading of mortgage servicing rights, as more product gets into the hands of specialty servicers, which are more efficient at resolving overdues. However, regulatory interventions in such trades are “also a concern,” he says, with New York's Benjamin Lawsky halting a sale of MSRs to Ocwen potentially just “the tip of the iceberg.”

According to MBA's most recent numbers, for the fourth quarter of 2013, 6.39% of all single-family mortgages are overdue, while 2.86% are in foreclosure.

These numbers are at their lowest since 2008, suggesting that Sharga's right: We're close to peak NPL.

Mark Fogarty, Editor at Large at National Mortgage News, writes analysis and commentary based on his 30 years covering the mortgage industry.