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More Action In Mortgage Debt Mart: Volume Of Problem Loans Sold Rises, But Prices Keep Falling.
Two years ago, Mission Capital Advisors typically helped sell some $1 billion of bad mortgage loans every 12 months. That pace has picked up and in the last year the New York company has advised lenders on the sale of as much as $5 billion worth of problem home loans amid the souring housing market. "Everyone's foreclosure and REO (real estate-owned) exposure is rising. They are looking for ways to alleviate that burden," says Joseph Runk, one of the co-founders of Mission Capital.
Demand for Mission's services from mortgage companies and money center banks has risen in recent months because of the downturn in housing and the tighter credit markets that have slowed Wall Street's securitization machine. These days, it is tougher to sell mortgage- backed bonds pooling subprime home loans and Alt-A mortgages. Spreads on these securities have widened dramatically and some lenders are not portfolio lenders, so they want to sell their mortgages. The only way for some to get rid of that debt is to sell it as whole loans - that is, unsecuritized debt - to other lenders or investors such as hedge funds.
At the same time, some lenders sell loans that have been kicked out of mortgage-backed bonds because these loans have seen late payments early on, or defaults. Typically, Mission is retained by a lender and the advisory firm then sends out basic details about the loans for sale to a pre-qualified list of 50 to 100 people, many of them institutional clients. The highest bidders then get more information that offers more specifics about the mortgages so the buyer can judge if these loans can be cured. Since its inception in May 2002, Mission Capital has advised on 100 transactions worth more than $11 billion.
The pools of residential home loans can run from $50 million to $1 billion in size.
In addition to selling residential mortgage debt that is either delinquent or defaulted, Mission helps arrange sales of troubled commercial real estate mortgages for regional and community banks. Some of the banks turning to Mission Capital have been hit hard by the condo downturn in Florida and the general economic malaise in the Midwest.
The commercial mortgage loan pools usually are up to $100 million and each mortgage in these pools can be about $1 million to $50 million. In the case of the commercial mortgage loans, each mortgage can be bid on a loan-by-loan basis.
These days, though, the disparity between what sellers hope to get for their problem home loans and what buyers are willing to pay - the bid-ask spread - has widened, according to Mission's Runk.
For example, the typical $100 million pool of mortgage debt to subprime borrowers with 90-day delinquent loans, loan-to-values of 85% and FICO (Fair Isaac & Co.) credit scores of 600 to 650 would get 80 to 85 cents on the dollar two years ago.
In the current market, that very same loan pool gets bids of around 60 cents on the dollar, says Runk. "You get bids at 60 and the client says it's worth 70." What's behind the drop in prices?
For starters, a slowing economy and a heavily indebted consumer have likely made many investors wary of taking on more home loans. Just last week, the American Bankruptcy Institute reported that petitions for bankruptcy protection by consumers jetted 15.2% higher in February from the previous month - the highest single month since the 2005 bankruptcy law was enacted.
"You are being asked to look at an asset class with huge inherent risk," says Runk, adding that buyers of the mortgage debt are unsure when securitization will become routine. "Will it come back in six months or 12 months or 18 months? No one knows."
Also, many investors buying the pools of distressed loans are unsure how many of the borrowers in the loan pools will be able to refinance their mortgage. Ideally, a distressed loan is cured through a refinance and performs long enough to make it palatable for a securitization. Many borrowers cannot as readily qualify for a mortgage refinance and that means investors have to plan on foreclosing on the property and reselling it. "People are not pricing a 60- or 90-day delinquent loan as if it will re-perform," says Runk.
Some of that inability to readily refinance may be tied to the fact that many borrowers have seen their home values decline while their borrowing costs have risen. US housing agency Freddie Mac said last week its measure of home prices fell in the fourth quarter, following a third-quarter drop, the first time there have been two consecutive quarters of price declines since 1982. The housing agency's Conventional Mortgage Home Price Index Classic Series saw a 0.5% drop in US home values in the fourth quarter of 2007, following a third-quarter drop of 1.5%.
The Freddie Mac index takes into consideration loans for home purchases and refinancings. Freddie Mac also produces a gauge that tracks home sales and this index showed that home prices fell 9.3% nationally during the fourth quarter. That is the largest drop in home prices since the third quarter of 1972. "Buyers [of problem loans] won't assume anything but continued house price depreciation," says Runk.
Also, lenders selling troubled loans may not be getting the best prices these days because many buyers have seen their own credit dry up or become more expensive. "You are using precious capital to buy a loan that will sit on a balance sheet," says Runk, noting, though, that "hedge funds and PE funds have stepped up their presence" in the market for troubled mortgage loans. In addition to these funds, Wall Street non-performing loan desks have been known to buy the troubled mortgages. However, this demand has ebbed because some of the biggest buyers of non-performing mortgages have been tripped up by problems within the collateralized debt obligation and collateralized loan obligation markets. Runk would not say which Wall Street firms have been the biggest buyers of the troubled loans. "We're very shy to hand out names."
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