The key to solving the housing crisis is the disposal of billions of dollars worth of nonperforming loans sitting on the books of the nation’s depositories and investment banks. But now that the mortgage industry has been wracked by the “foreclosure-gate” crisis the NPL market may be the next victim of this fast growing mess.

According to interviews with players in the NPL space, the situation now boils down to this: Why purchase a nonperforming mortgage when one of the avenues of disposal—foreclosure—has been shut down by the nation’s politicians and courts?

A key concern for buyers in the market is establishing clear title to a house. With so much fear out there concerning lawsuits, investors are expected to sit on the sidelines for several weeks before reassessing the situation.

One vendor who works in the NPL space said that the “entire market (for NPLs) is at a stand still right now. I can’t tell you how many phone calls we’ve been getting over the past week.”

A West Coast-based investor in NPLs, who has been an active buyer of notes for three years, saw the problem a little differently.

Speaking under the condition his name not be used, he described foreclosure-gate as a “pile driver” on the NPL market. “Massachusetts, Maryland—everyone is declaring moratoriums on foreclosures,” he said. “How do they expect any business to get done out there?”

But he did see a silver lining in the crisis, noting that some sellers of NPLs are finally coming to their senses on price expectations. “Two months ago a group wanted me to buy a $23 million pool for 24 cents on the dollar. They came back to me recently and were willing to take 20 cents,” he said. “I might offer 15 cents.”

Meanwhile, public information on NPL sales by the nation’s banks continues to be scarce. Many institutions won’t disclosure their sales, although certain investors and advisors that broker sales will. This past summer Citibank was actively selling a handful of nonperforming residential loan portfolios, including three pools in the $90 million range, according to one advisor.

Citibank declined to comment, but a recent research report from Sandler O’Neill notes that the bank is a “willing seller” of NPLs, adding, “Citigroup has and will continue to take advantage of the willing market as the company attempts to keep its balance sheet as clean as possible.”

As for the nation’s growing foreclosure crisis, several states are asking for additional moratoriums.

Many of the nation’s largest servicers—Bank of America, Wells Fargo, JPMorgan Chase and GMAC—are in the crosshairs of state attorney generals from coast to coast for cutting corners on their foreclosure processes. Ohio, last week, filed a civil fraud suit against the government-owned GMAC, accusing it of foreclosure fraud. GMAC countered that it did nothing “fraudulent,” adding that it will “vigorously” defend itself in court.

Most megaservicers admit they made processing mistakes, but also claim they have fixed their errors, or are in the processing of doing so.

One vendor who workers with servicers said, “The law is the law but [House Speaker Nancy] Pelosi is doing this for political purposes. This is all form over substance.”

Pelosi has requested that the Department of Justice launch a probe of foreclosure practices with attorney general Eric Holder saying he will look into the matter.

Residential servicers are responsible for reviewing foreclosure documents before signing the affidavits, but in the so-called robo-signing cases they relied too heavily on their attorneys who prepared the documents, according to Lender Processing Services chief executive Jeff Carbiener.

LPS, a technology and document service vendor to mortgage bankers, said isolated instances of errors in the system are now being brought out and pointed back to robo-signing, making it sound like a large percentage of these transactions are invalid. “That is not the case,” said Carbiener.

Because it is a vendor to servicers, LPS has been named in some of the foreclosure-related lawsuits.

“Although LPS has not been served, we are aware that lawsuits seeking class certification have been filed against many defendants, including LPS, seeking class certification alleging unlawful fee splitting and unauthorized practice of law,” he said.

Carbiener noted that LPS provides technology and data entry services for its clients. He does not believe the plaintiffs will be able to achieve class certification.

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