David Tobin, principal of Mission Capital Advisors in New York, attended National Mortgage News' recent Buying and Selling Distressed Mortgage Portfolios Conference and does not agree with those at the conference who said the gaps between bid and ask are too big in this sector.

Tobin, whose firm values commercial and residential mortgage debt and has done $35 billion in whole loan sales since 2002, says the distressed mortgage market is more robust than some would think.

“Deals are happening,” he said. Tobin said that last year there were some $20 billion in trades on single-family nonperforming loans and “scratch and dent” paper, plus about $26 billion in deals on the commercial mortgage side.

And that’s only deals that were reported, he said. Other deals were private and not reported.

Tobin’s firm values both performing and nonperforming loans. Its model values loans in three different ways: as if the loan was performing to term, as if it has been restructured and as if it has been foreclosed on. An A/B structure is set up, based on the current value of the collateral.

For instance, a $1 million loan may be worth $750,000 now, based on a current appraisal. At a 66% loan-to-value, the A piece would be $500,000 at par and the B piece $250,000 of equity yield.

How does it get comfortable with its evaluations? By doing a lot of them. Tobin said the firm will value $40 billion to $50 billion of debt in order to sell $4 billion to $5 billion.

The bid-ask disparity referred to at the conference generally means the distressed asset seller is holding out for a better price on a favorable market turn.

Commercial banks have capital they are using to carry the distressed assets rather than dump them at what they would consider distressed prices.

It can also refer to “bottom fishing” by investors who hope lenders will be tempted to move assets off their books at a lower price.

It’s interesting to think about how this market will develop over the course of the next year. It remains an enormous niche, with hundreds of billions of dollars of distressed assets available and a whole lot more to follow.

Once reasonable expectations can be set for both the buyers and the sellers, watch for the distressed mortgage assets niche to really take off.

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