So far, some think the market for distressed portfolios could be more active in 2011.
“We think that the market is going to unfreeze a little bit and there’s going to be more transactions going forward,” said Frank Marshall, president of Default Resource, Frederick, Md., in an interview.
“You can have portfolios that are very distressed sales and people just need to raise capital. There could be situations where maybe the GSEs want to reduce balance sheet a little bit but they also want to maximize upside return on their nonperforming assets. So it could be a variety of reasons,” said Marshall, a mortgage servicing industry veteran who has worked for Wells Fargo and Freddie Mac.
“Really, it’s going to come down to access to capital, which is there,” Glen Calderon, chief executive officer of Default Resource.
“There’s been a lot of money that’s been on the sidelines. There’s going to be appetite to move portfolios at reasonable cost. No one wants to dump this stuff and I think you’re starting to see that. And so it looks like the market could unfreeze a little bit and you could have maybe...companies that have been dormant...that have been in the sector begin to be more active and you could probably see new players coming in that begin to purchase portfolios and maybe platforms,” he said.
It can be a challenge to get consolidated data about the distressed market, but clearly the inventory built up in delinquent loans — be they in modification, performing or nonperforming —combined with continuing unemployment, real estate vacancies and availability of cash suggests that something has to give.
If trade in distressed portfolios increases, “that shadow inventory that everybody talks about and writes about may begin to work its way through the system,” he said.
This probably won’t happen quickly, given a recent Standard & Poor’s report, for example, shows the shadow inventory timeline extending. The two men acknowledge this, noting that that the current supply and demand situation—in combination with retail financing challenges—do not allow for large, fast trades.
Then there is the concern surrounding variances, intensified by high loan balances and wide differences between local markets.
“When you have someone who says the property is worth 80, another person says it’s worth 60 and if it winds up selling for 30 you have serious problems,” Calderon said. “Those variances can kill your PNL on a transaction.”
In response DR tightens up the variances as much as possible, he said. “We...say, ‘Hey, we...have these variances let’s...have a licensed appraiser review it and maybe we can come up with a more reasonable number on the variance,’” said Calderon, who has done both securities trading and residential real estate brokerage work.
He noted that the “elephant” in the room in regards to the distressed market remains the government’ current involvement in it and its ability to play roles in it that private sector cannot, making activity in today’s market a unique private-public endeavor.