Distressed Asset Investors Hold Firm on Bids
A number of companies formed in the wake of the collapse of the subprime market are looking to turn a profit on distressed assets, but sales have been few and far between. Jon Daurio, chairman and CEO of Kondaur Capital, a scratch-and-dent purchaser/servicer, said there is no shortage of mortgages to bid on.
He said the number of scratch-and-dent mortgages in the market at the moment "infinitely dwarfs" the number available in the early 1990s. Daurio said the bid-ask on distressed assets is closer than it was a year ago, but he suggested that sellers are still asking for too much money.
"The bid is not going up; ask prices are coming down to realistic values," he said. Sales of distressed assets are currently driven by companies’ need for liquidity. "It appears that a lot of sellers have a need for cash," Daurio said.
Kondaur received more than $150 million in capital support from an undisclosed financial institution this week to expand its loan purchasing capacity. Daurio co-founded subprime lender Encore Credit Corp. and was a senior vice president at subprime lender Long Beach Mortgage Company.
He said some of Kondaur’s competitors are incapable of delivering on promised services. "We are hearing the horror tales of unsuspecting sellers dealing with these new entrants who demonstrate a surprising level of inexperience in scratch-and-dent transactions," he said. "They simply do not know how to conduct purchase and sale trades or provide basic customer service."
Daurio said some companies are making bids on assets and then extending the sale’s closure, waiting for dropping property values to strengthen their positions. He said a "final bid" often is often unreliable. When a pool bid is accepted, Daurio said the deal should close within four weeks, if not two weeks.
Servicing Issues
After acquiring a mortgage, Kondaur re-underwrites the borrower to consider a possible refinance, reduction in principal, cash-for-keys or a sale of the property. In a cash-for-keys scenario, Kondaur will pay a borrower’s deposit on an apartment and moving expenses. Kondaur is not a long-term buyer. Daurio said the company holds most of its mortgages for fewer than 180 days. Kondaur and Vantium Capital, another distressed asset purchaser and servicer, purchase whole loans.
Vantium also takes a personalized approach to loss mitigation and will not complete blanket loan modifications. Amy Brandt, CEO of Vantium, said the average employee at Vantium handles 180 assets, while the industry average is 800 assets per person. Vantium owns 40 percent of the assets it services, with the rest of the company’s portfolio owned by investors. "We have skin in the game," Brandt said.
Daurio said Kondaur originally planned on refinancing most troubled borrowers, but with a complete retraction of the non-agency MBS market, financing has been scarce. And he noted that most of the mortgages Kondaur acquires are not eligible to refinance into an FHA mortgage. Often the borrowers have not made a payment in a year. He said borrowers often inflated their incomes to qualify for mortgages.
"Borrowers bought homes they couldn’t afford due to stated income," Daurio said. Ocwen Financial, another special servicer, turned a profit again in the third quarter of 2008. Ocwen reported net income of $15.6 million for period, more than double the $6.0 million in profit it reported in the third quarter of 2007.
The company’s loan servicing segment drove profits in the third quarter of Ocwen shrank its portfolio. The company had $41.75 billion in subprime servicing period, down from $44.83 billion the previous quarter, according to Inside B& William Erbey, Ocwen’s chairman and CEO, noted that the company is considering spinning off Ocwen Solutions as a separate, publicly traded company. Ocwen provides technology products, outsourcing services and debt collection.