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Banks Seek $10 Billion of Bids in Effort to Sell Bad Mortgages

Chairman and CEO of WL Ross & Co. Wilbur Ross
Chairman and CEO of WL Ross & Co. Wilbur Ross, speaks during a panel discussion in New York. Photographer: Daniel Acker/Bloomberg

Banks are boosting efforts to sell distressed U.S. home loans, according to two buyers of the debt.

Lenders have sought bids on about $10 billion of troubled mortgages in recent months, more than in all of 2008 and 2009, and probably disposed of about $3 billion of those, Jon R. Daurio, chief executive officer of Kondaur Capital Corp., said today during a panel discussion at the Mortgage Bankers Association conference in New York.

“We’re certainly seeing a lot more packages now,” said James B. Lockhart, vice chairman of WL Ross & Co. and former regulator of Fannie Mae and Freddie Mac, who spoke at the same session.

U.S. foreclosures reached a record 4.63 percent in the first quarter and delinquencies climbed to 10 percent of home loans after unemployment reached the highest since 1983 and property prices fell by the most since the 1930s, according to the Washington-based mortgage-bankers group.

Banks are stepping up their sales in part to clean up their balance sheets so they can be in the running to acquire failed competitors with assistance from the Federal Deposit Insurance Corp., said Thomas Goodwin, an executive vice president at Boston-based DebtX, which runs a loan marketplace.

Lenders may also be seeking to appease equity analysts, who often prefer banks with lower levels of nonperforming assets, he said. Regulators are also pressuring banks to sell bad debt, said Lockhart, whose New York-based unit of Invesco Ltd. is run by billionaire Wilbur Ross.

DebtX Auctions

As more banks explore selling soured housing debt, a smaller share of the loans that they are considering off-loading are actually being sold, Daurio and Goodwin said. Instead of one in five potential deals turning into DebtX auctions, “that ratio has gotten worse recently,” Goodwin said during the session.

Orange, California-based Kondaur is buying delinquent mortgages at about 75 percent of the “true economic value” of the underlying properties, and then usually foreclosing or paying borrowers to move, Daurio said. In contrast, investors buying property seized by lenders, known as real-estate owned, or REO, can’t make much because they face more competition, he said.

“We believe people buying REO are overpaying,” Daurio said.

Lockhart took issue with Daurio saying that the federal government’s Home Affordable Modification Program is bad for debt buyers. Relying on servicers that are part of the program means a “bad economic decision is forced on you,” Daurio said.

HAMP, which Lockhart helped create while at the Federal Housing Finance Agency last year, is good for the country and loan buyers have a moral responsibility to try to help homeowners “keep their houses,” Lockhart said.

“That should be your goal, even if you’re buying non-performing loans,” he said.

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