Setting The Stage

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56 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest SECONDARY MARKET examining loan sales in today's market David LeBlanc, managing director for DebtX, discusses what he's seeing today. i n recent months, institu- tional investors seem to pre- fer buying non-performing loans instead of more solvent ones, according to David LeBlanc, managing director of capital markets at DebtX. His company is the world's largest online loan sale advisor for buyers and sellers of commercial, consumer, and specialty finance debt. LeBlanc said this action is thought to be caused by the de- creasing margins available in real estate acquisitions. These types of loan sales are expected to increase as a result of new regula- tions forcing depository institu- tions to shed their bad loans to avoid increased holding costs and reserves. There are still 2.2 million loans delinquent or in foreclosure for 90 days or more, according to reliable market reports. "Although the whole loan market has been variable in the last few years, the residential whole loan market last year was the busiest in recent memory," Leblanc said. "I think this year is probably going to be even busier for private market activity." He explained the market can be characterized by three things— liquidity, velocity, and pricing. In addition, he said financing for participants is easier than it has been since the housing crisis. Other factors influencing the increased sales include increased prices, increased access to capital, increased access to leverage, and increased transparency. He said all of these factors result in stimulating transaction volume. He explained there is more transparency in the market today than there has ever been, particularly in the residential sector. "It was not so long ago when transactions were so few and far between, if there was a portfolio on the market, you did not really have a lot of clarity regarding the way that portfolio would clear, but that is not the case today because there is very good data available to market participants," LeBlanc explained. He suggested this additional transparency gives market players more assurance in the market and therefore more confidence to buy. LeBlanc estimated the size of the residential market is now somewhere between $40 billion and $50 billion. The commercial market is somewhat less as it probably peaked a couple of years ago, he explained. "I think the largest seller of resi- dential whole loans is the FHA [Federal Housing Administration], and then probably the top 10 banks. Those two categories are by far the largest," he said. Although his company handles a lot of transactions with smaller banks, he said in general, DebtX works with large financial institu- tions in the purchase of large transactions, mostly on the selling side. In addition, they also work with smaller organizations on the buying side. David LeBlanc Average residential sales handled by DebtX are in the $500 million plus range and are for the most part sales from institution to institution. However, the transactions DebtX is most actively involved in are in the $50 million range. These are secondary trades with a large fund or a large bank on one side that is selling off a small portion of their portfolio to a smaller fund. It used to be many investors would buy a non-performing loan and then roll it. Now, however, LeBlanc said it's too risky to sell a loan to someone who just wants the real estate and does not want to work with the borrower. "I think that many times the strategy is to convert a non-performing loan into a performing loan, and frankly we see that all the time because one of the resells we do for larger institutions are loans that two years ago were non-performing. They are now performing, and I can sell them at a 25 point profit." He also said the most important characteristic investors look for today is collateral value, and "loans today are trading closer to collateral value than we have seen since the crisis." Presently, the most popular product sold through DebtX is "anything with cash flow followed by anything that is a quality asset in a recovering market." Forecast for 2014: LeBlanc said this will continue to be a sellers' market and buyers are going to see more and more products. "You kind of get concerned whether or not the demand will be there," he said, "but we have not seen anything close to satiating the market for at least the last 18 months." His prediction is there will be a year or two of a continued seller's market consisting of large investments, and then slowly but surely, the definition of large will begin to shrink. "So, if large today is a billion, next year, it may be $500 million, and a year after that, it may be $250 million, and so on," he said.

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