The market for nonperforming loans — billions of dollars of which are still sitting on banks' books — may be the next casualty of the fast-growing foreclosure document crisis.

Players in the NPL business say the situation now boils down to this: Why purchase a nonperforming mortgage when one avenue of disposal — foreclosure — is being delayed?

A key concern for buyers is establishing clear title to a house. With so much fear out there concerning lawsuits, investors are expected to stay on the sidelines for several weeks before reassessing.

One vendor who works in the NPL business said that the "entire market is at a standstill right now."

A West Coast investor in NPLs, who has been an active buyer of notes for three years, saw the problem a little differently. Speaking under the condition his name not be used, he described foreclosures as a "pile driver" on the NPL market. "Massachusetts, Maryland — everyone is declaring moratoriums on foreclosures," he said. "How do they expect any business to get done out there?"

But he did see a silver lining: Some sellers are finally in agreement on price expectations. "Two months ago a group wanted me to buy a $23 million pool for 24 cents on the dollar. They came back to me recently and were willing to take 20 cents," he said. "I might offer 15 cents."

Many of the nation's largest servicers — Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC Mortgage — are in the crosshairs of state attorneys general for allegedly cutting corners in foreclosures. Ohio filed a civil fraud suit last week against GMAC, accusing it of foreclosure fraud. GMAC countered that it had done nothing "fraudulent," adding that it will "vigorously" defend itself in court.

House Speaker Nancy Pelosi has asked the Justice Department to probe foreclosure practices, and Attorney General Eric Holder has said he will look into the matter. However, Federal Housing Administration Commissioner David Stevens and White House senior adviser David Axelrod said last weekend that "valid" foreclosures should be allowed to move forward while institutions review their foreclosure procedures and paperwork.

Several states are calling for foreclosure moratoriums. The Obama administration said it does not support halting foreclosures nationwide, on grounds that it could delay and hurt the housing market's recovery.

Meanwhile, public information on NPL sales by the nation's banks remains scarce. Many institutions will not disclose their sales.

Last summer Citigroup Inc. was hawking a handful of nonperforming residential loan portfolios, including three pools in the $90 million range, according to an adviser. Citi declined to comment, but a recent research report by Sandler O'Neill & Partners LP said the banking company is a "willing seller" of NPLs. Citigroup has taken, and will continue to take, advantage of the market as it tries "to keep its balance sheet as clean as possible," the report added.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.