To improve earnings from the sale of charged-off debt, many consumer lenders are putting less of it on the market. The strategy is working as prices have inched up since late 2009.
While the prices being fetched vary by lender and by the quality of debt sold, most sellers have seen a price jump of about 10% since the beginning of the year, said Lou DiPalma, a managing partner at Garnet Capital Advisors LLC, which brokers sales of bad debt for companies such as Chrysler LLC, Wells Fargo & Co. and Navy Federal Credit Union. "Limiting the supply raises prices and with the strategy working, I don't expect to see issuers move away from it anytime soon," he said. "Issuers are cutting their supply by about half of what they previously had been bringing to market."
The portfolios not sold off remain in a lender's collections department to be worked on an extended basis. Even with prices climbing, some lenders feel they can earn a better return by keeping the paper rather than selling now.
"We are seeing lenders that are holding on to bad debt longer because the return on the sale price is not what they want and they feel that because the debt has already been charged off they can afford to work it longer to get the desired return," said Joel LeBlanc, a senior receivables management consultant at Square Two Financial, a buyer of defaulted debts.
Such a strategy can be risky for lenders given the continued high unemployment rate, LeBlanc said.
"There are a lot of consumers whose accounts have charged off but that remain out of work," he said. "If they can't find a job they don't have the income to pay down the debt. At some point a tipping point of diminished returns is going to be reached by continuing to work it."
That point is likely to be reached by the end of year when lenders will have a more pressing need to raise cash to fund new initiatives for 2011 and meet yearend profit projections.
"Toward the end of the year I think we will see more activity in the debt-sales market," said Tim Kirkpatrick, the president of the brokerage Loan Trade Inc.
Some debt buyers remain more cautious about increased supply by year's end, out of concern over tightening of the credit markets in the past year. "We have not seen a lot of loan and credit activity by lenders the past year, so that raises questions about how much supply is going to be available and what prices will be like," said Deb Everly, chief acquisitions officer at Asset Acceptance Capital Corp.