Tight supply has sent prices for the freshest portfolios of charged-off consumer debts soaring in recent weeks to as much as 12 cents on the dollar.
Prices for these portfolios are now averaging more than 9 cents on the dollar, according to debt buyers.
In June, prices for new chargeoffs were running between 5 cents and 7 cents on the dollar, up from a low of 3 cents at the start of the year.
Stacey Schacter, the chief executive of Vion Receivable Investments, said his company was recently outbid on a portfolio by a lender it had been buying from for nearly two years.
"We increased our price a lot and still lost," Schacter said. "Since there is less supply, we are seeing some buyers willing to pay more for fresh chargeoffs to continue feeding their shops."
As has been the case for months, availability of fresh portfolios has dwindled as lenders hold on to recent chargeoffs longer.
Earlier in the year lenders were holding back new paper and working it in-house or assigning it to agencies, because prices were so low.
With prices rising and bidding wars ensuing more often, lenders and creditors are more inclined to wait for prices to hit the level they want before selling.
"A year ago it was the buyers who were sitting on the sidelines waiting for prices to drop further before they moved on a portfolio. Now it's the sellers that are waiting out the buyers," said Joel LeBlanc, a regional sales manager for Atradius Credit Insurance Inc. "Citibank has delayed the sale of some portfolios for months in the hope they get a higher return."
LeBlanc's duties at Atradius include pairing debt buyers that do not have collection arms with licensed firms that can work the debt on their behalf.
Although prices are rising, they still vary widely depending on the quality of the portfolio, type of debt, age and average balance.
The spread on credit card chargeoffs, for instance, ranges from 5 cents to more than 10 cents on the dollar, said Aaron Hadam, executive vice president at the debt brokerage National Loan Exchange.
"Prices remain very dynamic and product-specific," he said.
Sellers are not expected to begin reversing the trend of constricting supply, despite rising prices.
"As long as lenders are happy with the [return on investment] they are getting through placing the debt with an agency, they will continue that practice," said Al Brothers, CEO of the collection agency Calvary Portfolio Services LLC. "When the ROI from a sale exceeds the ROI from placement is when supply will start to increase."
That day may not be far away. LeBlanc said prices are rising dramatically on all types of consumer debt, including medical debt.
"Prices may level out in the 14-cents-to-15-cents range, and that will loosen up supply somewhat, but at that price buyers need to rethink their rule of earning an ROI of 2.5 to 3 times the purchase price," he said. "The economy remains weak and unemployment high, so returns are diminishing as prices rise. At some point, buyers are going to have to diversify their portfolios, or the higher prices they are bidding will come back to bite them."