Prices for bad debt are up by as much as 15%, depending on portfolio quality, and a lack of supply likely will keep prices high in the near-term, according to several industry insiders. The freshest credit card debt is fetching between five cents and seven cents on the dollar.
Higher prices have brought more types of consumer debt into the market, including auto loans, unsecured mortgages and second mortgages, says Lou DiPalma, a managing partner at broker Garnet Capital Advisors LLC. The housing market collapse is leading some mortgage lenders to sell debt that cannot be refinanced or restructured.
“There is not a lot mortgage debt flowing into the market, but the larger balances represent billions in charged off receivables,” he says.
Since the first of the year, improved economic conditions brought some investors back to the debt-buying market. The combination of higher prices, new investors and improving economic conditions is expected to bring more portfolios to market by the end of the year. For now, the supply remains below demand, helping keep prices up, according to Tony Spencer, vice president at broker National Loan Exchange.
Adds DiPalma, “Given current market conditions, the third quarter is when increased supply is likely to start coming into the market. We are starting to see some sellers show signs that they will be expanding their offerings.”
Melody Cuff, senior vice president at buyer Oliphant Financial Corp. agrees: “We are seeing some lenders that haven’t been as active test the waters to see what their portfolios can fetch,” she says. “We just had one creditor contact us to feel out potential prices.”
Cuff expects the fourth quarter to have more sales activity than in earlier quarters this year. The fourth quarter traditionally is an active time for debt sales.
“Last year, activity in the fourth quarter was way off, and we expect it bounce back this year given that more lenders are giving indications they are ready release their portfolios.”
Overall, the cause for the current low supply is two-fold. First, the recession and the subsequent bottoming out of the credit markets prompted lenders and creditors to pull back and reduce the number of new loans and credit lines being issued. Second, debt prices dropped in 2009 as the quality of the debt coming into the market declined because of the severity of the recession. This led many lenders to work charge-off debt longer in hopes of earning a better return than they could by selling it.
“A lot of lenders and creditors had a hard time selling debt at prices they didn’t want to take,” says Stacey Schacter, president and CEO at Vion Receivable Investments. “Given the depth of the recession some sellers decided to play more defensively and hold their bad debt longer."
