It’s no secret that banks are parked over a mother lode of bad loans, mainly residential and commercial mortgages, and they prefer to not publicly acknowledge (by marking to market) what those loans are really worth. That tactic has helped banks recuperate and appear healthy, but it’s a stance that’s also costing at least of few jobs, in a roundabout way.
We’re a little late to this story, but our new-found fascination with state WARN notices led us to find one from a California company called Kondaur Capital, which said about a month ago that it plans to lay off 161 workers by April 18. A little searching brought up an article last month by the accomplished Paul Muolo at National Mortgage News.
Seems Kondaur buys nonperforming loans, and finds itself needing to layoff workers because there aren’t enough bad loans available to buy.
Come again? Aren’t banks still sitting on mountains of toxic debt? Can’t find enough to buy?
From Muolo:
Company chairman Jon Daurio told National Mortgage News that sellers of NPLs (banks and investment banking firms) “are not even putting their bad loans out to market.”
With an estimated $850 billion in delinquent loans in America, Daurio’s statement, on the surface, might seem hard to believe. But he insisted that it’s not the asking price of these loans—it’s a lack of product.
Meanwhile, recent interviews conducted by NMN suggest that there is product to purchase but the “bid/ask” ratio has gotten out of whack again.
One loan trader estimated that of all the NPL deals offered over the past two years, just 7% ever closed. “Seven out of 100,” he said. “It’s the bid/ask.”
The bid/ask, as the name implies, refers to the difference between what an investor is willing to pay compared to the reserve price the seller has in mind. (In the summer and fall of last year the bid/ask narrowed and more deals were getting done.)
According to Daurio, some bank sellers have underreserved for their bad loans and if forced to sell them at current market values they’d have to take additional losses. “They won’t mark [NPLs] to market,” he said. (The Kondaur executive blames accounting rules for allowing banks to warehouse NPLs instead of taking true writedowns on them.)
Perhaps banks would end up with increased losses if they begin to let go and sell more of their toxic assets, but on the other hand, maybe it could also create a thriving industry within the financial sector and create jobs, toiling away at removing and disposing of all the sludge.
At least then 161 people at Kondaur Capital might get their jobs back.
