Journal of Corporate Renewal

In many of the hardest-hit markets, distressed funds are the buyers rather than long-term homeowners, suggesting opportunistic use of capital instead of a sustainable recovery. Mortgage delinquency rates, while slowly improving, remain above historical numbers. So, real demand for housing remains unclear.

Unemployment remains the
most significant economic
factor determining the length of the
current distressed cycle. It drives, or fails
to drive, the economic recovery,
including housing. While there is room
for improvement, over the eight quarters
from July 2010 to July 2012,
unemployment dropped from 9. 5
percent to 8. 2 percent. On average,
payrolls increased by 151,000 jobs per
month in 2011, and payroll figures have
improved in 2012, according to the
Bureau of Labor Statistics (BLS).

The relatively large bid/
ask spread that buyers have
seen during this distressed
cycle will grow, meaning
true distressed opportunities
beyond two years out
will be harder to find.

growth, and unemployment has been more than 8 percent for several years. It’s hard to see sustained improvement in unemployment and a pending drop in absolute and saleable NPL inventories.

Historically, GDP
The U.S. is in the fourth year of
increased distressed loan sale volume.

Bank earnings have continued to improve, and corresponding levels of loan loss reserves have allowed many banks to strategically sell more of their NPLs.

As their balance sheets improve, banks will be able to sell more NPL portfolios in the near term. Whether they choose to do so is another matter. Recovering balance sheets over the next two years will reduce pressure on banks to offload distressed debt or at least enhance pricing power of the sellers. The relatively large bid/ask spread that buyers have seen during this distressed cycle will grow, meaning true distressed opportunities beyond two years out will be harder to find.