Why distressed loans are scarce but market activity is up

Jan 17, 2024

by Bonnie Sinnock | National Mortgage News

Serious delinquency rates by at least one measure have dropped to a low not seen since 1999, but distressed servicing trades may be trending in the other direction.

That’s in part because interest rate-related developments have created an environment where more mortgage firms are interested in selling, according to Pamela Hamrick, president of Incenter Due Diligence.

“What’s happening a fair amount in the marketplace is there are small- to medium-sized originators that had been holding onto servicing for the last several years and because volumes have been down so much there, a lot of organizations are looking for ways to increase their capital position,” Hamrick said.

Distressed assets tend to be most cost-intensive so mortgage companies tend to shed them first, and while delinquency rates have been low for a while, housing finance firms may have older servicing with issues. Some may have new distressed loans from expiring pandemic relief.

In line with typical market trends, certain products like loans that the Federal Housing Administration back have higher delinquency rates relative to other products and generate more distressed servicing, Hamrick noted.

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