Real Estate Owned is Trading Higher Than Notes.(Managing REO)

Byline: Bonnie Sinnock

When it comes to dealing with the mortgage debt left over from the excesses of 2005-2007, a lot hangs on how government plans take shape. In the meantime, experts say the market for this often-securitized product has reached the point where real estate-owned in many cases trades better than notes and subprime loss estimates are increasing to the point where another downgrade of thousands of ratings could be seen.

"REO used to be at the bottom of the pricing spectrum. Now, however, and with few exceptions, REO packages are trading at a higher dollar price than even some mildly distressed note packages - something that has never happened," said Frank Pallotta, one of three former Wall Street executives serving as principals at the Rumson, N.J.-based Loan Value Group, an independent, third-party provider of advisory services aimed at helping clients assess, evaluate and manage residential mortgage risk.

"This is not a question of buyers feeling as though all loans will default, but rather absent a true source of liquidity at a reasonable market level; both buyers and sellers will stand down and discount cash flow to almost zero," said Mr. Pallotta.

He said cramdown legislation uncertainties in particular threaten private-label securitization market participants. "There is virtually no way to effectively price securities or loans with cramdown legislation in the air," he said. He alternately suggests alternatives that allow modifications even of non-delinquent loans without violating the language of securities' trusts when there is perceived imminent distress and he cautions that mods, which have had mixed success to date, might be more effective if they are carefully approached in practice on a case-by-case basis rather than in a "one size fits all" manner.

With these issues remaining uncertain, bulk REO packages have been trading but have declined in value from as high as 65% of broker price opinion dollar price to the low 40s to 50s because the properties "remain on the market longer, resulting in ...