Determined to improve earnings on sales of bad debt, many credit issuers and consumer lenders are holding back the amount of chargeoffs placed for sale. The strategy is working as prices have inched up since late 2009.
While the prices being fetched vary by issuer and the quality of the debt sold, most sellers have seen a price jump of about 10% since the beginning of the year, says Lou DiPalma, a managing partner at Garnet Capital Advisors LLC, which brokers sales of bad debt for companies such as Chrysler LLC, Wells Fargo & Co. and Navy Federal Credit Union.
“Limiting the supply raises prices and with the strategy working I don’t expect to see issuers move away from it any time soon,” says DiPalma. “Issuers are cutting their supply by about half of what they previously had been bringing to market.”
The portfolios not sold off remain in collections to be worked on an extended basis. Even though lenders and creditors are holding back the debt to put upward pressure on prices, some lenders are holding on to the paper because they feel they can earn better a return by working it longer, rather than selling now, even with prices inching up.
“We are seeing lenders that are holding onto bad debt longer because the return on the sale price is not what they want and they feel that because the debt has already been charged off they can afford to work it longer to get the desired return,” says Joel LeBlanc, senior receivables management consultant at debt buyer Square Two Financial.
LeBlanc believes such a strategy can be risky for lenders given the continued high unemployment rate.
“There are a lot of consumers whose accounts have charged off but that remain out of work,” says LeBlanc. “If they can’t find a job they don’t have the income to pay down the debt. At some point a tipping point of diminished returns is going to be reached by continuing to work it.”
That point is likely to be reached by the end of year when lenders will have a more pressing need to raise cash to fund new initiatives for 2011 and meet year-end profit projections. “Toward the end of the year I think we will see more activity in the debt sales market,” says Tim Kirkpatrick, president of broker Loan Trade Inc.
Some debt brokers and buyers remain more cautious about increased supply by year’s end out of concern over tightening of the credit markets in the past year.
Says Deb Everly, senior vice president and chief acquisitions officer at debt buyer Asset Acceptance Capital Corp.
“We have not seen a lot of loan and credit activity by lenders the past year, so that raises questions about how much supply is going to be available and what prices will be like,” she says.