ASK THE EXPERTS: What's Happened to the Secondary Market for Debt Portfolios?

Ask the Experts is a new interactive section that will allow readers to ask direct questions to the experts at Kaulkin Ginsberg, the leading strategic advisors to the accounts receivable management industry, and parent company of insideARM. We will also feature other experts from around the industry from time to time.

Thank you to one of our readers for our latest question:

Question: What’s happened to the secondary market for debt portfolios? 

Answer: Credit issuers have flooded the market over the past year with portfolios available for purchase by debt buyers. This has caused the price of paper at all stages of delinquency to drop significantly. As a result, demand for resold paper has gone down dramatically, thus weakening the secondary debt portfolio market. At the same time, debt buyers have been changing their liquidation expectations for purchased portfolios, dragging down prices further.

It’s interesting to note how this trend emerged.

As with most trends in financial services, macroeconomic forces are driving portfolio price deterioration. Financially strapped consumers are having a hard time repaying their bills, which hits creditors first. Credit issuers, who were the main benefactors of the debt purchasing boom over the past 5 years, simply increased the amount of debt they put up for sale. When consumers’ economic situation began to impact the collection rates among debt buyers, they lowered the prices they were willing to pay for portfolios. But banks, many of which were in a liquidity crisis due to the credit crunch, were still compelled to sell their portfolios.

By some measures, debt prices have dropped by as much as 50 percent from their highs in 2005 and 2006. With debt prices so low in the primary market, buyers had little incentive to acquire portfolios from other debt buyers in the secondary market. Furthermore, debt buyers have been forced to offload some of the portfolios they bought in earlier years, creating a flood of inventory into the secondary market. As a result, the large, robust resell market for debt portfolios all but dried up over the past year due to too much supply and not enough demand.

An exception can be found in the smallest of debt buying companies, including law firms that purchase accounts zip code by zip code.  These companies lack the scale and resources to negotiate directly with credit issuers, and as a result they continue to carve out pieces of larger portfolios acquired from credit issuers by other debt buyers and brokers.

Other factors specific to the secondary market itself are also at play. Debt buyers have shied away from the secondary market because of their concerns over access to documentation for the accounts they are purchasing (also called “media”). The secondary market also carries some additional “buyer beware” risks — like the existence of fraudulent transactions and lack of knowledge of liquidation efforts prior to sale — that do not exist as much in the primary market.

Even as the resell market has declined substantially, there are still great opportunities for opportunistic buyers. And the secondary market will return for resellers as soon as consumers are on more stable economic footing.

To send a question to Ask The Experts, please email editor@insidearm.com.