How to Prepare for the Rise of Non-Performing Loans (NPLs) in 2023’s Market
Jim Smith
As COVID-19 support enacted by the CARES Act likely comes to an end in 2023, many industry experts and economists predict that non-performing loans (NPLs) will flood the market. Lead measures of asset quality deterioration have already been seen in 2022, and a possible recession in the first half of 2023—as predicted by the MBA—is only likely to accelerate those conditions.
While a significant amount of borrowers have exited forbearance programs since they were introduced at the start of the pandemic, around 700,000 loans remained in forbearance as of February 2022. According to the Consumer Financial Protection Bureau (CFPB), many borrowers still in these programs have less financial capacity and were more likely to have been pre-COVID delinquent on their loans. The profile of these borrowers, coupled with the fact that today’s interest rates are hovering over 7%, means that many Americans will unfortunately encounter challenging loan modification situations as forbearance programs end. In turn, the fallout of distressed loans will begin to show in the marketplace.
Due diligence considerations for NPLs
It’s been a while since the industry has had to contend with significant levels of NPLs. While memories of the subprime mortgage crisis remain fresh in some lenders’ minds, many businesses aren’t equipped for the considerations related to this type of asset. As investors gear up to buy NPLs, lenders need to prepare for an influx of these loans and the requirements related to them, specifically within the due diligence process.
A rise in NPLs can benefit investors seeking higher-yield opportunities because they allow for the purchase of portfolios of non-performing loans at discount, which can then be sold for significant returns. Still, both sellers and buyers need to contend with significant requirements related to the NPL marketplace. Processes for NPL deals can be labor-intensive, complex, and document-heavy. This includes due diligence—for instance, reviewing servicing notes, payment activity, and valuation analysis of the property. These factors as well as others make it vital for lenders and investors to leverage trusted partners experienced in this type of asset.
Diligence providers specializing in NPLs
In preparation for the rise in NPLs in 2023’s market, lenders should get ahead of due diligence requirements by carefully choosing a partner adept at navigating the specific criteria related to these types of loans. That means finding a due diligence provider with proven expertise and technology to produce predictable, trusted outcomes. Here, lenders should look for capabilities that offer multi-layered security via multi-factor authentication, sophisticated encryption, information rights management, and more.
Maxwell Diligence offers due diligence services across a variety of asset classes, including NPLs. Our team of 100% onshore talent averages more than 15 years of industry experience, allowing lenders to access fast, reliable reviews at competitive prices. Since our team specializes in a variety of loan types, lenders can prepare for the influx of NPLs in 2023’s market with confidence.
Want to learn how Maxwell Diligence can help you with the diligence requirements of NPLs? Click here to schedule a call with our team.
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