Group Purchasing of Charged-off Consumer Assets at Wholesale Pricing - National Portfolios, Issuer Direct
Your Subtitle text
Is Fresh the Best?

Fresh Charge-Off Credit Cards - Facts and Fiction


Buying Fresh Charge-off debt is difficult, because quite frankly, there is very little of this kind of product on the market. And apparently, there never has been.


According to many Brokers we have talked to who have decades of experience in this business, the firms that can acquire this product from an Issuer, generally collected it themselves. While they may make portions available for their approved business partners, typically it is not in small increments. If these portfolios are listed for sale on a state basis, it is because the seller will get a premium price for selling individual states. Occasionally a national buyer may out bid all of the state buyers and purchase the entire portfolio. Since these are expensive purchases, there are only a handful of buyers that can participate, and they generally have a very specific strategy to collect the accounts and a long time horizon to realize their collection objectives. But is Fresh even the right paper to buy in the current economy?


Fresh Portfolio Review


Las year we evaluated a Fresh portfolio that was available for bidding on a State level from one of the online brokers with a charge-off balance of about $100 million. There were many bidders on the state level, yet the file was ultimately acquired by a national debt buyer. The file was sold on a direct flip basis, meaning the accounts came directly to the buyer, without the seller ever touching them. The file sold for just less than 6¢, which was higher than the amounts bid combined, by all of the state buyers.


We thoroughly evaluated this portfolio, and determined that the net standard liquidation (no legal work) for 12 months was 5.50% and for 18 months, the total recovery was 8.25%. These are the gross liquidation numbers, and the cost of management and collections need to be subtracted from these figures.


The breakeven point on these acquisitions as forecast by one of the public debt buyers was 18 to 28 months prior to 2009, and they have since revised their forecast by extending the time frame of recovering 100% of their invested capital to 24 to 39 months. From these figures we can understand that the assets that they are acquiring are going to be held for a long time, up to 7 years to gain the total expected recovery from the portfolio.


Every Debt Buyer utilizes a specific system to analyze a new purchase. The Loan Buyers Group uses a recovery model to determine the value of a portfolio, where we compare the proposed portfolio against similar portfolios, and estimate the collections at different time intervals, based on how similar files are currently performing. Others may use some type of scoring system or other technique which may be a combination of different criteria which is proprietary for that specific firm. In any event, this initial valuation process provides the buyer with some guidance on how a portfolio is expected to perform, and how much can be paid for the receivables.


Calculating Net Returns

Fresh Paper


In this particular portfolio, using the recovery method, for this national package of fresh charged-off credit card accounts, we would not expect to have our initial investment returned for well over 1 year, if we paid about 6¢ for the product. This is one reason that the Buyers of Fresh Charge-off’s, tend to hold the paper from 3 to 5 years (or longer) so they can squeeze the most from the files and get a stronger ROI. Still with a 5.50% gross recovery rate at the end of 12 months per our model, and if we are paying just 30% for collections, we have only earned back 3.85% (5.50% - 30% for collections = 3.85%) for a portfolio that we originally paid 5.90% for. Assuming that the portfolio has lost 60% (which is better than average) of its resale value in this 12 month period, the resale value will be 2.36% (after 12 months, less Broker fees). So if we add the 2.36% - (4% Broker fees) or 2.27% + 3.85% (net from collections) = 6.12% net return in 12 months. Now we take the 6.12% - 5.90% (purchase price) = 0.22% profit on the entire portfolio. To calculate the return on investment, we take 0.22% / 5.90% = 3.73% Return on Investment in 12 months.


This example is why we look for other products to purchase. We need a much larger profit at the 12 month mark, just in case we don’t perform as well as the model projects. In the next example we look at buying the portfolio above after the 12 months.


2 Agency Paper


So let’s look at an alternative. If we were buyers of the portfolio above after 1 year, it would have been through at least 2 Agencies. Let us assume that we buy the file at the 2.27% price which we show as the value after 12 months above. We know that based on the recovery model the gross collections at 18 months was 8.25%. We subtract the first 12 months of collections, 5.50% which leaves us with 2.75% for the 6 months. Since we do not have a figure for 24 months, let us assume that the collection will be ½ of what the portfolio collected between 12 to 18 months, or 1.38%. Now we add 2.75% to 1.38% which equals 3.78%. Now that the portfolio is older, we should realistically use at least 40% for collection costs. So we take 3.78% - 1.51% = 2.27% then we add the resale value of the portfolio, which is the purchase price less 60% - the broker fees like before, which is 0.91% - (4% Broker fees) or 0.87% + 2.27% (net from collections) = 3.14% net return in 12 months. Now we take the 3.14% - 2.27% (purchase price) = 0.87% profit on the entire portfolio. Then the return on investment is calculated by taking the 0.87% / 2.27% = 38.40% Return on Investment in 12 months.


We look for older portfolios for several reasons. One is the examples that we have just shown and another is that when accounts are going to charge-off today and is offered as Fresh Paper, the event that led up to the charge-off of that account is also still fresh for the consumer. Bankruptcies are higher in the first year or two after charge-off and these customers need some time to find a job, get healthy, or resolve the issues in their lives that forced these accounts to get charged-off in the first place.

Liquidation Rates


We know from all of our data sources, and the reporting by the public Debt Buyers and Collectors, that liquidation rates are down on all types of portfolio classes, due to the overall weakness in the economy and the high unemployment numbers. But we also need to be aware, that the Banks are taking a more aggressive posture in collecting their accounts both prior to charge-off as well as after. We know that last year, one of the nation’s largest Banks was offering settlements at 15¢ on the dollar, with a 4 month payment plan on their higher balance credit card accounts in the last 30 to 40 days before charge-off. The Bank would rather get the 15¢ for their accounts, than the 5¢ or so that they will receive after charge-off, if they don’t try to collect on them themselves.


The obvious problem with these offers for Debt Buyers is that the customer, who has not taken the Bank up on the offer, is probably still in very poor financial shape and will not be able to pay a Debt Buyers collection agency any faster right after charge-off. The Debt Buyer also might not be aware of the Banks previous offer so when there is a conversation with the customer, that customer may believe that the new collector will settle for the same 15¢. These types of accounts decrease the value of the portfolio for the Debt Buyer.


The banks may work the accounts minimally when they are in house with their own collection staff, but at charge-off they typically place these accounts with their preferred outside collectors. The banks generally provide guidelines to their collectors on how to talk to the customers, as they are very concerned about their image. They also have a rigorous policy established for the amounts that the collectors can settle the accounts for (about 75% of the balance for the first or second Agency and down to about 60% for the second or third agency). The outside agency must get approval for each account settlement which is less than those amounts. Most of these outside agencies score the accounts prior to collection, and predominantly work only the higher rated accounts, which create additional problems for the bank. Since the agency has an abundance of accounts, and since they are on a very low fee basis with the bank, (in fact many have to front all of their collection costs) the collection agencies often only work the best accounts to be profitable. 


What all of this really means is that the accounts the bank had that could have been sold as Fresh charge-offs, were sent to one agency for 3 months and maybe another for 3 months but the accounts were generally softly worked. So these Zero, One or more Agency accounts, can still have a lot of meat on the bones depending on the issuer. This is usually not the same process that a typical contingency collection agency would follow, if the accounts were owned by a large Debt Buyer, so it is important to know who is in the chain of title.


 A portion of the banks’ fresh charge-off is sold to their preferred vendors, which are almost entirely major National Debt Buyers who have forward-flow arrangements. There are only 10 to 12 National Buyers now, according to several reports, and maybe only 5 or 6 of them are buying Fresh Charge-off on a regular basis. The others may either have enough inventory (which may be collecting slowly), old inventory where they may have paid far too much (which is also collecting slowly), or have had a decline in funding due to the tight borrowing requirements of the banks or loss of hedge fund capital. These forward-flow arrangements are negotiated at different time intervals and are really only great for the Buyers when prices are rising, and that was not the case in 2009.


Determine the Type of Paper to Buy


Zero, One or Multiple Agency Debt is far easier to obtain than Fresh charge-off accounts and is much less expensive. Zero or Multiple Agency paper can be collected quite profitably. It all depends on who worked the files first and how they were collected. Older accounts that are about 12 or more months after charge-off have generally been performing better than Fresh accounts this past year.


The lower balance accounts ($1000 to $1500) for credit cards for example, are often collecting better than $5000 to $10,000 credit card balances, and some of the sub-prime paper is collecting better than the major banks according to our information. Other types of loans such as Pay Day loans and DDA’s are reported to be collecting well at the $700 to $800 level, but proof of the actual performance of these accounts is nearly impossible to document, so we generally stay away from them. (We are not tracking auto deficiencies or real estate loans and medical, utility etc.)

The Brokers


The Brokers have access to many of the same or similar files from similar sources. There are only so many issuers of credit card debt, so no one broker can have truly a unique product. Many things are different between the Brokers including the price that they charge, fees, purchase contracts, confidentiality and non-compete contracts, broker service levels and reputation. Some Brokers have access directly to Issuers, while others may obtain portfolios from a variety of sources. Some sell on a bid basis, others on a set price (which is generally negotiable) and some don’t have any products at all on hand, they will just locate what you want. We stay as close to the source as possible for any of the portfolios that we are purchasing. Adverse selection within a file is a very common practice, so the fewer hands that touch a file, the better.


Fees are generated for brokers at every turn of a transaction and for the most part the fees charged by the Brokers are very similar. This is a very small and relatively tight industry, and most of the Brokers know each other, and have a fairly good idea of the transactions taking place in the market.


Web Hosting Companies