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Trade in distressed property loans grows in US

Brokers have noticed a brisk trade in billions of dollars of distressed bank loans backed by collateral from houses, land and commercial premises. The so called 'problem loans' are being traded on a rash of new websites which auction them to the highest bidder.

'All of a sudden, it's in vogue to want to buy distressed assets. Pools of capital are forming all over,' said Kingsley Greenland, president of DebtX, the leading online loans sales company.

But there are concerns that this market is unregulated and most of these trade for a fraction of their original value making them a tantalizing target for investors. Some are warning that with the US in recession and real estate values still falling aggressive bidders risk overpaying even for assets that appear cheap.

'The whole art to all this is figuring out which one is an opportunity and which one's a trap. If you don't buy the right thing you're never going to make any money. It is opportunistic investing,' said Chris Moench, who manages a distressed-debt investment fund in St. Petersburg, Florida.

Buying loans is a far different proposition from simply buying real estate. The new owner of a delinquent home mortgage, for example, must essentially take over where the previous lender left off. That means working out a more affordable payment plan with the borrower or foreclosing on the property.

'It's not a quick buck. Once you've acquired a note the challenge it to manage it, explained John Martin, a real estate investor from California.

The statistics show interest is soaring. In February nearly 2,700 investors registered to bid on DebtX's auction site, more than 10 times the number for the same month last year. The company sold notes worth more than $1 billion in the fourth quarter of 2008, triple its sales from the same period in 2007.

The precise volume is difficult to gauge, however. While loans are increasingly being sold online, billions of dollars more in loans are traded in relative secrecy by banks and loan brokers. Most experts believe that, even with the recent increases, banks have sold only a fraction of the troubled loans on their books and the transaction volume is going to rocket in the next three to four years.

There are even correspondence courses for property investors who want to learn how to buy and manage distressed mortgages.

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