More than 80% of would-be investors in US distressed debt portfolios haven't managed to complete a transaction over the past 12 months, Ernst & Young says in its recent survey of investors.

It wasn't necessarily for lack of trying: 60.3% of respondents said they either bid on or priced the debt, and on a global basis, 54% of the respondents have either bought or attempted to buy a nonperforming loan portfolio somewhere in the world. Domestically, it's still more of a waiting game, with 76% of the investors surveyed saying the US market is "still developing" and another 13% opining that it hasn't even gotten started. "Up until now, most, but not all, banks have not been engaged in selling distressed loans," leaving the FDIC to take the lead, E&Y's Mark Grinis and Christopher Seyfarth write in the report. Seyfarth, a partner in E&Y's real estate distress services group, notes that to date, most who would buy the debt have been frustrated simply because there isn't enough of it on the market to satisfy investor appetite. "It takes two to tango," he says. "Investors are all dressed up and they're ready to dance, but the lenders never showed up to the party, and the biggest reason is that the pricing didn't work for them."

Up until now, most lenders have been reluctant to sell distressed commercial real estate loans and other nonperforming debt at below face value, despite this debt weighing on their balance sheets. That will have to change, says Seyfarth. Several recent studies have highlighted the $1.4 trillion in commercial mortgages due to mature in the next few years. "The Congressional Oversight Panel in February suggested that as much as half of that is lenders that have resisted tackling those issues up until now will feel as though some of the pressure is off. But Seyfarth doesn't see that happening. "Sitting on a large portfolio of nonperforming loans isn't necessarily the best long- term strategy," he says.

Rather, Seyfarth forecasts, the stabilization of fundamentals could lead to more agreement between buyers and sellers. "So far in pricing loans, investors have assumed that things were getting worse," he says. "But if an investor thinks that things have hit bottom, that will help on the pricing side."

When the stars align, investors will be ready. More than 55% of respondents to E&Y's survey believe that conditions in the NPL market will be favorable enough for them to enter sometime this year, far outnumbering those that don't expect to make a move until 2011. Two-thirds of respondents say they'll each have up to $500 million available for purchases, and about 5% will have between $500 million and $1 billion to bring to the table. In terms of loan type, nearly 75% of investors surveyed say they favor distressed whole loans backed by office, industrial and multifamily properties. About a third of investors favor distressed residential loans, including single-family and condo as well as acquisition and development and construction debt. Some investors also want hotel, CMBS and land loans, but none are looking for residential MBS, according to E&Y .

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