Lead Story

A Little Sunshine Would Be Nice in the Secretive Market for NPLs

By Paul Muolo

As the mortgage and banking industries debate whether the PPIP program will work and whether a similar effort over at the FDIC will ever see the light of day, Wells Fargo & Co. recently (and quietly) sold a $600 million portfolio of mostly non-performing subprime loans. Or so we're told.

Late last week a source close to the transaction identified Arch Bay Capital of Irvine, Calif., as the winning bidder on the portfolio whose loans were originally funded by two mid-sized subprime wholesalers: Accredited Home Loans, and NovaStar Financial.

Arch Bay co-founder Steven Davis declined to comment on the purported sale to his firm, referring calls to his partner Shawn Miller who serves as Arch Bay's CEO. Mr. Davis didn't deny that the sale took place but he wouldn't confirm it either. Mr. Miller could not be reached for comment.

Meanwhile, one question the sale raises is this: How exactly did the publicly traded Wells wind up with so many crummy non-prime loans from these once highflying firms? Answer: I don't know and Wells isn't talking. A company spokesman said the bank's corporate policy is to not discuss its loan auctions.

Perhaps one reason the PPIP (Public-Private Investment Program) and the Federal Deposit Insurance Corp.'s 'Legacy Loan' sale initiative (involving whole loans, presumably residential and commercial mortgages) hasn't caught fire is 'sunshine,' that is, the concept of disclosure. If bankers and investment bankers use these government programs that means all the messy details of their crappy investments might see the light of day, which could anger shareholders — and maybe even board members who might lean toward being "activists."

The nice thing about the private non-performing loan market is that none of these messy details have to see the light of day, including the price paid. One banker told me that the 35 cents on the dollar that Arch Bay reportedly paid was twice what some hedge fund bidders were offering.

No matter how you do the math, Wells is going to take a nice hit on the sale, if it hasn't done so already. Will the public ever get wind of the NPL sale price (outside this story)? That's hard to say. The Securities and Exchange Commission requires that publicly traded companies disclose "material events" in their 10-Qs and Ks but when you have a mega bank the likes of Wells a $600 million loan auction might garner a sentence in the next earnings report, at best.

Perhaps, the PPIP program will indeed take off. Someday. And maybe it won't. Just keep in mind that Wall Street and the banking industry have plenty of dirty subprime laundry they may not want aired. Private sales (by publicly traded banks) will guarantee that the details of those deals stay private. To borrow a marketing phrase from the Nevada's gaming industry: What happens in the (private) NPL market, stays in the NPL market.

Meanwhile, the Treasury Department has finally launched a revamped PPIP that will provide $30 billion in capital and debt to support the first public-private funds to invest in non-agency residential and commercial MBS.

Originally, Treasury wanted a much larger program to purchase $500 billion in bad assets from banks. However, bankers shunned the first draft of the program out of concerns it would have forced them to take larger write-downs on similar assets remaining on their books.

Under the newly unveiled PPIP investment funds can purchase "legacy" securities in the open market, thus increasing liquidity for these hard-to-sell toxic mortgage-backed securities.

"While utilization of legacy asset programs will depend on how actual and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate," according to a joint statement issued by the Federal Reserve Board, Federal Deposit Insurance Corp. and Treasury. "Thus, while the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs."

Treasury picked nine fund managers to raise capital and run the PPIP funds. These managers, which include BlackRock, Invesco, and Marathon Asset Investment, have 12 weeks to raise at least $500 million in equity to launch the first funds.

Treasury will match the fund's capital and provide financing for the purchase of assets. A senior Treasury official said the Troubled Asset Relief Program will provide $10 billion in equity, $20 billion in debt with the fund managers are expected to raise $10 billion in equity.

No additional debt is allowed unless the fund manager decides to use the Federal Reserve's TALF program to purchase assets. "This would allow them to get additional leverage from the TALF — up to a limit of five times total leverage," the senior official said. But the manager has to reduce its take of Treasury debt by 50% to use this "half turn" option.

Separate from the PPIP effort, the FDIC has developed a Legacy Loan Program of its own and plans to sell certain receivership assets — presumably residential whole loans, among other assets — this summer.

— Brian Collins contributed to this story.