NPL Sellers Fear Dirty Linen

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 nonperforming 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 midsized 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 nonprime loans from these once high flying 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. Where am I going with all this? 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 nonperforming 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 column)? 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.

Paul Muolo can be emailed at: Paul.Muolo@SourceMedia.com.