Will GSEs Tap NPL Auctions?

Every so gingerly, Fannie Mae and Freddie Mac are beginning to contemplate selling their nonperforming mortgages - roughly $250 billion worth of single-family product - in the open market. But will it ever happen? And if so, who will step up to the plate with cash?

Investment bankers who play in the nonperforming loan market say the two have quietly begun talking to Wall Street firms and several hedge funds about how they might unload their bad assets. The buyers, I'm told, would presumably be hedge funds and investment partnerships with certain Wall Street trading desks - Goldman Sachs and Morgan Stanley - acting as middlemen.

"There's been lots of meetings and they're talking to a lot of people about it," said one veteran investment banker, requesting his name not be used because of the sensitivity of the matter, "but they're a long way away from doing anything yet." One idea the two are said to be contemplating involves the securitization of NPLs. The GSEs would hire third-party vendors to gather broker price opinions on the properties collateralizing the mortgages. Fannie and Freddie might then issue a security backed by the NPLs based on the new BPO value. "If they could get 80% of the current BPO value they'd be ecstatic," said one investment banker.

Both GSEs declined to comment for this column. To date, neither has tapped the NPL market but they've "force-placed" the servicing of delinquent loans away from certain seller/servicers to specialists such as Ocwen and Nationstar. Both continue to sell single-family properties out of their REO portfolios, offering homes both to owner-occupants and investors. (As reported on the National Mortgage News website recently, Fannie is now once again offering REO assets in bulk.)

Of course, the NPL market continues to operate in a somewhat secretive matter, with little public disclosure on auctions and sales. But if Fannie and Freddie eventually decide to unload their NPL wares all that could change. It also might mean that, potentially, $250 billion in delinquent mortgages might flood a market that already has plenty to offer.

Recently, FDIC chief Sheila Bair signaled her intention to have the agency be a conduit allowing open (and solvent) banks to sell their delinquent mortgages in the secondary market. The agency is shooting for its first such sale in the first quarter of next year.

If the FDIC program proves workable - and if Fannie and Freddie finally decide to auction off their NPLs - it also means that prices for these delinquent assets could fall further, dragging down home values even more. But one thing we keep hearing from both investors and reluctant sellers is that there is too big of a difference between the "bid" and "ask" on these loans which is why more sales haven't occurred. Then again, Fannie and Freddie are owned by the government and have already set up massive reserves. They no longer have to answer to shareholders and can afford losses that the private sector can't stomach.

"If Fannie starts selling nonperforming loans it'd be huge," said Jeff Freud, a principal in LoanMarket.net of California, a Web-based loan auction site for small investors. Mr. Freud believes that eventually the GSEs will unload their NPLs but can't predict when that eventful day will come. He notes that the NPL market can be a conundrum. "If you admit you're selling it will drive down prices," he says. "I know that sounds crazy but that's why I think so much is happening anonymously."

Paul Muolo is executive editor of National Mortgage News. He can be e-mailed at Paul.Muolo@SourceMedia.com.