Can FDIC Break the NPL Ice?
It's all still preliminary but the Federal Deposit Insurance Corp. is contemplating securitizing upwards of $30 billion worth of subperforming and nonperforming loans in the first quarter.
The mortgages - mostly residential in nature - reside in the agency's receivership division and from what I'm told, the FDIC would like nothing better than to convert these nonperformers to cash.
"These are single-family whole loans accumulated from closed institutions," noted one investment banker familiar with the concept. "What's being talked about at the agency is a prototype."
What the FDIC hopes to do is issue a mortgage-backed security backed by nonperforming mortgage loans.
The loans will be evaluated, written down to their current market value and placed in a legal trust. A bond will be issued - in the FDIC's name and with agency guarantees.
Investors in the MBS could profit handsomely if real estate markets recover and the collateral backing the security (thousands of homes) suddenly becomes worth more than the value of the (marked down) loan amount. How serious is the FDIC about the idea described?
An agency spokesman declined to discuss the issue, but one thing is for certain: requests for proposals have been issued and a handful of executives with securitization experience are already on the government's payroll, including one who supposedly worked at UBS Securities.
Of course, there are a few details and questions that need to be worked out. What questions are we talking about exactly?
Questions like: Which contractors will be in charge of "curing" the delinquent loans that serve as collateral and how will the FDIC's goal of making money on the MBS conflict with government mandates to help struggling consumers via the White House's HAMP program?
For those of you wondering why the private sector hasn't tried something like this the answer is simple: The FDIC can "mark down" troubled loans all it wants without worrying about the ramifications of these "marks" washing through to its bottom line.
Private sector depositories and Wall Street firms don't have the same luxury that the FDIC does. They have to answer to their shareholders.
As we've reported in these pages before, few large NPL auctions have been completed - with little in the way of public disclosure. Most of the loan pools that have actually traded are for $100 million or less.
Further, many of those loan pools in question are sold in small baskets of $5 million to $20 million - not exactly headline-grabbing deals.
(It seems the last thing in the world a bank wants to admit is that it is unloading its garbage loans.)
If the FDIC does, in fact, successfully securitize billions worth of NPLs it could spark private sector sales, that is, if the seller is finally willing to accept what the market is offering.
Time and time again we keep hearing from investors that the reason more deals aren't getting done is because of the huge gap between the "bid" and the "ask" price. That may be what they're saying, but that's just not the reality.
What is the reality? Even with an improved economy, sellers of NPLs will only unload their toxins if they have enough earnings on hand to offset the losses taken.