NPL Market Finally Heating Up?

It would appear that large holders of nonperforming residential loans — primarily commercial banks — are beginning to test the auction waters, offering up some of their worst dregs for sale.

At press time, more than $800 million worth of NPLs were out for bid from Wells Fargo and Citigroup with additional hints from Residential Capital Corp. that it might begin selling its $2-billion-plus portfolio of nonperformers.

Also, the Federal Deposit Insurance Corp. is still toying with the idea of issuing bonds backed by NPLs held in receivership, a move that might allow up to $20 billion of mortgages to be effectively liquidated. But nationwide, financial institutions and investors hold at least $1 trillion in delinquent mortgages, either in “trust” (from securitizations) or in whole loan form. (Some of these financial institutions include Fannie Mae and Freddie Mac.)

Wells is actively marketing a $416 million portfolio of NPLs, mostly payment option ARMs that are “legacy” loans it inherited when it bought Wachovia Corp. last year.

Citigroup has already reached terms with a hedge fund buyer that will purchase NPLs that had a face value of $400 million, sources said. The purchase price was in the range of 50 cents on the dollar, said one manager.

According to one investor familiar with the offering, some of the mortgages have loan-to-value ratios of up to 105%. He also said Wells, initially, is asking 70 cents on the dollar for some of the pools.

A hedge fund manager, requesting anonymity, said he is reviewing the Wells offering and thinks eventually it could sell for 40 cents on the dollar. He described the portfolio as “not very good.”

A spokesman for Wells confirmed to Managing REO that the portfolio is out in the market, but declined to provide specifics. He described the assets as “Pick-a-Pay” loans, a type of payment option ARM that Wachovia funded during the height of the mortgage boom.

Meanwhile, it appears that Wells is making inroads on reducing its massive POA holdings, which stood at $85.2 billion at yearend. In a recent investor presentation, the company bragged that it had reduced the negative amortization portion of its holdings by $28.2 billion in 2009 but provided little detail on how it accomplished the task.

A spokesman for Wells’ mortgage unit declined to provide any insight as well. Recent media reports suggest the bank has been lowering payments for some underwater borrowers who originally took out Pick-a-Pay loans by offering them extended-term mortgages with interest-only payments.