Will anyone want to buy banks’ toxic assets?
Prospective buyers hunt for the good stuff amid all the bad debt, anticipating a supersale.
Buying loans from banks – the types of loans that need to be handled with latex gloves and hazmat suits – is becoming a new growth industry.Skip to next paragraph
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Former mortgage bankers and Wall Street wheeler-dealers even now are leafing through confidential bank documents detailing tens of billions of dollars of bad mortgages and other loans known as “toxic assets.” Their goal: to find undervalued assets they can buy cheaply and make money on.
It may be chutzpah. It may be opportunism. Or it may be the solution to cleaning up the banks’ balance sheets. Whatever the case, many prospective buyers are mining for data that will help them in June, when a new government plan to deal with banks’ problems starts up.
This time, unlike during the roaring mortgage boom, some potential investors are actually visiting houses, talking to lenders, and acting like crime scene investigators for bad loans.
The decisions made by loan sleuths on how much to pay for the banks’ bad holdings will determine the success of the government’s plan to try to move those holdings off the banks’ books. If the banks agree to the prices offered for their loans, the shifts in ownership of those loans could ultimately free up capital for the economy’s recovery. But if the banks balk because they believe the assets are more valuable, think about the economy in terms of molasses.
“It will be interesting to see who does participate,” says Paul Koches, executive vice president and general counsel at Ocwen Financial Corp., a mortgage servicing company. “We need to get this part of the economy unstuck from the mud.”
No doubt, there’s lots of opportunity. The combination of smelly loans and battered securities (pools of loans) on banks’ books may total as much as $2 trillion, say industry insiders. Less than $50 billion has been raised so far from private investors and institutions such as pension funds and endowments to buy some of these troubled assets.
A big part of the money that needs to be raised will go toward the federal government’s latest effort to take bad loans off the banks’ balance sheets: the Public-Private Investment Program (PPIP). This complex program will try to get the banks to sell bad loans (termed “legacy loans”) and legacy securities (containing lots of loans).
The buyers eyeing these loans have different histories and take different approaches.
Take Private National Mortgage Acceptance Co. (PennyMac) in Calabasas, Calif. It was founded in January 2008 by Stanford Kurland, a former executive at Countrywide, a US mortgage firm that was bought by Bank of America after it ran into trouble.
“If anything, we are the good guys,” says David Spector, the company’s chief investment officer. “Homeowners actually like us.”
The reason homeowners may smile on PennyMac: After it buys loans from banks at a discount, it tries to work on loan modifications to prevent foreclosures.