Magazine article American Banker

Banks Are Shedding Distressed Loans at Higher Prices, Faster Pace

Magazine article American Banker

Banks Are Shedding Distressed Loans at Higher Prices, Faster Pace

Article excerpt

Byline: Kate Berry

Banks are moving both residential and commercial loans off their balance sheets at a faster pace and at higher prices than at any time since the beginning of the financial crisis.

Several major banks including Bank of America (BAC), Citigroup (NYSE:C), HSBC and Wells Fargo (WFC) have sold large blocks of nonperforming residential loans since the fourth quarter, according to companies that facilitate loan sales. SunTrust Banks (STI), Synovus Financial (SNV), and Wells are among the sellers of nonperforming commercial loans.

Through the first two months of this year, sales of more than $5.2 billion of residential loans and $1.9 billion of commercial loan have been announced, a pace that could lead to a 20% to 40% jump in overall sales this year, says David Tobin, a principal at Mission Capital Advisors, a New York loan advisory firm.

"Banks are clearing more stuff off their books and what's driving the increase is pricing," says Tobin. "It's a virtuous cycle upward, kind of like a short squeeze. There's not a lot of inventory, lots of people are trying to buy and that drives nonperforming loan prices higher."

Rising real estate values, a shrinking inventory, historically low interest rates and an abundance of capital that needs to be deployed by institutional investors are all factors spurring bulk loan sales of both commercial and residential loans.

On the residential side, the largest banks that signed onto the $25 billion national mortgage settlement a year ago have been incentivized to whittle away at the so-called shadow inventory by modifying large numbers of seriously delinquent loans that otherwise were headed to foreclosure. They also have increased short sales, in lieu of foreclosures, making buyers more comfortable that property values have firmed and are no longer on the decline.

"The shadow inventory is nowhere near the peak that it used to be before the national mortgage settlement," said Stew Larson, head of mortgage banking, at $63.3 billion-asset Bank of the West, the San Francisco-based unit of France's BNP Paribas.

To be sure, home prices are still 29% below their peak in 2006, according to the S&P/Case-Shiller Index, a housing barometer. Still, home prices jumped 6.8% in December compared with a year earlier, the largest gain since July 2006, Case-Shiller reported last week. Meanwhile, the inventory of homes for sale fell 16.5% in January from a year earlier, to 1.5 million homes, the lowest point since 2007, according to the National Association of Realtors.

"Banks have had to hold off on foreclosures and underwater borrowers don't want to sell so there so there's definitely a squeeze, which has depressed inventory," says Dean Williams, chairman and co-founder of Tulsa, Okla., auction house Williams & Williams. …

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