Submitted by Edward Harrison of Credit Writedowns.
I got a tip from a friend Andrew about a sale of assets by Wells Fargo (WFC) which raises a number of interesting questions. He sent me the following 14 July article from the Milwaukee Business Journal.
Wells Fargo sold $600 million in mostly non-performing subprime loans to Irvine, Calif.-based Arch Bay Capital, National Mortgage News reported, citing sources familiar with the sale.
The industry publication said the loans sold for 35 cents on the dollar, about double what most hedge funds were offering.
Most of the subprime loans San Francisco-based Wells Fargo (NYSE: WFC) sold were originated by once-high flying Accredited Home Loans and NovaStar Financial, both of which originated subprime loans in the Milwaukee area.
No one involved in the recent sale is talking on the record, which may be a key reason lenders will look to private transactions to unload bad assets rather than turn to a government-sponsored program, National Mortgage News said.
Now, this transaction has not received a lot of coverage. But the OC Register’s Matthew Padilla covered it as well as the buyer Arch Bay is based there. And they ask some interesting question based on the piece from the original source, National Mortgage News.
National Mortgage News reports Wells Fargo recently sold $600 million in distressed subprime loans to Irvine-based Arch Bay Capital.
Paul Muolo of NMN says the loans were originally funded by two mid-sized subprime lenders: Accredited Home Loans and NovaStar Financial.
Arch Bay co-founder Steven Davis declined to comment on the purported sale to his firm, referring calls to his partner Shawn Miller who serves as Arch Bay’s CEO. Mr. Davis didn’t deny that the sale took place but he wouldn’t confirm it either. Mr. Miller could not be reached for comment.
Meanwhile, one question the sale raises is this: How exactly did the publicly traded Wells wind up with so many crummy non-prime loans from these once highflying firms? Answer: I don’t know and Wells isn’t talking. A company spokesman said the bank’s corporate policy is to not discuss its loan auctions.
The nice thing about the private non-performing loan market is that none of these messy details have to see the light of day, including the price paid. One banker told me that the 35 cents on the dollar that Arch Bay reportedly paid was twice what some hedge fund bidders were offering.
I have calls into Wells and Arch Bay and will update the post if and when I hear back.
Does such a sizable deal signal we really don’t need PPIP? Or, looking at it another way, if paying 35 cents on the dollar is a high bid, then I don’t see how PPIP could help banks’ books.
The last question is a good one, but I have others. Here is what I wonder:
- Why does Wells have this exposure to Milwaukee-based loans to begin with? If these were part of an MBS, the loan pool would be more dispersed. Were they out buying NovaStar and Accredited Home loans back in 2007 when these companies’ subprime operations went to the wall? (See my list of bank writedown news by lender for the 2007 events at NovaStar and Accredited Home.)
- Do they even own these loans or are they the ‘asset manager?’ They could be selling on behalf of a third party. But, as they are not talking, we have to assume this is their own exposure.
- How much more Midwestern exposure does Wells have? I have to assume they bought these loans to hold on their books if these are not part of a broader MBS pool. I know they have operations in the Midwest because of Norwest. But, the fact that they probably bought loans outright to hold on their books would suggest that they have a lot of exposure in the Midwest.
- As The OC Register says: is 35 cents a high bid? That would suggest massive writedowns waiting to be taken on other assets of similar quality in the Midwest. Think Ohio and Michigan. Where are these assets marked on the books? At 35 cents, higher, or lower? I’m betting much higher. Will we learn more in the WFC Q2 conference call next Wednesday on 22 July?
- Who else is doing deals like this? And does that mean they are bypassing the PPIP program because they can do these deals privately?
Finally, as the OC Register suggests, a 35 cents on the dollar bid means huge writedowns that banks do not want to take – especially banks still on government TARP life support like WFC. To me, this explains very well why the PPIP program was a failure: if banks can sell distressed assets quietly over time to private bidders, they might be able to delay taking writedowns. But, the price discovery involved in the PPIP program would be a blood bath for banks already capital-constrained. This is why the program has failed.
I'm curious as to why Arch overpaid by such a margin. But even more so. why did Wells Fargo pull the trigger and take a balance sheet hit? Definitely does not bode well for PPIP.
There is an assumption that these loans are on WFC balance sheet at $1. They wrote down $40BB of Wachovia loans at consummation.
NovaStar was a large Wachovia client. Not saying that's where they came from. Just pointing out that this could be a profitable transaction for WFC.
The remaining TARP banks have huge incentive to book profits in Q2&3 Doesn't make sense for them to start taking large write-offs.
The fact that someone just doubled the "market price" for these assets suggests something cynical — not market based — is behind the scene. The financing and the money trail of this deal should be interesting to know.
The Milwaukee thing is a red herring – the Business Journal is part of a chain which publishes any business story tangentially related to the city. Hence the note that both lenders worked in the Milwaukee area.
A quick check of NovaStar's 10-K yields this line: "The Company sold $668.8 million of mortgage loans held-for-sale at a price of 91.5% of par to Wachovia during 2007 in an effort to reduce margin call risk." They also had a $1.9B fiancing facility with Wachovia which they repaid on May 9, 2008, although I'm not sure how much of that was used. Mortgage loans and securities were collateral for the agreement.
This is Edward, not Yves and I appreciate the added information, especially from anonymous.
I asked "Where are these assets marked on the books? At 35 cents, higher, or lower? I’m betting much higher." If these AR Wachovia assets that have been marked down, it would make sense that Wells would offload them, as the marks may be much higher.
It will be interesting to see if this story gets any play in the MSM because it suggests continued distress in loan portfolios.
As Expected Returns asks, why did Arch 'overpay.' Is this a straightforward transaction or is there a derivative or secondary transaction it is linked to?
Very curious story. I would like to see more detail or clarification from WFC.
I'm under the impression that banks have already written down these assets to $0.50 – $0.60 on the dollar with the knowledge that the value could indeed be much lower. One key about this deal is that the MBS market has been frozen for so long now…hopefully this (along with PPIP) will begin to open things up again.
who says anything about Milwaukee based loans in any of those articles???? Where is that even coming from … A paper called the Milwaukee Business Journal.
Not to mention the big banks like Wells, often bought loans on the secondary from other lenders like Novastar. No mystery there. As another poster pointed out
so the actual "market" value of property assets is 17% of what they were a year ago….not good
I am sceptical as to the reasons why Arch Bay would pay such a high price for these distressed assets.
I think this may just be a scheme whereby Wells 'sells' the distressed assets to an 'independent' buyer and perhaps 'provide a 99.9% loan at a very, very 'preferential' interest rate to the buyer.
This way, Wells gets the distressed assets off its books at an 'above expectation' price and at the same time 'acquires' a new 'performing asset' and a valued client.
"Why does Wells have this exposure to Milwaukee-based loans to begin with?"
I'd guess they came from Wachovia, too. Wachovia was gobbling up loans in its final years. Mine, which originated with SunTrust, was bought by Wachovia, which became Wells.
Geography be damned. The monster was hungry.
As another Anonymous pointed out, this already stinks like a get-it-off-the-books shell game investment vehicle accounting gimmick… whatever you want to call it, there is likely very much more to this than meets the eye at first glance.
Banks do this with their financing of the so-called purchase, and homebuilders did it too with their financing and private arrangements to repurchase at a later date. I am still curious about a Lennar joint venture or "sale" with I think Morgan Stanley a few years ago.
Government-sanctioned alchemy that makes 1 + 1 = more than 2.
A poster at The Big Picture claims that Arch Bay Capital is a subsidiary of Leucadia National. And if I pay 35 cents on the doillar for an asset that, while not worth a dollar, is still worth more than 35 cents, how do I lose?
"I think this may just be a scheme whereby Wells 'sells' the distressed assets to an 'independent' buyer and perhaps 'provide a 99.9% loan at a very, very 'preferential' interest rate to the buyer."
This is a great, great blog.
Partially due to the comments.
Again, I learn more here in 5 minutes than through all my college courses and (shudder) hours spent watching CNBC.
"Does such a sizable deal signal we really don’t need PPIP? Or, looking at it another way, if paying 35 cents on the dollar is a high bid, then I don’t see how PPIP could help banks’ books"
Two points that are very important to bear in mind:
1) These are loans, not securities.
2) The story specifies that they are "mostly" non-performing, ie delinquent/defaulted.
Given these two facts, here's my two cents.
35 cents does indeed sound extremely high, given the recovery levels we've seen so far. That's not to say Arch Bay won't make its money back, but the returns probably won't be all that high.
It seems likely to me (though it's still a guess) that these are older vintage loans, which you would expect to have much higher recoveries than loans originated from late 2005 on, because of changing underwriting standards and the lower LTVs.
I don't think you can read too much into this for the PPIP:
a) As was commented above, Wells wrote down the Wachovia book heavily at the time of the merger, whereas most banks still hold their loans at or near par. If they took any hit at all on this (and I doubt it – pretty much by definition they'd already have taken a further impairment charge on these loans), it wasn't very big.
b) Because bids for non-performing loans are always very low – they require intensive management and have very uncertain returns – the PPIP is really aimed at portfolios of still performing but troubled loans.
c) The PPIP for loans was never going to work anyway.
Very clever move. They know that once the delinquent unsecured (i.e., credit card) debts will start flooding the market at 2 or 3 cents on the dollar, everything else will have to come down in price. This is far better than what Citi and Chase and BOA will likely unload their subprimes for.
Anonymous 10:56 –
Arch Bay is not a subsidiary of Leucadia National. Leucadia is, however, a large investor in several of Arch Bay's deals (purchased pools) and provides some financing to the firm. I know a couple of folks at Arch Bay.
So, Hu Flung Pu, indeed…
I've recently been trying to make a few in-roads to Arch Bay for a job interview.
Any hope (however scant) for a hook-up? Happy to provide CV upon request, email@example.com