SAN FRANCISCO -- A real estate recovery in California is fueling an already heated debate among bankers over whether it makes sense to sell off problem assets in bulk.

Lenders use bulk sales to put on the block whole portfolios of loans and foreclosed property with credit problems of varying severity.

Boosters tout the technique as an efficient and rapid method for cleaning up a balance sheet burdened by loan problems.

"Bulk sales reduce asset management costs and remove issues with regulators, rating agencies, and investors," said D. Michael Van Konynenburg, an executive vice president at Secured Capital Corp., a Los Angeles firm that brokers bulk deals. "Every institution that has done one has realized the benefits."

Distressed Realty Surges

Now, with the Golden State's economy on the mend and an ever-larger pool of buyers chasing deals, the price of distressed Southern California real estate has risen sharply.

In recent bulk sales, mixed pools of problem commercial realty loans and foreclosed property fetched 75% or more of original loan value. That was up from about 65% obtained in sales late last year and 55% at the end of 1992. Buyers who once demanded returns of 30% or more on their capital are today settling for a more modest 15%.

Skeptics are seizing on these market gains as proof that many deals carried out at deep discounts were mistakes. They argue institutions that sold portfolios near the market bottom squandered valuable assets and took unnecessary hits against income and capital.

Even as prices recover, they contend, some institutions are selling assets too cheaply, forcing unneeded writedowns and charges against earnings.

'Abdication of Responsibility'

"Any bulk sale simply done to accomplish a reduction in nonperforming assets represents management's abdication of its responsibility," said Glendale Federal Bank chief executive Stephen J. Trafton, one of the most scathing critics of the deals.

Mr. Trafton just agreed to sell in bulk $226 million in problem assets to four separate buyers. But he stressed that Glendale Federal waited until the market had firmed up enough to hold a sale without taking further writedowns or special charges.

"This sale ... has rewarded our patience in waiting for improved market conditions rather than dumping problem loans at fire sale prices," Mr. Trafton said in a press releas announcing the sale results.

Most experts take a more moderate view, noting the pros and cons of bulk sales. They stress that each institution must consider its particular situation in weighing the tradeoffs.

On one hand, a bulk sale lets an institution quickly dig out from under a mountain of bad loans, providing a series of benefits. It slashes the substantial cost of carrying nonperforming credits, refocuses attention on marketing rather than loan workouts, and wins back the favor of leery investors.

But institutions inevitably sell assets at discounts well below what they could realize by working out credits one at a time while waiting for the market to turn. What's more, massive additional writedowns may be necessary unless an institution has ample loan-loss reserves and has already aggressively written down its portfolio.

"Those companies that kept their loans have done very well, although the process is longer," observed Stan Ross, a managing partner in the Los Angeles office of the accounting firm Kenneth Leventhal & Co. "But if you want to clean up the balance sheet faster and you have a sufficient capital base, [bulk sales] provide hope for a speedier recovery - if you can bear the burden."

Mr. Trafton's barbs are aimed most pointedly at several of the largest Southern California thrifts: H.F. Ahmanson & Co., Great Western Financial Corp., and California Federal Bank.

In the last year, each of the savings giants sold off huge pools of assets, sharply reducing credit problems at the cost of chargeoffs amounting to hundreds of millions of dollars.

Most recently, Los Angeles-based California Federal agreed to sell two packages of bad loans and foreclosed property totaling $581 million, part of a broader balance sheet cleanup designed to trim nonperforming assets from more than 5% to less than 2% of total assets.

Despite a recovering real estate market, the thrift took a $280 million special charge in the first quarter in connection with the two sales and a related loan securitization program.

California Federal chief executive Edward G. Harshfield has little patience for those who question his credit cleanup strategy.

"This thing was overwhelming us," he said in an April interview, referring to the thrift's burden of bad loans and foreclosed property. "To work it off would have cost the same $200 [million] to $300 million and taken three more years of negative earnings."

California's major banks also have grappled with the bulk sale question. BankAmerica Corp. carried out some of the industry's most massive sales, but Wells Fargo & Co. spurned the technique.

Big bulk sales in 1993 helped BankAmerica achieve impressive gains in credit quality despite California's depressed economy.

But the nation's second-largest bank company sold at distressed prices. In its biggest transaction, it received just 34% of face value on a $1.4 billion package sold to a Morgan Stanley fund.


BankAmerica was reacting to a special set of problems following its 1992 purchase of Security Pacific Corp.

The San Francisco bank company inherited billions of dollars in bad assets from Security Pacific. It hadn't originated the loans and had little confidence in their underlying quality.

As a result, BankAmerica had compelling reasons to get rid of the assets quickly. In addition, the acquisition used a purchase accounting method that gave BankAmerica the opportunity to book credit losses as goodwill, thereby avoiding charges to earnings.

Crosstown rival Wells Fargo took the opposite tack, relying entirely on workouts and individual property sales to cleanse its portfolio.

Wells was convinced of the solid underlying value of its credits. Said chief financial officer Rodney Jacobs: "We had a lot of confidence in the projects we had financed. Our view was that the markets were not differentiating good properties from bad properties."

Wells endured several years with high problem asset totals, while pressure from regulators and Wall Street mounted. But now, with markets improving, Wells has been vindicated.

The company's problem assets have been falling for more than a year, and it has recovered tens of millions of dollars in credits previously charged off. Its stock has tripled in value since the market bottom three years ago.

Veteran of Texas Bust

First Interstate Bancorp, which owns California's third-largest bank, falls somewhere in between its two major rivals.

When California went sour, the Los Angeles-based bank company already had lived through the nightmare of the Texas real estate bust. It moved fast to deal with credit problems in the Golden State.

Today nonperforming assets amount to only 15% of the total four years ago. The company will make no additions to loanloss reserves this year. Meanwhile, First Interstate has become a darling of Wall Street and regulators.

Chief credit officer Robert Greene said small-scale bulk sales accounted for roughly one-third of the company's credit gains. Restructuring of loans and aggressive collection, including foreclosure, accounted for the remaining two-thirds, he said.

"An institution's strategic objectives are important in the equation," Mr. Greene said. "If you have an acquisition strategy, a growth strategy, it is in your best interest to aggressively reduce credit problems."

Now that California's major banks and thrifts have gotten rid of most problem credits, bulk sales are likely to be fewer and smaller in size.

Market participants say the universe of investor groups eager to buy California real estate assets amounts to several hundred. But the pool of assets avanable to feed their appetites is shrinking.

Bidding Wars

Today the problem is a shortage of sellers, not buyers. Bidding in recent sales without exception has been highly competitive.

A straw in the wind: One of the successful bidders in Glendale Federal's bulk sale was none other than Wells Fargo, which is buying a pool of loans on apartments, offices, and retail developments.

"Two years ago, we were flying all over the country begging people to buy," recalled Mr. Van Konynenburg of Secured Capital. "Now, in any sale we can bring in 10 to 15 different buyers."

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