Marshall & Ilsley Corp. said Monday that it had sold a pool of troubled home loans in a move that bodes well for the Milwaukee company and for other lenders looking to sell problem assets.
The sale of 800 mortgages — mostly on single-family homes in Arizona — is a boon for M&I, as it clears its books of about $297 million of housing loans that could continue to sour as unemployment rises. It's good for the industry because it shows that demand might be picking up for the kinds of troubled assets that banks, for the most part, have had a hard time unloading.
"There are buyers out there," said Dennis Klaeser, an analyst with Raymond James & Associates. "That would confirm that the real estate market is reaching a bottom."
Gregory Smith, M&I's senior vice president and chief financial officer, said the buyer was a "private investor."
He declined to identify the investor or disclose the price, though industry watchers estimate that the loans fetched slightly less than 50 cents on the dollar, given that M&I sold loans with a balance of $297 million and booked a chargeoff of $151 million on the transaction.
Smith said M&I decided to sell the loans for two reasons. It is looking to get ahead of further problems in the housing industry as more people lose their jobs. It also wanted to take advantage of an uptick of demand for loans in the secondary market.
"In the last couple of weeks we've really seen the evolution of this market for single-family, nonperforming loans," Smith said. "We felt it was a good business decision to remove these nonperforming loans, and not incur the future upkeep, maintenance and other costs associated with these properties."
M&I has sold $1.3 billion worth of problem construction and development loans over six quarters. This marks its first notable sale of home loans. Smith declined to say whether there would be more types of loan sales on the horizon.
The timing of the sale — which closed on July 31 — presented some complications for M&I. A new accounting rule dealing with material events that occur around the time a company reports earnings prompted M&I to book this sale in the second quarter. It restated second-quarter results to indicate a wider loss than it had initially reported because of higher credit costs.
M&I now lost $209 million in the second quarter, up from the $139.3 million it initially said it lost on July 17. Provisions to cover loan losses are now $619 million, up from $468 million and chargeoffs were $603.3 million instead of $452.6 million.
Smith said it was "unfortunate" that it had to restate results, as that is never desirable. But booking the transaction in the second quarter was the "appropriate" interpretation of the new accounting rule, the Financial Accounting Standards Board's FAS No. 165.
Analysts for the most part were unfazed by the restatement, while noting that M&I's third-quarter results were looking up now that it has this chargeoff behind it.
M&I said it now expects provisions and chargeoffs this quarter to be "significantly less" than those in the second quarter, after initially saying they would be similar. And based on its performance so far this quarter, it expects a "stabilization" in its level of nonperformers.
This guidance prompted analysts with Regions Financial Corp.'s Morgan Keegan & Co. Inc., and Oppenheimer & Co. to raise their earnings outlooks. "They are taking a bit more aggressive approach to managing their problem assets than it appears that they have been before," said Anthony Davis, an analyst with Stifel, Nicolaus & Co. "We're encouraged by that."