In a drastic departure from prior practice, when banks retained and worked out their own Problem loans, more and more have engaged in or are planning bulk sales of problem-loan portfolios to nonbanks. Such efforts have been well received in the marketplace.

A second trend, not yet wide-spread, involves the securitization of commercial loan products. Securitization has been very well accepted and, in fact, is the predominant mode of investment in the residential first-mortgage market.

Efforts are under way to design and introduce to the market the concept of securitization of commercial loans, whereby banks would retain their historical role of origination and servicing but would seek secondary market placement of these securitized commercial loan portfolios.

Wall Street Sees Bargains

Fueling the bulk-sale trend has been Wall Street's tremendous appetite for distressed bank loans, which can be purchased at a discount to book value.

Both institutional investors and special funds that did a number of transactions with the Resolution Trust Corp. appear enthusiastic about continuing to buy troubled loans in the bank market.

Bulk loan sales allow banks to write down troubled assets, take a one-time writeoff against profits, and achieve a balance sheet goal.

In many cases in New England, such writeoffs may have already occurred so that the loan portfolios may be offered to the market at a discount without any negative present balance sheet effect.

And once the investment community perceives that a bank has put its problem loans behind it, the bank's stock price has improved. The bank also is free to pursue its traditional business of making loans and investing in businesses.

Structuring Loan Pools

These portfolios usually are structured by pooling large groups of bank loans. Depending on the viability of the loans, different segments of the pools are assigned different values.

For the borrowing community in general, bulk loan sales introduce a whole new ball game. Borrowers will see their loans sold to third-party strangers, who have bought the loans at a discount.

Whether these buyers are institutional investors or special funds, they have the right to collect 100% of the loans, plus interest. They will take many different approaches to getting the returns they need to justify purchasing the loans in the first place.

New Secondary Market

At the same time that banks are selling off their troubled loans, they also are anticipating the securitization of their commercial loan products. Just as Fannie Mae and Freddie Mac demonstrated a secondary market for residential mortgages, banks are actively looking for a means to standardize commercial loans so that they, too, can be repackaged and sold.

Unlike bulk loan sales, commercial loan securities will not be distressed products and will be intended to sell at par. Since the key to securitization is uniformity, criteria for this new Product will include solid collateral and cash flow ratios.

Banks will conduct extensive appraisals and submit detailed financial statements before their loans will be securitized. Underwriters will be vigilant in enforcing these tough commercial loan securitization guidelines.

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