Suffocating under high ratios of nonperforming assets, some banks are finally putting such loans on the market — alongside higher-quality credits that sweeten the overall pot for buyers.
As a result, banks have been able to fetch higher prices for their worst-performing loans.
Because these types of mixed batches are not subject to mark-to-market accounting rules, the blended bundles avoid heavier markdowns. "This way, they don't have to mark the loans as severely," said Jon Daurio, the chairman and chief executive of Kondaur Capital Corp., a Santa Ana, Calif., investment firm that buys mortgages. "Whereas if they tried to sell only nonperforming loans, the price would be much lower."
Gauging how many banks are pursuing this approach or others is difficult, given that most lenders are as reluctant to talk about their efforts as they are to absorb losses in general. When they have sold loans throughout the financial crisis, bankers have preferred to sell individual credits, as those types of transactions tend to draw better prices, even if it takes longer for a bank to work its way through its portfolio. Now, though, when selling in bulk to move assets off the books with some pace, mixed pools have become the way to go, Daurio said.
A spokeswoman for Marshall & Ilsley Corp. said the Milwaukee company included some performing loans in its sale on July 31 of $297 million of mortgages.
And Synovus Financial Corp., which sold more than $400 million in troubled loans last quarter, is starting to market riskier, performing loans alongside performers, according to Tommy Prescott, the Columbus, Ga., company's chief financial officer.
"We're willing to do that — we're looking at that going forward," Prescott said. "We are beginning to put some of the higher-risk … performing loans in some pools that we're looking at" selling.
Synovus' priority is to unload nonperformers. Its ratio of nonperforming assets to total assets stood at 6.24% as of June 30, among the highest in banking. The industrywide ratio for large banks is 3.39%, according to KBW Inc.'s Keefe, Bruyette & Woods Inc..
Though selling performing loans may not be ideal, it is worth it if the credit brings a high price and doing so helps the company clean up its balance sheet, Prescott said.
He said demand seems to be spiking for troubled loans. Synovus sold $404 million of loans in the second quarter, versus $106 million in the first quarter. Its loans in the second quarter drew 45% of their initial value, which Prescott described as "slightly" better pricing than in the first.
Gregory Smith, a senior vice president and the chief financial officer of M&I, said that an uptick of activity in the secondary market spurred the company to sell 800 home loans, most of them in Arizona. A spokeswoman for M&I said most of those loans were nonperformers or "moving in that direction."
Industry watchers estimate that the loans fetched just under 50% of their initial face value.
Like Synovus, M&I is striving to pare down its unwieldy level of nonperforming loans, which accounted for just over 5% of total loans and leases at the end of June. Smith said the sale moved M&I in that direction while helping it get ahead of more trouble in the housing market, which is expected to worsen as unemployment rises and home values continue falling.
Buyers of such loans typically include mortgage investors, private-equity firms and hedge funds.
Even if demand is picking up, the majority of banks are reluctant to book losses by selling their troubled assets at steep discounts.
Take BB&T Corp. The Winston-Salem, N.C., company sold a package of $15 million of loans in the first half of the year to test the market. "We just wanted to dabble and see what the discounts would be, and we didn't like what we saw," CEO Kelly King said in a conference call last month.
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets, said only companies with the highest level of nonperformers, like M&I and Synovus, have a real impetus to sell assets. Others may be wary of selling assets for fear of establishing a market-clearing price that could force them to mark down the carrying value of their nonperforming portfolios, he said.
Prescott said that fear is not totally unwarranted, as sales of assets at a discount could put pressure on fair-value appraisals. But he said that concern is not holding Synovus back.
"If you don't" sell assets, he said, "somebody else will. You'd just as soon be the guy out there de-risking and cleaning up your balance sheet."