Wells Covertly Offloading Subprime Loans

A relatively obscure piece in the Triangle Business Journal, referring to a piece in the National Mortgage News, demonstrates how some of the larger banks are bypassing the PPIP and going direct to willing toxic buyers in a very "under the radar" fashion. In this particular case, Wells Fargo has apparently offloaded $600 million in subprime loans to Arch Bay Capital at 35 cents, or double what other hedge funds had offered. While the price discrepancy alone is worth a follow up, the TBJ had this interesting tidbit to note about the transaction:

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.

It is very interesting how many other comparable portfolios Wells Fargo has been offloading without public notification, at what price, and how much of an MTM hit it has had to endure as a result. What is confusing from this development is that the bank would be willing to take a 65 cent hit (which on $600 million is not, or rather in the pre-taxpayer-guarantee-of-everything days, used to not be, peanuts), when it could keep the loans, even if massively non performing, and sell into the PPIP at what the FDIC would announce is a much higher and "fair" price. Is Wells admitting it realizes that PPIP is a failure and thus is pursuing private transactions even at a major loss? The discovery of comparable transactions by other banks would be useful to determine if this is indeed the case.

hat tip Mike

Comments

[JonML]

Whether or not this is a hit to WFC earnings depends on whether the loans were included in their Wachovia kitchen sink provisioning. The secrecy might also have something to do with vendor financing which, combined with, say, a first loss retention (say by writing off some of the loan on non performance) would encourage a hedge fund buyer to up the price. While the PPIP encourages buyers to increase the price it does so simply by offering the buyer a first loss with non recourse leverage.Another reason for private rather than public deals is that no matter what price assets are sold into the PPIp any bank selling too much into the programme is admitting publicly the state of its balance sheet. The WFC board is definitely not keen to come clean, especially given the high correlation of the residential and commercial loans on their balance sheet.

[Anonymous]

35 cents on the dollar is overpaying for subprime whole loans.

there is a ton of money chasing distressed assets these days, money that will get thrown away chasing yields on unproductive assets, as usual.

the lure of easy money - some things never change.

[Anonymous]

Perhaps Arch Bay is planning on being a huge landlord. That might make it work as a LT investment.

Even if RE is flat for 15 years, they'll have cash flow from rents, and when prices eventually bottom and start to slowly (very slowly) reverse, they might well be very profitable - Eventually.

Then again, there's always the PT Barnum factor.

[finan_learn]

It would be crazy for wells to sell to Arch Bay for 35 cents and at the same time agree to the first loss retention (meaning that wells would agree to pay a certain %of the losses back to the buyer). Think abt it: even if 30% of the subprime loans go bad, it wouldbe on the hook for another200 mill( and with this being accounted as a derivative, it can be buried deep under so that even Buffet wouldnt understand the true impact:) ).

I called Wells the other day - no help offered in temrs of note mods! All they offered was a refi that would cost about 2% ofthe loan amt for closing. It makes me believe that they are not offering any real help to anyone.

[Anonymous]

ArchBay's approach makes perfect sense. Remember that you were the idiot who thought that house prices would decrease 70% from 2009 prices.