03/12/2010

FDIC Arranges Rapid-Fire Loan Liquidations

The FDIC is speeding up efforts to sell home loans it has taken on from failed banks.

Stifel Nicolaus and HSBC are separately preparing to pitch loan portfolios on behalf of the deposit insurer, adding to a string of so-called structured transactions it began conducting late last year. Those offerings, in turn, fit into a multi-pronged effort to shed a mix of bank assets seized since the 2007 credit-market meltdown.

While market players have been anticipating the loan sales, they thought the process would bring gradual one-at-a-time liquidations. Instead, the Stifel and HSBC offerings would join two other portfolios that have already been making the rounds for about a month - with Stifel also leading one of those pitches and RBS handling the other.

Why is the project moving faster than anticipated? The FDIC expects the number of banks under its control to swell this year as more of the institutions eventually succumb to financial-crisis pressures, meaning it will need to make room for their mortgage holdings. The insurer has already taken 193 depository institutions into receivership since mid-2007. Some industry players see the total surpassing 450 this year. Stifel, HSBC and RBS were among a group of institutions designated by the FDIC last year to aid in the resulting home-loan sales. So were Barclays, Deutsche Bank, Keefe, Bruyette & Woods and Pentalpha.

Stifel's next offering is expected to hit the market in the coming weeks. It will likely consist of some $1 billion of first- and second-lien loans, mostly nonperforming, that the FDIC took on with the December 2009 failure of Cleveland-based AmTrust Bank.

HSBC's transaction is earlier in its development. The bank got the assignment this week, beating several other candidates.

HSBC and the FDIC are now sifting through the insurer's loan portfolio to assemble a pool for sale, likely totaling $500 million to $2 billion. Expectations are that the offering will be ready to go in 30-60 days, consisting of performing and nonperforming mortgages and home-equity loans from a number of banks. Many would be tied to borrowers in Western U.S. markets that were hit hard by defaults.

Stifel's other offering, called Single Family Residential, 2010-2, weighs in at $475 million. It encompasses loans from 16 banks across the country. A mid-April pricing is planned. The RBS pool, Single Family Residential, 2010-1, contains some $1 billion of loans from 19 banks, mostly in Florida. It could price any day.

Structured transactions use special-purpose vehicles to hold the loans for sale. Buyers, who must be pre-screened, agree to manage the accounts and handle servicing - while taking stakes of 30-50% in the vehicles. The FDIC picks up the rest and gets a cut of returns.

The FDIC has been putting together similar offerings for other types of failed-bank assets. It has also been working to securitize some holdings.

One such transaction priced on March 5, with Barclays selling $1.8 billon of FDIC-insured bonds backed by previously issued mortgage securities. Barclays also priced a $1.4 billion commercial mortgage securitization for FDIC on March 10, and is planning a sale of home-loan bonds held by the deposit insurer. Each of those deals would involve assets from big banks. Separately, Pentalpha and Sandler O'Neill & Partners are helping the FDIC assemble securitizations of loans from smaller banks. It looks like underwriting assignments will go out soon.

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