Issuers Chasing Bad-Mortgage Portfolios

Arch Bay Capital and Kondaur Capital are among the leading bidders for a large portfolio of nonperforming mortgages that Flagstar Bank is shopping - assets the shops are eyeing as future bond collateral.

The activities of Arch Bay and Kondaur are of particular interest to market players, as the firms have been behind two of the only new home-loan securitizations in recent memory. Both submitted offers on large chunks of the Flagstar portfolio, and are now conducting due-diligence reviews ahead of final bids. J.P. Morgan is brokering the sale, and hopes to complete the process in the next 30 days.

The Flagstar loans are viewed as a strong fit for Arch Bay and Kondaur, which both specialize in buying troubled loans and then working with borrowers to rehabilitate the credits - with securitization among their favored exit strategies. Fortress Investment, Goldman Sachs, Lone Star and Morgan Stanley have looked at the package as well, also with securitization in mind.

The Flagstar book is among the largest distressed-mortgage portfolios to make the rounds lately, as many offerings in the sector have totaled less than $10 million. It consists of prime-quality, alternative-A and subprime loans in the hard-hit California and Florida markets. The Troy, Mich., bank services $325 million of the accounts, with Carrington Mortgage collecting on the other $275 million.

While a number of companies have been working on issuance plans, the mortgage-securitization scene has been largely dead aside from recent deals from Arch Bay and Kondaur. Arch Bay, of Irvine, Calif., completed a $229 million offering in January via Morgan Stanley. Kondaur closed a $376.2 billion transaction via underwriter RBS on July 29, selling $79 million of the securities while retaining the rest. The issue was the Orange, Calif., firm's first, but sources said a follow-up is already in the works.

Flagstar is among a number of banks that have sought to unload distressed mortgages. The flow is expected to pick up as institutions seek to clean up their balance sheets before yearend. Indeed, Citigroup just unloaded $500 million of nonperforming loans that drew bids from mortgage-bond issuers.

Overall, industry participants expect $4 billion of such sales to take place during the fourth quarter, well ahead of the third quarter's pace. That's encouraging for securitization specialists, as it could help ease a collateral shortage that has hindered recent dealflow. J.P. Morgan is expected to be a particularly active seller, as opposed to its work as a broker for Flagstar.

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