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SNL Financial: A Resurrection in Problem Loan Sales


Sept. 3 - The pace of problem loan sales at banks rebounded in the second quarter, reaching the highest level in the last 18 months.

After a slow start to 2014, banks' sales of nonaccrual loans rose considerably in the second quarter. Problem loan sales at banks more than tripled in the period, jumping 222.2% from the first quarter and 12.6% from a year earlier. Inflows of nonaccrual loans dropped as well, declining 6.9% from the linked quarter and more than 29.3% from a year ago, according to SNL data.

Banks' problem loan sales bounced back even as real estate prices held virtually flat in the second quarter, with U.S. home prices climbing just 0.8% from the linked quarter, according to the Federal Housing Finance Agency. Still, the jump in volume could have come from pent-up demand, with bankers noting that problem loan sales activity was exceptionally slow in the first quarter due to the severe winter.

Even at this late stage in the credit cycle, the potential supply of problem loans that could be sold on the market remains considerable. For instance, Compass Point analysts estimate that the supply of nonperforming one- to four-family mortgage loans stood at $305 billion at the end of the second quarter, based on holdings of commercial banks, the Department of Housing and Urban Development and the government-sponsored enterprises. The analysts said pricing on recent sales has reportedly increased, even with home prices holding fairly steady. The higher pricing could lead to increased sales activity, they said.

"Given increases in pricing, we would not be surprised to see more supply come to market (and recent activity and press reports indicate this is happening)," Compass Point analysts wrote in an Aug. 26 report.

Indeed, banks significantly increased their plans to sell problem loans in the second quarter, reversing a trend witnessed over the last few quarters. Banks reported $110.48 billion in loans classified as held for sale in the second quarter, up 42.5% from $77.51 billion in the linked quarter, SNL data shows.

Some banks took opportunities to purge their balance sheets in the second quarter and continued to take hits despite the increase in prices.

"On the nonperforming side, I still think for the folks that still have meaningful nonperformers on their balance sheet, I think the bid/ask spread is still pretty wide," said Kenneth Segal, a managing director in the bank and loan advisory group at Situs. "Despite relative recovery in values, there isn't still enough value there to support motivating the folks holding these assets to sell them."

Segal, whose firm provides portfolio valuation services and has also recently worked with banks on data population and aggregation services to help with stress testing, told SNL that the spread between investors' bids and banks' carrying values has narrowed some but still remains wide enough to result in losses when banks sell problem loans.

"With the nonperformers, particularly for the smaller banks, the bid/ask spread is more narrow than it used to be, but I still think it is sufficiently wide to prevent a lot of people from truly cleaning up their balance sheet without a major capital infusion. It's still relatively challenging for a smaller bank to attract capital," Segal said.

Keep reading the full report and analysis here: