DECEMBER 23, 2009
By LINGLING WEI, Wall Street Journal
Investors are jostling for the chance to buy a $1.1 billion package of commercial real-estate loans extended by failed banks, as these once-toxic assets attract growing interest.
More than a dozen investors, including Texas banker Andrew Beal, have submitted bids to the Federal Deposit Insurance Corp. for the portfolio of loans held by Franklin Bank, IndyMac Bank and other failed lenders, according to people familiar with the matter.
But the portfolio represents only a fraction of the real-estate loans held by the FDIC and the volume is mounting as more banks fail.
The FDIC, which declined to comment on pending transactions, is expected to announce the winning bidder within weeks in what will be its second-largest bulk sale of commercial-property assets since the downturn. The largest deal involved the sale in October of about $5 billion in condominium loans and other property made by now-defunct Corus Bank.
Demand for these assets, at a discounted price, has grown intense. Investors have amassed billions of dollars to buy distressed loans and property much as investors like Sam Zell did in the early 1990s.
"A lot of investors are anxious to invest cash they have raised," said David Tobin, a principal with Mission Capital Advisors, a loan-sale adviser.
But many banks won't sell. Some, especially community and regional banks, haven't marked down the value of their existing loan portfolios to current market rates—something that could jeopardize the survival of weaker lenders. Many hope the low cost of funds offered by historically low interest rates will let them earn their way out of trouble.
"They don't want to be blowing the entire mess out at the low point of the cycle," says John Howley, an executive director and specialist in loan sales at Cushman & Wakefield, a real-estate firm.
That makes the FDIC practically the only game in town.
The agency has to sell off a growing pipeline of real-estate assets acquired from banks that collapsed after lending too aggressively to owners of offices, shopping malls, apartments and other commercial property.
Demand for its current package of loans is a consolation of sorts for the FDIC, which is trying to limit taxpayer losses and shore up its deposit-insurance fund. An avalanche of bank failures wiped out the fund in the third quarter of this year, putting it at negative $8.2 billion at the end of September.
While the loans are expected to be sold for a steep discount, experts say, the competition should drive the price higher. Also, the FDIC is structuring the deal so taxpayers will share in the upside if the market improves.
Despite the strong interest from investors, the FDIC faces growing challenges to unload the assets. A total of 140 banks have gone belly up so far this year. Currently, the FDIC has about $30 billion in real-estate debt held by failed banks that is available for sale for the next 12 months, according to the agency. That figure is double the level a year ago.
In most FDIC deals involving failed banks during the current downturn, the agency has lined up buyers to take over loans, deposits, branches and most other assets when the banks have failed. But for some failed banks like Corus, Franklin and IndyMac, the FDIC has decided to sell some hard-to-value assets separately.
These bulk sales use a public-private partnership structure pioneered by the Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess in the early 1990s.
The set-up enticed private investors to buy distressed real-estate assets while giving the government the opportunity to make money on behalf of taxpayers should the assets rise in value.
Since last year, the FDIC has sold residential and commercial loans through eight such partnerships, with the agency's equity interest ranging from 50% to 80%. Those partnerships bought loans at discounts ranging from pennies on the dollar to more than 50 cents on the dollar of face value.
These structured deals, however, carry additional risk for the FDIC and, by extension, taxpayers. Because the agency takes a big chunk of the equity and provides financing, it stands to lose more if the markets continue to decline.
Under the options being considered for the $1.1 billion package, the FDIC would likely hold a 60% stake and provide financing. Deutsche Bank AG is advising the FDIC on the auction.
The portfolio consists of mostly nonperforming commercial property loans. Both Franklin, led by mortgage-bond pioneer Lewis Ranieri, and IndyMac were best known as home-mortgage lenders. But they also lent heavily to home builders and other property developers during the boom times, in states from California to Texas.
According to Foresight Analytics, Franklin had a total of $1.6 billion in commercial real-estate loans as of the third quarter of 2008, before its closure last November, and IndyMac had about $2.8 billion in such loans before its failure in July 2008.
Among the bidders for the portfolio is Mr. Beal, whose Beal Bank laid low during the boom years and avoided much of the real-estate bust. It has since gone on an opportunistic buying and lending binge, increasing its assets to more than $9 billion from $2.9 billion in 2007.
"We're in the business of buying loans," said Mr. Beal, a math whiz who likes to drive racecars in his spare time. "There are good opportunities, but investors have to be careful of what they buy and what they pay for."
He said the bank's goal is to buy performing loans at discounts. If the borrower defaults, the bank may modify the terms to bring it back to current. The bank would make money as long as the borrower stays current on modified terms.
contributed to this article.
Write to Lingling Wei at email@example.com