Government agencies don't generally enjoy a reputation of being cutting edge. Yet as it turns out, when it comes to using the Internet to advertise and sell unwanted loans, the federal government, and the Federal Deposit Insurance Corp. in particular, is a leader. In fact, the FDIC accounts for the lion's share of business on the two most popular online auction sites for such loans, HanoverTrade and DebtX. Many of the loans sold are linked to previous securitizations.
Since January of 2001, for example, HanoverTrade has auctioned $2.1 billion in loans, about $1.25 billion of which came from the FDIC, the Small Business Administration, and the Department of Housing and Urban Development. Meanwhile, DebtX, which has auctioned about $800 million in loans since its inception in January 2000, has handled eight FDIC deals. Although the specific value of those deals was not available, according to information on the company's Web site, just three of those deals totaled $226 million.
"The government sector has been the quickest to adopt Internet technology to dispose of these assets," said Irma Tavares, president of HanoverTrade. "Over the last six months, there's been a lot more participation by the buyside as they get comfortable with the technology. But the government has really forced the issue."
Recently, HanoverTrade helped the FDIC auction off the last of the assets of Superior Bank, which the FDIC took over last summer. The $267 million auction of subprime loans - from Superior Bank's mortgage company subsidiary Alliance Funding, were sold in a sealed bid in April. Bear Stearns special service subsidiary, EMC Mortgage Corp., bought the portfolio of residuals, which were reportedly discounted last fall from $1.1 billion to $939 million.
Also in April, DebtX helped handle the auction of the government seized NextCard credit card portfolio. About 900 loans totaling just over $1.1 million were auctioned on the site.
But these are just two of the more high-profile auctions involving FDIC assets. It turns out that the FDIC is a regular seller on the auction sites of loans linked to securitizations issued by the Resolution Trust Corp. (RTC). As part of the Saving & Loan bailout of the late 1980s and early 1990s, the RTC repackaged many loans and floated MBS and CMBS offerings.
When the RTC was dissolved in the late 1990s, the FDIC inherited any final housecleaning. Tavares explained that that housekeeping includes handling the unwinding of those securities, typically when only 10% to 20% of the assets remain. These assets include residential, commercial, multi-family and manufactured housing, Tavares said. The FDIC did not make a spokesperson available for comment by press time.
DebtX CEO Kingsley Greenland noted that online auctions enjoy three primary advantages: a cost-effective way to reach a broad swath of potential buyers, streamlined due diligence (no more flying to another city and sifting through filing cabinets), and a choice of auction formats, either sealed bid or outcry format. The latter allows buyers to see the size of incremental bids and are therefore less likely to be outbid by a "single tick."
Adds Tavares: "We've found the Internet the best way to distribute the data. It's a very efficient and secure way to do so compared to a 50 page, mailed document." Clearly the FDIC agrees.