In a market where financial institutions are scrambling to shore up capital with asset sales, firms that facilitate these transactions successfully are poised to emerge from the recession with deeper pockets.
Mission Capital Advisors, a residential, commercial and consumer loan sale advisor, is one of the few firms to close deals in the paralyzed marketplace.
The firm, which structures sales of performing, subperforming, nonperforming and charged-off residential, commercial, commercial and industrial (C&I) and consumer whole loan portfolios, is seeing strong demand for its services - closing almost 92% of its sale offerings over the past year and a half.
"This is a perfect storm for us," said David Tobin, principal at Mission Capital. "The only real market for anybody, including people trying to sell agency eligible or conforming single-family loans, is to do a whole loan sale, not a securitization."
Indeed, whole loan sales are currently the only way to exit or monetize a portfolio, Tobin said. "The name of the game today is liquidity, and people are looking to raise cash in any way that they can, whether it is selling assets to the Troubled Asset Relief Program, repoing assets with the Federal Home Loan Bank, selling loans to Fannie Mae or Freddie Mac or selling assets, in the case of a bank, where you are reserving capital against the unpaid principle balance of the loan."
Furthermore, securitizations remain defunct. "We have seen people capitulate in terms of their securitization staffs," Tobin said. "Volume has disappeared because there are not a lot of bids out there for bonds in general. There has to be true fixed-income pension fund or insurance company demand before the securitization market returns."
Lack of Opportunities
With whole loan sales standing as one of the only seemingly viable alternatives for cash-strapped financial institutions, Mission Capital is forecasting to be up 15% to 20% over last year, just in terms of revenues. The numbers reflect the volume of business the firm is doing, according to Tobin.
For 2009, Mission is projecting a 20% to 25% increase in revenues and business volume overall. This number, however, could turn out to be even bigger - it is difficult to forecast a financial institution's quarterly needs to sell assets, although weakness in bank loan portfolios is expected to continue.
Regarding some of the more high-profile loan sales work that the firm has done, Mission Capital advised H&R Block on all of its whole loan sales as it wound down and then sold Option One Mortgage Corp. - totaling roughly $2 billion in 15 or 16 different transactions from September 2006 until May 2008. The firm also orchestrated a similar type of program for First Franklin Financial Corp. and National City, both before and after its sale to Merrill Lynch. In September 2006, Merrill purchased First Franklin Financial Corp., affiliated business units National City Home Loan Services and NationPoint, for $1.3 billion. Mission arranged 14 different sales totaling roughly $2 billion.
The firm has also done work this year for Marshall & Ilsley Bank, among other banks, selling scratch-and-dent, subperforming loans, nonperforming loans, single-family loans and, to a much greater degree, commercial and land development-type assets. Mission has also sold broken condominium loans where the condo was initially for sale, but then sales disappeared.
Last week, the firm announced two new deals in a series of smaller whole loan portfolio sales, including a portfolio of subperforming and nonperforming commercial mortgage loans, secured by various commercial real estate and business assets in the greater Chicago Metro area and towns in Indiana, with a balance of more than $50.3 million. The real estate collateral comprises retail, multifamily/condo, industrial, office, C&I, residential and commercial development land.
The company also announced that it would be accepting bids for a portfolio of commercial and residential bank-owned real estate in Tennessee, Mississippi, Georgia, South Carolina, Florida and Oregon, with a current appraised value of $29 million. The portfolio is divided into 13 pools, with a total of 232 properties. The bank-owned real estate includes retail, condo, industrial, office, single-family residential and various commercial lots and land.
And there are buyers for these assets. Last week, G8 Capital, a purchaser of real estate owned (REO) and distressed mortgage loan portfolios, as well as other performing and nonperforming loans and real estate, closed its 10th portfolio acquisition from a top-five U.S. financial institution. The portfolio consisted of 88 California REO properties. The firm also announced that it expects to close two more REO portfolio acquisitions before the end of the year, which would mean more than $150 million in portfolio acquisitions over the past 12 months. G8 Capital expects to acquire more than $500 million in REO and nonperforming loan portfolios next year.
Where the Buyers Are
The buyers in today's market are private equity funds and high-net-worth individuals and operators, with not as much Wall Street money chasing the forced selling, Tobin said. Mission just completed a $126 million sale of land development assets in Arizona that closed at the end of the third quarter.
In the deal, 26 loans were sold to 12 different investors, and eight of these investors were new to Mission Capital. Many of the investors were also local to the area.
"Local investors are typically the smartest; they know the market best," Tobin said. "Arizona is a beaten-up market just like Florida or Las Vegas, and as investors are out buying land assets - which they are in droves - that sets the floor for the market."
Furthermore, investors can buy commercial loans and assets backed by land, even if they are performing, at fairly significant discounts because people are underwriting collateral to take two to four years to resolve, Tobin said.
There are also new sellers. The Federal Deposit Insurance Corp. is now entering the whole loan marketplace selling assets, in some cases doing structured sales. In other instances, like with Downey Savings Bank, the FDIC engineered a sale to U.S. Bancorp where it arranged a loss sharing agreement on the Downey performing loans.
"This is a great resolution on this type of portfolio because it is such a large portfolio of option ARMs that you don't really want to sell it into the marketplace because even for good-performing loans, the market is rather thin," Tobin said.
The FDIC has also set a precedent that land assets and land development assets can be sold into the market, while performing assets are better held or sold in a shared-appreciation type of transaction, Tobin said.
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