Thursday, April 01, 2010

FDIC Sells Troubled Home Loans at 14c on the Dollar?!?!

It's possible that I'm misinterpreting this (anyone disagree with my math? it seems pretty simple) - let's look at the story:

"WASHINGTON (AP) -- The Federal Deposit Insurance Corp. has sold $490.7 million in troubled mortgage loans from 19 banks that failed between August 2008 and March 2009 as it works through an inventory of assets from the institutions it has taken over.

The FDIC said Thursday that the winning bidder in its auction, Charlotte, N.C.-based Roundpoint Mortgage Servicing Corp., paid $34.4 million for a 50 percent stake in a new company set up to hold the home mortgage loans. The FDIC has the other 50 percent."

I whipped out my HP-12C (yeah mofo's - I still have it!)  and did some math.. If $34.4MM bought 50% of the holding company, that implies that the total value is $68.8MM.  If the face value of the assets is $490.7MM, then $68.8MM is 14c on the dollar!  Also known as 14%.

Now what's the point?  For me it's this:  the crisis was never about liquidity - it was about SOLVENCY!  If it had been a (temporary) liquidity problem, these loans would be worth a whole lot more than 14c on the dollar now, two years later.  So called temporarily dislocated "fire sale prices" that people were blaming for driving financial firms to bankruptcy were not fire sale prices. They were real, true, prices.

So, the article notes that these loans in question were mostly in Arizona, Florida and Georgia, some of the worst areas of the housing bust, with the highest numbers of failed banks.  Again, I interpret two things:  1) I find it impossible to believe that banks have taken all the losses they will need to take on real estate loans and 2) I can't imagine we've seen the bottom in home prices.


Disclosures:  short XLF, long a house.


CP said...

I agree!

getyourselfconnected said...

No worries, all on the Calculated Risk blog assure me this is all normal and we little folk never saw it before. So you know its true.

Sex Panther; 50% of the time, it works everytime.

mr_a11is said...

Don't quote me on this, but..

I think the $34.4M is the equity contribution (50%). The FDIC kicks in the other 50% equity, and finances the remaining amount of the bid. The article doesn't say what the total bid amount was. I seem to recall they'd finance up to 70%.

At least that was my understanding based on an article I read a while back. I could be wrong.

David Merkel said...

KD -- look at this article:

Quoting: "The RoundPoint bid equates to 42% of the unpaid principal balance of the portfolio, and the servicer will be responsible for managing the loans."

If I understand it right, it is 84 cents on the dollar, because of the leverage provided. The 84% figure, with half of the loans at least 30 days delinquent or worse, is reasonable. Performing loans should be near par. REO should go near 50 cents on the dollar. Stuff less bad should be higher.

I don't know for sure; I could be wrong, but that is what it seems to be. It's still pretty bad.

Kid Dynamite said...

thank you, David, and Mr_a11is. that makes more sense.

wcw said...

Cool kids still have their HP 11C from physics class. I gave mine to my buddy who is one of those permanent physics grad students Caltech likes to grow. An 11C will get you more raised eyebrows in Pasadena physics labs than a Porsche in the parking lot.

Kid Dynamite said...

wow - i never had an HP11c. i did, however have the world class TI-82 in high school calculus - the graphing calculator! that thing was a beast. although i bet the Iphone could out-process it nowadays.