Wells sells $600 million in distressed assets at 35 cents on dollar

I got a tip from a friend Andrew about a sale of assets by Wells Fargo (WFC) which raises a number of interesting questions.  He sent me the following 14 July article from the Milwaukee Business Journal.

Wells Fargo sold $600 million in mostly non-performing subprime loans to Irvine, Calif.-based Arch Bay Capital, National Mortgage News reported, citing sources familiar with the sale.

The industry publication said the loans sold for 35 cents on the dollar, about double what most hedge funds were offering.

Most of the subprime loans San Francisco-based Wells Fargo (NYSE: WFC) sold were originated by once-high flying Accredited Home Loans and NovaStar Financial, both of which originated subprime loans in the Milwaukee area.

No one involved in the recent sale is talking on the record, which may be a key reason lenders will look to private transactions to unload bad assets rather than turn to a government-sponsored program, National Mortgage News said.

Now, this transaction has not received a lot of coverage.  But the OC Register’s Matthew Padilla covered it as well as the buyer Arch Bay is based there. And they ask some interesting question based on the piece from the original source, National Mortgage News.

National Mortgage News reports Wells Fargo recently sold $600 million in distressed subprime loans to Irvine-based Arch Bay Capital.

Paul Muolo of NMN says the loans were originally funded by two mid-sized subprime lenders: Accredited Home Loans and NovaStar Financial.

Arch Bay co-founder Steven Davis declined to comment on the purported sale to his firm, referring calls to his partner Shawn Miller who serves as Arch Bay’s CEO. Mr. Davis didn’t deny that the sale took place but he wouldn’t confirm it either. Mr. Miller could not be reached for comment.

Meanwhile, one question the sale raises is this: How exactly did the publicly traded Wells wind up with so many crummy non-prime loans from these once highflying firms? Answer: I don’t know and Wells isn’t talking. A company spokesman said the bank’s corporate policy is to not discuss its loan auctions.

The nice thing about the private non-performing loan market is that none of these messy details have to see the light of day, including the price paid. One banker told me that the 35 cents on the dollar that Arch Bay reportedly paid was twice what some hedge fund bidders were offering.

I have calls into Wells and Arch Bay and will update the post if and when I hear back.

Does such a sizable deal signal we really don’t need PPIP? Or, looking at it another way, if paying 35 cents on the dollar is a high bid, then I don’t see how PPIP could help banks’ books.

The last question is a good one, but I have others.  Here is what I wonder:

  • Why does Wells have this exposure to Milwaukee-based loans to begin with?  If these were part of an MBS, the loan pool would be more dispersed. Were they out buying NovaStar and Accredited Home loans back in 2007 when these companies’ subprime operations went to the wall?  (See my list of bank writedown news by lender for the 2007 events at NovaStar and Accredited Home.)
  • Do they even own these loans or are they the ‘asset manager?’  They could be selling on behalf of a third party.  But, as they are not talking, we have to assume this is their own exposure.
  • How much more Midwestern exposure does Wells have?  I have to assume they bought these loans to hold on their books if these are not part of a broader MBS pool.  I know they have operations in the Midwest because of Norwest. But, the fact that they probably bought loans outright to hold on their books would suggest that they have a lot of exposure in the Midwest.
  • As The OC Register says: is 35 cents a high bid?  That would suggest massive writedowns waiting to be taken on other assets of  similar quality in the Midwest. Think Ohio and Michigan.  Where are these assets marked on the books?  At 35 cents, higher, or lower?  I’m betting much higher. Will we learn more in the WFC Q2 conference call next Wednesday on 22 July?
  • Who else is doing deals like this?  And does that mean they are bypassing the PPIP program because they can do these deals privately?

Finally, as the OC Register suggests, a 35 cents on the dollar bid means huge writedowns that banks do not want to take – especially banks still on government TARP life support like WFC.  To me, this explains very well why the PPIP program was a failure: if banks can sell distressed assets quietly over time to private bidders, they might be able to delay taking writedowns.  But, the price discovery involved in the PPIP program would be a blood bath for banks already capital-constrained.  This is why the program has failed.

  1. Anonymous says

    Fascinating article, Ed. I think the key question is whether Wells owned these loans or was acting as an agent. I would tend to think they probably were acting as an agent for someone else as I can’t figure out a rational path from Accredited and Nova Star to Wells.

    Here, however, is one off the wall idea. Was Wells providing warehouse loans to the two? If so, as the two companies melted down did Wells end up with these loans because they were collateral that was backing their warehouse loans?

    1. Edward Harrison says

      Tom, that is a distinct possibility which is why I wondered if they were ‘brokering’ a transaction.

      another question is where are these marks on WFC’s books. I got a good tip from a commenter over at Naked Capitalism who makes a good case for these loans being Wachovia-originated paper that has already been severely marked down.

      Apparently Wachovia had a lot of business with NovaStar. So, it would make sense that this could be Wachovia paper now being marked up.

      I would also note that WFC was one of the few banks that made M2M adjustments in Q1 due to the revised FAS 157 guidance so the notes in their 10-Q might give some clues as to how their marks are changing and the effect on Q2 earnings.

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