Wells Fargo's Assets Sale Begs Some Questions

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 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 questions 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.

Comments

[everyotherc...:]

If Wells did indeed own these assets I agree there are some good questions put forth in this article. My stong sense, though, is that Wells is the contract servicer for owners who were speculative buyers of the paper; and if so, maybe a better question is "If Wells as a major servicer is going to the mat and selling big packages like this, are they making money for their efforts?

But first things first. Are these loans from portfolio or not? Wells would presumably be transparent about the transaction, so I look forward to Mr. Harrison's follow-up.

Jul 15 04:41 PM

[SLW:]

Seems like a lot of hypotheticals, maybes, whatifs, and speculation to me. Also, keep in mind that WFC is really Norwest with a name change so it shouldn't be much of a surprise it holds assets originated in the midwest (more like MN, WI, IA,NE rather than Ohio and Michigan). And my preference would be for assets from the midwest rather than west coast ( perhaps we should refer to the Plains States rather than midwest - I always find it hard to think of anything east of the Mississippi as "midwest").

It seems much more likely to me that these assets had already been written down by the time they were sold and WFC is just as likely to recored a gain as a loss from the sale (assuming, of course, they owned them in the first place).

Its OK to have questions (and you raise some good ones), but don't try to provide the answers until you have all the information.

Jul 15 04:55 PM

[Edward Harr...:]

At this point, it IS a bunch of hypotheticals and getting some clarity will be very helpful in determining what this sale means for the PPIP program, where asset values are trading, what to expect at WFC for Q2, and how other regional banks in the Midwest are doing.

I understand that the assets in question actually may NOT only be Milwaukee-based loans given the wording of the article. We maybe dealing with a standard MBS - so the Milwaukee part may just be a ed herring.

Here are three possibilities regarding ownership:

1. This is a transaction where WFC is merely the broker/servicer. The question then becomes: who is the seller and is this a distressed sale

2. This is a Wachovia asset. Wachovia is known to hae had a lot o dealings with NovaStar pre-2007. The question then becomes: how far were these assets marked down? Wachovia assets were marked way down before going on WFC's books. So, it is entirely conceivable that WFC would record a gain from the sale.

3. This is a WFC asset. The question then is the same: where are the marks and are these MBS assets or straightforward loans?

As to Norwest exposure, WFC does not have large exposure in MI and OH, but other large banks operating in the Midwest do and that's the point: if Milwaukee-based assets are selling at 35 cents on the dollar, where would Cleveland or Detroit-based assets sell in a similar transaction. And what does that mean about the potential writedowns for FITB or HBAN and the like?

So, getting a hold on this situation will be very illuminating on a lot of fronts.

Jul 15 05:38 PM

[driftwood2:]

It's public knowledge that wells fargo has a large footprint in the midwest.

Jul 16 01:19 AM

[LT:]

If you remember... after the Wachovia purchase Wells took a massive write-off. At this same time at the worst of the crisis I read where an undisclosed Regional Bank sold some (subprime) second mortgages for .10 cents on the dollar. I would place a bet that Wells books a nice gain on this while clearing another $2 billion in junk off their books forever.

Maybe even more positive is if they brokered a deal and sold them for another private fund reaping a Goldman type commission and become established as a "go to" person to liquidate distressed mortgages and they can get you 2-3 times the auction bid.

WFC did not buy Wachovia out from under Citi for the fun of it at such a premium. They intend to make a huge amount of money on this deal. You are underestimating the earnings power of these big banks after they have taken massive write-downs. What if...they just tripled their money ? (book value at time of purchase $200 m/ selling price $600m ?) Puts an entirely opposite and different spin on your article.

Jul 16 04:49 AM

[SLW:]

Thanks for taking the time to reply. I agree that once we know the details of this transaction, it could provide a clearer picture in a number of areas - but I will resist trying to extrapolate one specific transaction too broadly.


On Jul 15 05:38 PM Edward Harrison wrote:

> At this point, it IS a bunch of hypotheticals and getting some clarity
> will be very helpful in determining what this sale means for the
> PPIP program, where asset values are trading, what to expect at WFC
> for Q2, and how other regional banks in the Midwest are doing.<br/>
>
> I understand that the assets in question actually may NOT only be
> Milwaukee-based loans given the wording of the article. We maybe
> dealing with a standard MBS - so the Milwaukee part may just be a
> ed herring.
>
> Here are three possibilities regarding ownership:
>
> 1. This is a transaction where WFC is merely the broker/servicer.
> The question then becomes: who is the seller and is this a distressed
> sale
>
> 2. This is a Wachovia asset. Wachovia is known to hae had a lot o
> dealings with NovaStar pre-2007. The question then becomes: how far
> were these assets marked down? Wachovia assets were marked way down
> before going on WFC's books. So, it is entirely conceivable that
> WFC would record a gain from the sale.
>
> 3. This is a WFC asset. The question then is the same: where are
> the marks and are these MBS assets or straightforward loans?
>
> As to Norwest exposure, WFC does not have large exposure in MI and
> OH, but other large banks operating in the Midwest do and that's
> the point: if Milwaukee-based assets are selling at 35 cents on the
> dollar, where would Cleveland or Detroit-based assets sell in a similar
> transaction. And what does that mean about the potential writedowns
> for FITB or HBAN and the like?
>
> So, getting a hold on this situation will be very illuminating on
> a lot of fronts.

Jul 16 11:24 AM