Toxic loans for sale!
Some banks are looking to dump loans to fix balance sheet woes. But others resist, betting the economy will recover.
NEW YORK (CNNMoney.com) -- For some banks, trying to get healthy has simply meant getting smaller.
With problems in the residential and commercial real estate markets continuing to fester, a number of lenders have been selling off some of their most troubled assets in recent months.
Marshall & Ilsley (MI), a Milwaukee-based regional bank that has branches in the economically strained states of Arizona and Florida, sold nearly $500 million worth of non-performing or at-risk loans during the first nine months of 2009.
Georgia's Synovus Financial (SNV) shed some $339 million worth of similarly troubled real-estate development loans and mortgages in the third quarter. The company has said it plans on selling another $261 million by year end.
Loan sales are hardly new to the banking industry. Lenders will often sell both good and bad loans to make sure they aren't overexposed to any one particular asset class.
In recent months, however, lenders have increasingly looked at loan sales as borrowers struggle to stay current.
"You are seeing a lot more lenders thinking about it," said Laird Minor, a managing director at Nautilus Capital, a firm that helps banks broker distressed loans to investors.
In one telling indicator, banks sold nearly $1 trillion worth of 1-4 family mortgages over the second and third quarters, according to SNL Financial, more than twice the amount sold during the 2007 when the U.S. housing market was first starting to show signs of strain.
Still, many lenders have been reluctant to act as aggressively as Synovus and Marshall & Ilsley. In fact, most banks have resisted selling their most troubled loans altogether -- largely out of fears that the sales could trigger severe losses.
"The problem is that banks are facing rather difficult capital problems these days and can't take the losses involved," said Minor.
It hasn't helped that a government program geared towards removing so-called toxic loans from banks' books is off to a slow start. The Treasury Department unveiled the Public-Private Investment Program, or PPIP, in March. Only a handful of deals have taken place as part of PPIP.
Synovus and Marshall & Ilsley were only able to dump some of their toxic assets because both companies built up a significant capital cushion in recent months to absorb the losses, said Robert Patten, an analyst at Morgan Keegan who tracks the two companies.
Marshall & Ilsley reported a loss of $248.4 million in the third quarter, but the bank has raised nearly $1.4 billion through stock offerings this year. Likewise, Synovus posted a third quarter loss of $423.7 million but it has sold $571 million worth of stock.
Synovus, however, may not have had much choice in the matter. State and federal agencies like the Federal Deposit Insurance Corp. have been leaning on both big and small lenders to clean up their balance sheets.
In September, the company revealed it had reached an agreement with the Federal Reserve Bank of Atlanta and the State of Georgia to boost its capital levels and reduce its non-performing assets.
Of course, some banks are holding out hope that the U.S. economy is indeed pulling out of recession and that their loan portfolios will recover in value.
The fact that Synovus and Marshall & Ilsley have both been punished by investors for booking losses now also is probably keeping many banks from rushing to sell troubled assets. Shares of the two banks have each fallen sharply in the past few months while the overall bank sector has rallied.
But even that is shaping up to be a risky bet. Last week, the government reported that the nation's unemployment rate soared above 10% for the first time since 1983, suggesting that some loans will only continue to deteriorate in value.
That could prove costly for banks that chose to hold onto their non-performing loans, said Kelly Garland, managing partner at Steel Mountain Capital Management, a residential mortgage investment firm based in Lakewood, Colorado.
"Their hope is that things stay where they are, that interest rates stay low and that somehow the recovery bounces us out of this position before long," he said. "I don't believe this strategy will provide the results they are hoping for. It will simply prolong the devaluation of the assets."