Mortgage

Fitch: GSE non-performing loan sales will help banks too

Fannie and Freddie sales could spur NPL market

The recent push by Fannie Mae and Freddie Mac to offload pools of non-performing loans could help more than just the GSEs, according to a new report from Fitch Ratings.

The new report from Fitch suggests that Fannie and Freddie’s NPL sales will increase the depth of the distressed residential mortgage market, which could have positive implications for banks seeking to sell their own non-performing loans.

“As more NPL buyers emerge and pricing trends develop, the magnitude of the impact to banks' NPL valuations and selling opportunities will become clearer,” the Fitch report states.

“Fitch believes that a deeper NPL market could help further extinguish the GSEs' and banks' crisis period residential mortgage asset quality issues,” the report continues. “At a minimum, the GSEs' NPL sales are an indication of further healing in the U.S. housing market.”

Earlier this week, Freddie Mac announced a new program for auctioning off pools of deeply delinquent non-performing loans from its mortgage investment portfolio.

The new program, called Extended Timeline Pool Offering, or EXPO, will target smaller investors by making smaller pools of non-performing loans available in addition to the larger pools of NPLs that Freddie recently began selling.

Fitch’s analysts believe that residential mortgage NPLs are far less of a threat to the GSEs and banks than they were five years ago, but note that 90-plus day past-due loans are still elevated relative to historical averages and relative to their contributions to total NPL levels.

“We believe this implies that both the GSEs and the banks remain motivated to address this lingering asset quality issue,” the report states.

According to Fitch’s data, FDIC-insured banks held a total of approximately $61 billion in 90-plus days past due one-to-four family mortgages at the end of 2014, down almost 22% from $78 billion at then end of 2013.

“While the residential mortgage NPL decline was meaningful, the average level of 90-plus day past due one-to-four family loans pre-crisis were just $4.8 billion between 2001 and 2004,” the report states. “Over that same period, these 90-plus day past due loans ranged from just one-quarter to one-third of the total 90-plus day past due loans held by U.S. banks, compared with 80% of the total NPLs on U.S. banks' balance sheets as of year-end 2014.”

By comparison, Fannie and Freddie hold about $86 billion of 90-plus day delinquent loans. The shrinkage of their NPL balances between the end of 2014 and the end of 2013 was about the same rate as the US banks, but the balances also still remain elevated relative to pre-crisis levels.

Those conditions make a robust NPL market a real possibility, Fitch said.

“Appetites for high-quality U.S. residential mortgage paper have been slow to recover since the financial crisis, as indicated by the tepid volume of securitizations of new residential loan pools,” the Fitch report said. “Seasoned distressed mortgage loan buyers initially tended to be specialized alternative investment firms, but as the market has matured, more major institutional buyers hungry for new, higher yielding opportunities have emerged.”

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