Investors sweet on soured Southland property loans.

Bear Stearns' unit leads Wall Street rush for lemons

Wall Street firms and other investors are expressing increasing interest in buying soured real estate loans from California banks and thrifts, industry sources said.

There are "spirited discussions" going on between a number of California institutions and Wall Street firms over possible bulk sales of nonperforming real estate loans, said Ed Raice, president of EMC Mortgage Corp., a subsidiary of Bear Stearns Cos. which has purchased more than $1.4 billion worth of real estate loans from giant Southern California thrifts.

Campbell Chaney, a financial institutions analyst with securities brokerage firm Dakin Securities in San Francisco, noted that the Resolution Trust Corp., the federal agency in charge of liquidating the assets of failed thrifts, has virtually completed its mission.

"The RTC's inventory is getting down to the stuff that can't be sold. So the people who are looking for distressed real estate are looking at the banks and thrifts," Chaney said.

So far, Bear Stearns has led the Wall Street rush on California institutions.

In July, Irwindale-based H.F. Ahmanson & Co. -- parent of Home Savings of America, the nation's largest thrift -- announced it would sell $1.2 billion in real estate nonperformers to Bear Stearns.

In August, Chatsworth-based Great Western Financial Corp., which has been criticized by Wall Street analysts for its high volume of bad loans, announced that it too would sell $200 million worth of nonperforming real estate loans to Bear Stearns.

In addition to buying those loans, Bear Stearns has been among the top winning bidders at auctions put on by the RTC's California office over the last 18 months, according to an RTC spokeswoman. Actually, it's not Bear Stearns which is buying up the loans, but its subsidiary, Dallas-based EMC Mortgage Corp., said Raice, president of EMC.

On each of these purchased nonperforming loans, EMC will "contact the borrower and work out the loan or get the loan current or go to foreclosure," Raice said.

EMC is employing a number of Los Angeles lawyers to foreclose on the properties, local asset managers to refurbish the properties and local real estate agents to sell the properties, Raice said.

Raice declined to give any details on the size of his firm's California portfolio or what sort of a return on the loans EMC is expecting to get.

EMC is specializing in what Raice called "recycling" of the bad real estate loans. "Most of the banks are not set up to do this," he said. "They're very good at taking deposits and holding a portfolio of mortgage loans," he said.

But foreclosing on bad real loans "is not their forte," Raice said.

Raice added EMC is particularly interested in California residential real estate for a number of reasons. "There's a lot less problems, like you don't have asbestos or lead paint problems that exist in the Northeast," Raice said.

In addition, the price of property in California, which still dwarfs the prices of houses in other parts of the country, makes California real estate more attractive to work out, Raice said.

He explained that it makes more sense to refurbish and resell a house with a loan balance of $150,000 than to refurbish and resell a house with a loan balance of $30,000.

Raice noted that, if California real estate prices turn around and begin climbing again, EMC would be in a position to make a big profit. "But the flip side of that is that (would be) the end of the cycle" and EMC could soon be out of the workout business.

Not all California institutions are selling bad real estate loans in bulk to Wall Street firms.

Los Angeles-based California Federal Bank announced in October that it had hired New York-based electronic auctioning firm Canter Fitzgerald Brokerage L.P. to sell $300 million worth of its nonperforming residential and commercial real estate loans.

Tony Labozzetta, managing director of Canter Fitzgerald, said that his firm has already received about 120 phone calls from Wall Street firms, financial institutions and investment groups interested in the auction.

The auction, in which bidders will submit their bids via computer, will take place in December, said Frank Moore, a CalFed spokesman. The exact date of the auction is yet to be determined, Moore said.

"The reason they (California Federal Bank) chose us is they believe that, through our program, they could get a better price than they would through one bulk sale," Labozzetta said.

In an auction, the institution pays the auctioneer a fee and collects the proceeds. In a bulk sale, the institution sells the loans in bulk to the buyer, typically at a discount.

Chaney, the financial institutions analyst with Dakin Securities, said it remains to be seen if more institutions will chose auctions or bulk sales to unload their sour real estate loans.

In addition to CalFed's auction, Beverly Hills-based City National Bank has announced it will auction off $157 million worth of its nonperforming assets and San Francisco-based Bank of America is planning an auction of $342 million worth of nonperforming assets, Chaney noted.

Meanwhile, Labozzetta and others said that there is increasing interest in distressed California real estate. "I would say it's gotten stronger in the last 12 months than it was 24 months ago."