More lenders mull bulk sales of 'nonperformers.' (Special Report: Banking and Finance)

Ahmanson's $1.2 billion sale could trigger mega-deals

Other financial institutions may follow H.F. Ahmanson & Co.'s lead in selling massive blocks of nonperforming loans to Wall Street, but banking experts say that a tidal wave of such sales is not expected in the immediate future.

Notably, Great Western Financial Corp. has "looked at bulk transactions" in the past and will continue to look at them in the future, said Ian Campbell, senior vice president at the Chatsworth-based thrift.

Irwindale-based Ahmanson, parent of Home Savings of America, the nation's largest thrift, announced last month it would sell $1.2 billion worth of nonperforming loans to the New York investment firm of Bear Stearns Cos. Inc.

Many analysts are now questioning whether Chatsworth-based Great Western, which owns Great Western Bank, the nation's second largest thrift, will follow Ahmanson's lead.

Campbell said, "It's certainly possible that we'll see a transaction that makes sense." Great Western would do a billion-dollar bulk sale deal if the price was right, he said.

Richard Deihl, chairman and chief executive officer of Ahmanson, said that in the agreement inked last month with Bear, Stearns, Ahmanson agreed to sell the loans for between 71 to 74 cents on the dollar.

The loss on the loans was responsible for Ahmanson's unprecedented $290 million net loss for the second quarter, but Deihl noted that the sale was applauded by Wall Street analysts, and caused Ahmanson's stock price to rise 50 cents per share on the day it was announced.

Campbell Chaney, an analyst with Dakin Securities in San Francisco specializing in California financial institutions, said Ahmanson's move was "good strategy," and noted that he didn't know of another analyst who thought otherwise.

The sale, in one fell swoop, brought H.F. Ahmanson's level of nonperforming assets to pre-recession levels.

It is expected that the bulk sale will reduce nonperformers to 2 percent of total assets, from 3.94 percent of total assets as of June 30 and a peak of 5.02 percent of total assets last fall.

Deihl said Ahmanson couldn't have made the sale if it had not been for the success the company had achieved already by reducing nonperforming loans on its own.

If Ahmanson had made the sale when nonperformers were above 5 percent of total assets last fall, Deihl said, "People would say, 'Maybe this is a sign they are having to do this transaction because their nonperformers are out of control.'"

But Ahmanson had shown that nonperformers had been declining for several months before making the transaction, Deihl noted.

Ahmanson's biggest rival, Great Western Financial, has been criticized by analysts for its high level of nonperforming loans, which were at $1.91 billion or 5.01 percent of total assets on June 30.

Campbell said that reducing nonperformers is "our primary objective."

But the deal has to be right for Great Western to take the plunge, Campbell said. "As a rule of thumb, when you talk about bulk transactions, you're going to have to sell it at a deeper discount than if you sell it individually," he said.

Bulk sales of problem home loans generally bring about 50 cents on the dollar for loans, whereas Great Western is currently getting 80 to 85 cents on the dollar selling the homes individually, Campbell said.

In order to make a deal, Great Western would have to weigh the price of a bulk sale against the cost of keeping the loans on its books, Campbell explained.

There are both "direct costs" and "carrying costs" associated with keeping a bad loan, Campbell said. Directs include the costs of foreclosing on homes and rehabilitating the property, he noted.

One carrying cost for an institution is that it is paying interest to depositors but is not receiving interest on the bad loan, Campbell said. Secondly, under federal law, institutions must have a higher level of capital for every bad loan and foreclosed property than is needed for performing assets, Campbell said.

Deihl said that Ahmanson took the same loss on the loans that it would have taken if it tried to foreclose on the loans and sell the property on its own. Deihl said the bulk sale "compresses the loss that would have dribbled out in the future."

So far, Campbell said, Great Western hasn't found a deal where a bulk sale price which would outweigh the price the institution could get by foreclosing on the loans and selling them individually.

"Are there signs that the bulk market is improving? Yes," Campbell said. "The best evidence of that is what Ahmanson did."

Deihl said in its $1.2 billion loan sale transaction Bear Sterns approached Ahmanson. "They came in and sought us out, Bear, Sterns did. They said, 'We'd like to give you an offer.'

"We said, 'We've heard these offers (before) and that they didn't impress us much,'" Deihl related. But this time, after three days of "hard negotiations" a deal was made.

Alan Polsky, director of asset management for accounting firm Coopers & Lybrand in Los Angeles, said Ahmanson could be a trend-setter.

Selling loans in bulk was first started by the Resolution Trust Corp., the federal agency which disposes of failed savings and loans' assets.

"This is a brand new, cutting edge thing, only 18 months old," Polsky said. "Ahmanson is now taking a cue from the RTC."

Polsky, who advises large institutions on how to dispose of problem assets, said that a number of institutions are considering such sales and may announce them in the future.

"You will see this kind of thing happening," he predicted. "Will you see a flood or an avalanche? No."

The reason that institutions are not racing into such deals is "there is a real, honest difference of opinion" on whether such deals offer the best price for nonperformers.

Another reason many institutions are not selling problem loans in bulk is that not many are able to, financial institution experts say.

Chaney said a bulk transaction such as the one done by Ahmanson can't be accomplished by institutions that are capitally impaired, such as Glendale Federal Bank.

Babette Heimbuch, president of Santa Monica-based First Federal Bank, said that Wall Street deals like the one that Ahmanson did are not available to smaller institutions.

Wall Street is looking for packages of loans of $50 million and more, Heimbuch said.

Chaney noted that for the institutions that are big enough and financially strong enough to make a bulk loan sale, "The question is, do you want to get rid of all your problems or do you want to hold on to your property and get a little bit higher prices?

"If I was in the driver's seat, I would do a deal like Ahmanson," Chaney said. "By clearing the decks, Ahmanson can take a more forward-looking strategy and spend time and energy forming business strategy for tomorrow."

While Great Western and other thrifts are going to be concentrating on working out problem loans, Chaney said, "This pushes Ahmanson to the head of the line."