Chicago-based Fitch Ratings said that the recent non-performing loan sales by Fannie Mae and Freddie Mac could have positive implications for banks in the United States that are seeking to sell off non-performing loans from their own portfolios.
The magnitude of the impact of NPL valuations and selling opportunities for banks will become clearer as more NPL buyers and pricing trends develop, according to Fitch.
"Fitch believes that a deeper NPL market could help further extinguish the GSEs' and banks' crisis period residential mortgage asset quality issues. At a minimum, the GSEs' NPL sales are an indication of further healing in the U.S. housing market," Fitch said.
While the demand for high-quality mortgage-backed securities has been slow since the housing crisis, Fitch said that more major institutional buyers that are hungry for new, higher-yielding investment opportunities have emerged as suitors for bulk NPL pools. Previously, distressed mortgage buyers tended to be specialized alternative investment firms.
"Residential mortgage NPLs are far less of a threat to the GSEs and US banks relative to five years ago, but 90-plus day past due loans are still elevated relative to historical averages and relative to their contributions to total NPL levels," Fitch said. "We believe this implies that both the GSEs and the banks remain motivated to address this lingering asset quality issue."
As of the end of 2014, FDIC-insured banks held about $61 billion worth of single-family residential mortgage loans that were 90 days or more delinquent, which was a 22 percent decline from 2013. By comparison, Fannie Mae and Freddie Mac held about $86 billion worth of 90-day plus delinquent loans at the end of 2014, a total that has been declining at about the same rate as that of FDIC institutions, according to Fitch. Those balances remain elevated compared to pre-crisis levels, however – between 2001 and 2004, residential mortgage loans that were 90 or more days overdue averaged just $4.8 billion and ranged from just one-quarter to one-third of the total number of 90-day or more delinquent loans held by U.S. banks. At the end of 2014, 90-day or more delinquent loans comprised about 80 percent of NPLs held by U.S. banks.
Freddie Mac has conducted three bulk NPL sales in the last eight months totaling approximately $1.97 billion in UPB. The last such sale by Freddie Mac, completed on March 25, was its largest bulk NPL sale ever – it included nearly 5,400 loans totaling $985 million in UPB. Fannie Mae announced earlier in April the marketing of its first-ever bulk NPL sale, featuring about 3,200 deeply delinquent loans with a UPB of $786 million.