Servicers to Play Important Role in Toxic Asset Plan

The Adminstration’s plan for toxic assets on banks’ balance sheets will require private investors who participate in the “public-private partnership” to work closely with special servicers to determine the best way to maximize the returns on assets, many of which will be non-performing mortgages.

Under the plan, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, in partnership with private investors, will establish a Public-Private Investment Fund (PPIF) to provide government capital, financing, and guarantees to help get private asset investment markets working again. The fund will be targeted at the “legacy” bad loans and assets that are now burdening many financial institutions. The PPIF would look to buy $500 billion in toxic assets in the near term, a figure that could eventually grow to $1 trillion – far beyond the second half of the $700 billion in the Troubled Asset Relief Program (TARP) fund allotted last year.

The Treasury would select four or five companies as "fund managers" to purchase toxic securities. Each of the fund managers would need to already have a minimum of $10 billion in toxic securities under management. Each of these managers are likely, in turn, to directly or indirectly use the services of servicers, special servicers, debt collectors, attorneys, accountants, appraisers and other real estate and financial professionals.

“Once someone invests in [a portfolio], they have to be able to manage it,” said John Jay, senior analyst at Aite Group, explaining there would be one servicer at the investor level, and a special servicer at the loan level. The special servicer would need to work each separate piece of the portfolio differently, because a real estate loan in the fast declining market in California would be quite different from a loan in some parts of the Midwest, which didn’t have the fast-rising real estate values, and therefore, not the fast declines of the coasts (some parts of the Midwest are suffering, too, however).

The banks want to get these assets off their books – they don’t want to be landlords, Jay said.

“The important thing is to get proper valuation on these assets,” Jay said, expecting the difficulty of the pricing to start easing once some of the assets start being priced – helping to establish prices for similar assets, though there will still be regional and timing considerations.

“The clearing price is not always tied to intrinsic value. A lot of it depends on the [available] financing,” Jay explained.

Now that the government has shown a willingness to at least partially back some of these assets, they should be able to command a higher price than before, though the pricing is likely to still be very complex, Jay said.

However, Jay doesn’t expect the TARP pool or a similar government-sponsored pool to ever include credit card debts. The U.S. government and taxpayers have always placed real estate in a “special category” of debt, seeing shelter as one of the necessities of life, Jay said.

Credit cards, on the other hand, are seen as a vehicle for discretionary spending. So even though credit card delinquencies and charge-offs continue to rise without any immediate change in sight, the government is unlikely to attempt another rescue for that debt, according to Jay.