Mortgages Up For Grabs

The FDIC took on a lot of water this year, rescuing banks that were drowning under tons of bad loans. In doing so, they absorbed several billion dollars in defaults, distressed loans, and other toxic assets. And now it’s come time to figure out what to do with them. And the best option they’ve come up with seems to be to sell them.

Now who’s going to buy toxic assets?

Would you?

Well, they’ve already found a buyer for over 1 billion dollars in bad commercial loans. Private global investment firm Colony Capital bought up 1,200 commercial mortgages at auction. 70% of those loans are behind, mostly located in Georgia, California, Nevada and Florida.

No surprises there right? Those states have been incredibly hard hit from all sides of the economy from unemployment to foreclosure.

Anyway, Colony takes a 40% stake in the loans while the FDIC retains the other 60%. They paid $90.5 million for the assets.

Now let’s do the math for a second.

40% of $1.02 billion = $408 million

Subtract from that the $90.5 million they paid and you’re left with $317.5 million.

Colony capital stands to gain $317 million dollars on their investment. Of course, they are responsible for managing, servicing, and disposing of the loans, so that’ll cut into their profits a bit.

But still, that’s a quite a mark down on those loans simply because of the risk of default.

What do you think? Has the FDIC overestimated the risk of default? Or underestimated it?

They marked down those loans by 77%!

This could prove to be a strong indicator of the strength of the recovery. Where are these loans headed, to repayment or bankruptcy? Will Colony pull a profit from them and how much? How much will the next batch of loans be auctioned off for?

I’d love to hear what you think.