OREANDA-NEWS. The moves by Fannie Mae and Freddie Mac (GSEs) to establish programed sales of nonperforming loans (NPLs) will increase the depth of the distressed residential mortgage market, which could have positive implications for US banks seeking to sell their own NPLs, says Fitch Ratings.

As more NLP buyers emerge and pricing trends develop, the magnitude of the impact to banks' NPL valuations and selling opportunities will become clearer. 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 US housing market.

Appetites for high-quality US residential mortgage paper have been slow to recover since the financial crisis, as indicated by the tepid volume of securitizations of new residential loan pools. Seasoned distressed mortgage loan buyers initially tended to be specialized alternative investment firms, but as the market has matured, more major institutional buyers hungry for new, higher yielding opportunities have emerged.

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. We believe this implies that both the GSEs and the banks remain motivated to address this lingering asset quality issue.

Freddie Mac completed its inaugural sale of NPLs in 2014, followed by a sale in February 2015 and one in March that included 5,398 of deeply delinquent loans representing \$985 million of unpaid principal balance (UPB). Freddie's latest sale was completed in three pools, with prices ranging between 70%-80% of UPB. Loan-to-value (LTV) ratios for the pools ranged from 74% to 84%, with the higher LTVs clearing in the low 70% range. Fannie Mae announced its intent to sell its first NPL pool of approximately 3,200 loans totaling \$786 million in UPB on April 8.

FDIC-insured banks in the US held a total of about \$61 billion in 90-plus days past due one-to-four family mortgages at the end of 2014, down almost 22% from \$78 billion as of year-end 2013. While the residential mortgage NPL decline was meaningful, the average level of 90-plus day past due one-to-four family loans precrisis were just \$4.8 billion between 2001 and 2004. Over that same period, these 90-plus day past due loans ranged from just one-quarter to one-third of the total 90-plus day past due loans held by US banks, compared with 80% of the total NPLs on US banks' balance sheets as of year-end 2014.

In contrast to US banks, Fannie and Freddie hold about \$86 billion of 90-plus day delinquent loans. The shrinkage of their NPL balances between year-ends 2014 and 2013 was about the same rate as the US banks, but the balances also still remain elevated relative to precrisis levels.

The conditions imposed by the Federal Housing Finance Authority (FHFA) on GSE sales of distressed mortgages may or may not be reflected in the loan pricing. According to the FHFA guidelines, bidders must comply with a host of requirements, including identifying servicing partners and demonstrating a record of successful resolution of loans through alternatives to foreclosure. Servicers will also be required to evaluate all pre-2009 borrowers for federal home affordability programs and comply with certain occupancy requirements for buyers of properties previously foreclosed and owned by banks, among other rules.