FDIC Finds Selling Some Bank Assets Trickier Than Expected

For months, the Federal Deposit Insurance Corporation, which had shut down such banks as Silicon Valley, Signature, and First Republic, has been looking to sell off assets to help cover the costs of the closures.

Just last week, the FDIC announced that the $33 billion CRE loan portfolio that came out of Signature Bank’s failure this year was now for sale.

But a Bloomberg report says that $12.7 billion in mortgage-backed securities that had come from Silicon Valley and Signature hasn’t been gaining traction with potential buyers.

The MBS assets are facing a problem similar to the ones that brought the banks down. Assets based on low-rate fixed interest don’t keep their value when rates have gone up, because they are bonds and when market rates go up, existing bond prices drop.

FDIC retained BlackRock Financial Market Advisory to help manage the process earlier this year. Even back in April, GlobeSt.com reported that bond investors were wary of being burned in an FDIC fire sale because a release of too much inventory could potentially upset a supply and demand dynamic.

Two banks that had purchased some of the existing assets passed on what had seemed like then-toxic bond portfolios of Signature or SVB, according to the FDIC. The failed banks had heavily bought into MBS, CMO, and CMBS bonds at times they were getting a lot of large deposits from the crypto and tech startup industries. They put money into bonds to generate profits at a time when yields were much lower but failed to hedge against the potential of an interest rate increase.

As Bloomberg just reported, this nearly $13 billion in MBS was tied to Ginnie Mae project loans that have been extremely unpopular because they are likely to pay below what other investments could offer. Those loans can take decades to reach maturity and require significant penalties if refinanced within 10 years because the homes would have been intended for low- to moderate-income families.

Reportedly, the FDIC has considered different options. One would be to cut the prices to get the securities to move. Another would be repackaging the debt into new “more complicated instruments,” although it is hard to see how that could fundamentally change the market realities. The mortgages wouldn’t suddenly throw off more cash, although perhaps the idea is to break them up and repackage them with a mix of securities that are currently more valuable to get a better average price.