FDIC Sells Off Loans From Failed Banks

FDIC officials and bank personnel and a sheriff's deputy work inside the offices of MagnetBank in Salt Lake City on Feb. 2 after it was closed Jan. 30.
FDIC officials and bank personnel and a sheriff's deputy work inside the offices of MagnetBank in Salt Lake City on Feb. 2 after it was closed Jan. 30. (By Douglas C. Pizac -- Associated Press)
By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, September 17, 2009

The Federal Deposit Insurance Corp. launched a new program Wednesday to subsidize investor purchases of loans that the agency has acquired from failed banks, as it tries to attract more bids and higher prices for its rapidly expanding collection of troubled assets.

The long-awaited program was announced earlier this year as a way to help banks that remained in business get rid of their soured loans, but a lack of interest from banks led the FDIC to focus on its own holdings instead.

The agency said Wednesday that it would form a partnership with a Texas company, Residential Credit Solutions, to take ownership of mortgage loans originally worth $1.3 billion. The company, which will manage the partnership, will pay the FDIC $64.2 million for a half-share of any profits as the loans are repaid or sold.

An FDIC official said a second deal would soon follow, and that he expected others before the end of the year.

The official said that the agency continued to believe that the program could help banks and that the agency in part was moving ahead so that it would be ready if the industry took a turn for the worse.

"We'd be ready to apply this process either on failed bank assets or on open banks," said the official, who conducted a briefing for the media on the condition of anonymity.

The FDIC repays depositors in failed banks and then seeks to recoup as much money as possible from the wreckage. Historically it has relied on the basic approach of immediately selling everything it can to another bank, but 92 failures so far this year have started to sate the appetite of eligible buyers. Increasingly the FDIC has sweetened the deal by guaranteeing to limit any potential losses, but even that sometimes is not enough, leaving the agency with a growing pile of assets that must be sold.

The FDIC said that 12 groups placed bids for the mortgage portfolio, which comes from Franklin Bank, a Houston company that failed in November. An executive with a group that placed an unsuccessful bid said that the FDIC had offered a particularly attractive portfolio in this first auction. Roughly 70 percent of the mortgages are still being paid on time.

An FDIC official said the portfolio sold Wednesday also was chosen because the loans resembled those held by many banks, creating a meaningful dry run for any revival of the program's original focus on helping the industry sell troubled assets.

The winner, Residential Credit Solutions, is a Fort Worth firm that specializes in working with borrowers who have fallen behind on their payments. Under the terms of the deal, the company agreed to modify the mortgages of borrowers who meet federal eligibility standards.

The FDIC will make money on the deal in three ways. First, it plans to sell a note to investors worth $727.7 million, plus interest, against the value of the loans held by the partnership with RCS. The money the partnership collects on the mortgages that it holds will first be used to repay that note.

Second, the FDIC will collect $62.4 million from RCS.

Finally, the FDIC gets to keep the rest of the profits after the note and RCS are paid.

The FDIC originally projected up to a $1.6 billion loss on cleaning up after the failure of Franklin Bank, in part because it expected to recover 50 percent of the value of the loan portfolio sold Wednesday. The agency says the new program should allow it to recover 71 percent of the value. Officials said they did not have an updated estimate of the loss.

There are risks, however. The FDIC will guarantee the value of the note sold to investors. It also plans to match the RCS investment in the partnership. If the value of the loans falls below expectations, the FDIC could lose some or all of its stake.

The government has announced a series of efforts to help banks clear away troubled loans, including the Bush administration's original $700 billion financial rescue program and the Obama administration's idea for investment partnerships.

Administration officials say the need for such purchases has faded because banks have been able to raise new capital from investors.

But the Congressional Oversight Panel, which monitors the federal bailout efforts, warned in a report last month that many smaller banks were still overwhelmed by troubled assets, and it urged the Treasury to launch some kind of program to help banks sell those assets.

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