The government intends to take some of the best loans and bonds it inherited from failed savings and loans and use the magic of Wall Street to turn them into billions of dollars in cash.
The Resolution Trust Corp., the federal agency overseeing the thrift cleanup, plans to pool its best financial assets -- including junk bonds, mortgage loans and consumer loans that are still paying interest -- and use them as backing for bonds that are sold to investors on financial markets.
The financial assets have a current value of $67 billion.
The plan -- meant to give the thrift cleanup some much-needed working capital and speed the sale of assets it has under its control -- was announced late yesterday by the Cabinet-level oversight board that sets RTC policies. The board includes the secretaries of the Treasury and housing and urban development and the chairman of the Federal Reserve Board.
The board also announced it would allow the RTC to more easily make loans to qualified buyers interested in purchasing real estate from the RTC's vast inventory of houses, office buildings and shopping centers. The new policy on so-called seller financing will also make available $250 million in low-interest loans that will allow low-income families to buy single-family homes from the RTC's inventory.
The financial assets that will back the new RTC securities account for more than 70 percent of the assets the RTC has amassed from failed thrifts. Of the $67 billion in financial assets that will be used to back the new RTC securities, $57 billion is in mortgage loans, $3.2 billion is in junk bonds and $6.9 billion is in consumer loans, according to oversight board spokesman Art Siddon.
The idea, said Siddon, is for the RTC to use these good loans and bonds to raise cash quickly, allowing the RTC to reduce its costly borrowing and take more time disposing of 40,000 pieces of foreclosed real estate that it is having great difficulty selling in the current depressed market.
Selling the securities, said Siddon, will "take the pressure off having to sell real estate at reduced values."
Siddon said the securities would be similar to mortgage-backed securities now sold by the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., known as Freddie Mac. The value of the securities that would be sold and when they would be sold, he said, are still uncertain.
"There has been a lot of discussion about how much they've got and when they would be coming to market," said David Andrukonis, who oversees the sale of mortgage-backed securities for Freddie Mac. "Timing is everything. My guess is they're talking about an orderly disposition of the assets."
In liberalizing its seller-financing policy, the board did away with a requirement that RTC loans to buyers be salable to other lenders within a year after they are made. The agency has had $1 billion in seller financing available, but as of September had been able to use only $50 million because of the difficulty in meeting that one-year requirement.
The RTC currently has about 8,000 houses with a market value of $67,000 or less, which qualifies them for the agency's affordable-housing program. Yesterday, the board took several steps to accelerate their sale by making more money available for low- and moderate-income buyers.
First, it agreed to try to get banks and other private lenders to provide first mortgages on the homes that, in turn, could be sold to Fannie Mae or Freddie Mac. If those agencies agree to such a program, then the RTC would provide smaller, second mortgages for the same properties.
The RTC would also originate direct market-rate loans for some families who can't otherwise get mortgages to buy an RTC-owned home. The agency would also allow some families who are now renting RTC-owned homes to put up two months' rent as a down payment and turn their rent into mortgage payments.