How Is The Mortgage Bailout and FDIC Legacy Loan Program Affecting Real Estate Investors and Homeowners? A lot of you have been asking us how the mortgage bailout and FDIC Legacy Loan Program is going to be affecting Real Estate Investors and homeowners, so we wanted to take a moment to give you an update as we understand it.
Just a few days ago, the FDIC announced that the Legacy Loans Program (LLP) will be established to help get non-performing loan portfolios off the books of banks.
The program is important because reducing the amount of non-performing paper (we call it “Ugly Paper” in our workshops) will make it easier for the banks to go out get more money to help them be able to make loans again.
Any bank that is insured by FDIC should be able to take advantage of the LLP.
The Department of the Treasury plans to join with private investors to guy these assets. The idea is that the blending of private sector experience with the government program will help value these heretofore “unvaluable” assets.
Public-Private Investment Funds (PPIFs) will be used to buy these assets. Private investors will bid for the opportunity to contribute up to 50 percent of the equity for the PPIF.
The winning bid for this equity share will set the implied value of the equity share held by the Treasury. With proposed financing guaranteed by the FDIC, this will define the overall price offered to the selling bank.
Both the government and private investors will share in any profits from these deals.
Credit markets have been hurt recently because of a lack of financing for certain assets. To address this, a PPIF will be able to issue FDIC-guaranteed debt. For providing the guarantee, the FDIC will be paid a fee, a portion of which will be allocated to the Deposit Insurance Fund. The FDIC will be protected against losses by the equity in the pool, the newly established value of the pool’s assets, and the fees collected.
This program will be coordinated with the other components of the financial recovery package to clean up bank balance sheets so that banks can once again provide the lending to further the recovery of the U.S. economy.
The FDIC is requesting comment from interested parties on all aspects of the proposed LLP. In particular it has formulated the following questions for interested parties to consider:
• Which asset categories should be eligible for sale through the LLP? Should the program initially focus only on legacy real estate assets or should any asset on bank balance sheets be eligible for sale? Are there specific portfolios where there would be more or less interest in selling through the LLP?
• Should the initial investors be permitted to pledge, sell or transfer their interests in the PPIF? If so, how should the FDIC ensure that subsequent investors meet the program’s criteria for investors?
• What is the appropriate percentage of government equity participation which will maximize returns for taxpayers while assuring integrity in the pricing by private investors? How would a higher investment percentage on the part of the government impact private investment in PPIFs? Should the amount of the government’s investment depend on the type of portfolio?
• Is there any reason that investors’ identities should not be made publicly available?
• How can the FDIC best encourage a broad and diverse range of investment participation? How can the FDIC best structure the valuation and bidding process to motivate sellers to bring assets to the PPIF?
• What type of auction process facilitates the broadest investor participation? Should we require investors to bid on the entire equity stake of a PPIF, or should we allow investors to bid on partial stakes in a PPIF? If the latter, would a Dutch auction process or some other structure provide the best mechanism for bridging the potential gap between what investors might bid and recoverable value? If multiple investors are allowed to bid through a Dutch auction, or similar process, how should asset management control be determined?
• What priorities (i.e., types of assets) should the FDIC consider in deciding which pools to set for the initial PPIF auctions?
• What are the optimal size and characteristics of a pool for a PPIF?
• What parameters of the note and its rate structure would be essential for a potential private capital investor to know at the time of the equity auction to provide equity?
• Would it be preferable for the selling bank to take a note from the PPIF in exchange for the pool of loans and other assets that it sells? Alternatively, what would be the advantages and disadvantages of structuring the program so that the PPIF issues debt publicly in order to pay cash to the selling bank? Would a public issuance of debt by the PPIF limit its flexibility compared to the issuance of a note to a selling bank?
• In return for its guarantee of the debt of the PPIF, the FDIC will be paid an annual fee based on the amount of debt outstanding. Should the guarantee fee be adjusted based on the risk characteristics of the underlying pool or other criteria?
• Should the program include provisions under which the government would increase its participation in any investment returns that exceed a specified trigger level? If so, what would be the appropriate level and how should that participation be structured?
• Should the program permit multiple selling banks to pool assets for sale? If so, what constraints should be applied to such pooling arrangements? How can the PPIF structure equitably accommodate participation by smaller institutions? Under what process would proceeds be allocated to selling banks if they pool assets?
• What are the potential conflicts which could arise among LLP participants? What structural arrangements and safeguards should the FDIC put into place to address or mitigate those concerns?
• What should the relative role of the government and private sector be in the selection and oversight of asset managers? How can the FDIC most effectively oversee asset management to protect the government’s investment, while providing flexibility for working assets in a way which promotes profitability for both public and private investors?
• How should on-going servicing requirements of underlying assets be sold to a PPIF and paid for? Should value be separately attributed to control of the servicing rights?
• Should data used by the independent valuation consultant, as well as results of such consultant’s analysis, be made available to potential bidders? Should it be made available to potential sellers prior to their decision to submit assets to bid?
Comments on the LPP may be submitted until April 10, 2009.
You may submit comments by E-mail: LLPComments@FDIC.gov. Include “Legacy Loans Program” in the subject line of the message.
We’ll be reporting more as this program develops.
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