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Dead Constitution
See other Dead Constitution Articles

Title: PPIP: F.D.I.C. Sells Failed Bank’s Troubled Mortgages to Private Investor
Source: [None]
URL Source: http://www.nytimes.com/2009/09/17/business/17loans.html
Published: Sep 16, 2009
Author: By EDMUND L. ANDREWS
Post Date: 2009-09-19 14:34:36 by DeaconBenjamin
Keywords: None
Views: 130
Comments: 12

WASHINGTON — Offering the lure of cheap government-guaranteed financing, the Federal Deposit Insurance Corporation moved on Wednesday to push its efforts to have private investors buy distressed mortgages from troubled banks.

Agency officials announced that they had reached a deal to sell $1.3 billion in mortgages from Franklin Bank, a Houston-based lender that failed last November and was taken over by the F.D.I.C.

It was the first deal reached under an Obama administration program announced this spring to help banks sell their problem loans, clean up their balance sheets and get credit flowing again.

But even though the F.D.I.C. is providing generous subsidies that could cost taxpayers heavily in the future, banks have generally refused to sell their troubled mortgages at the steeply discounted prices that bargain-hunting investors have demanded.

The deal announced on Wednesday is an effort to break that logjam, but it does not involve a solvent bank selling its assets and might not offer enough taxpayer-financed sweeteners to bridge the gap between the prices banks want and the prices investors will pay.

Under the deal, the F.D.I.C. will create a joint venture with Residential Credit Solutions of Fort Worth, a three-year-old company founded by Dennis Stowe, a veteran of the subprime mortgage industry.

Residential Credit will put up $64 million of its own money to obtain a 50 percent stake in the venture, which will hold and manage the $1.3 billion pool of mortgages from Franklin Bank.

The F.D.I.C. will own the other 50 percent stake in exchange for providing the loans as well as the bulk of the financing. Instead of taking cash for the loans, the F.D.I.C. will accept a government-guaranteed note for $727.8 million with an interest rate of 4.25 percent.

Agency officials said the deal meant that investors would be paying about 70 cents on the dollar for the loan portfolio, which is a higher price than hedge funds and other private investors have been willing to pay for troubled mortgages. [No, Residential credit is paying 5 cents on the dollar, and the taxpayers are paying the other 65 cents on the dollar.]

Had the government not provided Residential Credit with the ability to borrow most of the money it needed at low interest rates, agency officials said, the investors would have probably paid about 20 cents on the dollar less than they did. [In other words, Residential Credit would have paid 50 cents on the dollar, and the US would have paid nothing.]

Agency officials said the same kind of deal could be used to buy up troubled assets from banks that are still in business, which was the original purpose of the $700 billion Troubled Asset Relief Program. Since that program was approved by Congress last October, it has propped up banks, insurance companies, Wall Street firms and even car companies. But it has not been used to buy any troubled assets.

The main reason has been reluctance by both banks and investors, and some industry executives said they were still skeptical. Frank Pallotta, executive vice president of the Loan Value Group in Rumson, N.J., which provides analysis of mortgage values, said that many investors were worried about the strings attached to government-backed deals. One of the biggest strings is a requirement that the investors take part in the Obama administration’s Home Affordable Modification Program, which subsidizes loan modifications for borrowers at risk of losing their houses to foreclosure.

“The more active loan buyers are really not looking at these pools of loans,” said Mr. Pallotta. “I don’t think this sale is going to send investors off to the races.”

Officials said about 30 percent of the loans in the deal on Wednesday were nonperforming, meaning that payments were not being made on them, but said that percentage could increase depending on how much the houses being financed had dropped in value. About one-quarter of all homes are now under water, meaning that the property’s current market value is less than the mortgage.

Because homeowners have much less incentive to stay in houses that are under water, investors have become extremely dubious about mortgages in areas where housing prices have fallen sharply, even if most of the borrowers are still current on their payments.

The Obama administration has been working for months on two separate programs under the rubric of public-private partnerships to mop up the immense volume of bad assets tied to the housing bubble.

The F.D.I.C. program is intended to spur the purchase of whole mortgages, for both residential and commercial real estate, which are weighing down banks and adding to the uncertainties about their viability.

But banks have been extremely reluctant to sell their mortgages at a discount to their original value, because they would have to book losses.

The government’s other main public-private effort, run by the Treasury Department, is aimed at buying up mortgage-backed securities. Treasury officials have hired a half-dozen big money-management firms, which will raise $500 million in private capital each and then receive government financing to start working out deals.

That program has taken longer than expected to get off the ground, but Treasury officials expect the firms to start making deals in October.


Commentary from here

So private investors have come in with $64m, to get a 50% stake in a company that purchases $1.3bn in mortgages. The Treasury provides the other $64m, while the FDIC provides 6-to-1 leverage to purchase this. The actual bid on the loan is $727m ( which isn’t $64m * 2 * 6, so I need to investigate further).

FDIC even has a a chart outlining it, which reminds me of the charts I used to make outlining the payments (I wonder if they saw them?).

They don’t have a chart as to what the final payments look like given the distribution of asset worth; I’ll go ahead and draw that now:

They are equal on the right-hand side. Residential Credit puts up $64m, on a $727m bid for $1,300m in assets. If the assets are worth less than $727-$64 = $663m, then every additional dollar comes from me and you, the taxpayer. If the assets are worth more than $727m, then we split the earnings with Residential Credit.

So for small price of $64m, or about 8% of the bid, they get half the upside gains while only absorbing a bit of the downside loses. We are also on the hook for a lot of interest rate risk, which I’m not going to bother to quantify. This is a terrible deal – but there were other issues at stake. I remember the original PPIP debates well, and there were only two valid arguments, neither I found very convincing, to allow this giveaway to happen.

Get credit flowing again

The first argument is that it would take banks that were otherwise healthy and allow them to start lending again in the middle of a credit crunch. We taxpayers pay to help unload these loans onto other private markets, so that the bank can start lending again.

But as financeguy points out, the bank in question, Franklin Bank, is dead. FDIC took it over around a year ago, with its balance sheet deep in the red and after losing double digits in loans since 2007. It took a huge gamble in the real estate market, and it got destroyed. This isn’t an otherwise healthy bank with one bad asset on it.

Information

Astute readers may ask “why wouldn’t we just go ahead and pay the extra $64m above to get that other half of the upside? Why don’t we just ride out the loan if we are going to keep all the downside risk?” The reason PPIP was sold was that it would start to create a market price for these assets. Sophisticated hedge fund managers would come in, bid on the price of toxic assets, and then we could use that to start solving whether or not the banks in question were solvent. In addition to getting credit to flow again, getting a decent market price for assets which had frozen would be worth the taxpayer cost.

So, we have a market price for toxic assets. $1.3bn is only worth $727m. Is the Rubin family and the rest of the Obama economics team going to march to Wall Street and use this to mark down the asset values of the largest banks? I’m not holding my breath. Most of the crucial actions taken to replace PPIP – replacing the accountancy rules and enacting the stress test – were used to replace this information problem with methods that produced numbers that were less transparent and more friendly to the big banks.

So we’ve just auctioned out half the upside of this loan while retaining most of the downside for pennies, without accomplishing either of the major goals of why we were interested in PPIP in the first place. I’d like call my elected official but nobody voted for this bill. I seriously worry this is a prep run for bigger bids coming down the line… (1 image)

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#1. To: DeaconBenjamin (#0)

As I read it, Residential is putting up 64M for half of the 1.3B portfolio, the FDIC owns the other half that Residential will be managing for them.

Instead of taking cash for the loans, the F.D.I.C. will accept a government-guaranteed note for $727.8 million with an interest rate of 4.25 percent.

This is the note that Residential signed.

++++++++++++++++++++++++++++++++++++++++

If the portfolio was valued at market, Residential should do just fine. But if they were at book-value, things could go south in a real hurry for them. The article also failed to mention the fee that Residential would collect for managing the FDIC's half of the portfolio.

Without more information, I can't comment further.

Iran Truth Now!

Lod  posted on  2009-09-19   15:04:13 ET  Reply   Trace   Private Reply  


#2. To: Lod (#1)

Without more information, I can't comment further.

What is this world coming to???

Sir Lod has joined the ranks of the financial wizards, experts and geniuses.

I feel so alone, down here as a bottom feeder.

Cynicom  posted on  2009-09-19   15:07:34 ET  Reply   Trace   Private Reply  


#3. To: Lod (#1)

The F.D.I.C. will own the other 50 percent stake in exchange for providing the loans as well as the bulk of the financing.

the F.D.I.C. will accept a government-guaranteed note for $727.8 million with an interest rate of 4.25 percent.

This is the note that Residential signed.

If I understand you correctly, you are stating that Residential put up the entire $727.8 million used to purchase the $1.3 billion in loans at 70 cents on the dollar.

A trillion here, a trillion there, soon you're not talking real money

DeaconBenjamin  posted on  2009-09-19   15:18:18 ET  Reply   Trace   Private Reply  


#4. To: Cynicom. all (#2)

Whatever I know about RE was learned two decades ago during the S and L debacle back then.

Today the problems are here and there around the country with the majority of problem loans on single family residences whose owners used them as ATM machines.

The Tax Reform Act of 1986 absolutely wiped out the investor-class who generally had multi-family properties that they lost when the tax-advantages were taken away from them.

Iran Truth Now!

Lod  posted on  2009-09-19   15:19:07 ET  Reply   Trace   Private Reply  


#5. To: DeaconBenjamin (#3)

Quoting from the article, "The F.D.I.C. will own the other 50 percent stake in exchange for providing the loans as well as the bulk of the financing."

The way I read it, is that it will be half-Residential and half-FDIC ownership, with Residential managing all the properties.

Iran Truth Now!

Lod  posted on  2009-09-19   15:23:34 ET  Reply   Trace   Private Reply  


#6. To: Cynicom, Lod (#2)

Sir Lod has joined the ranks of the financial wizards, experts and geniuses.

Yeah, he's really rubbin' our noses in it. That really made me feel like the Hoosier hick hayseed that I am.

I feel so alone, down here as a bottom feeder.

Well, you've got me, and lucky for you I'm really nice to the oldsters. When you tell me the same story for the 50th time I might get a little short though.

Godfrey Smith: Mike, I wouldn't worry. Prosperity is just around the corner.
Mike Flaherty: Yeah, it's been there a long time. I wish I knew which corner.
My Man Godfrey (1936)

Esso  posted on  2009-09-19   15:35:43 ET  Reply   Trace   Private Reply  


#7. To: Esso, Lod (#6)

Yeah, he's really rubbin' our noses in it.

Sir Lod was the last person on this 4um that I thot would ever go uppity on us.

Now we have one more pair of eyes looking down on us.

Maybe olde Lod will go blind from counting his money every nite?????

Cynicom  posted on  2009-09-19   15:41:56 ET  Reply   Trace   Private Reply  


#8. To: Cynicom (#7)

We might have to start our own website and call it Freeedum5um, but them damn computers flummox me.

Godfrey Smith: Mike, I wouldn't worry. Prosperity is just around the corner.
Mike Flaherty: Yeah, it's been there a long time. I wish I knew which corner.
My Man Godfrey (1936)

Esso  posted on  2009-09-19   15:58:52 ET  Reply   Trace   Private Reply  


#9. To: Cynicom, Esso, all (#7)

Boys, if olde lod had just half the money you guys have, I just burn what I've got.

Iran Truth Now!

Lod  posted on  2009-09-19   15:59:43 ET  Reply   Trace   Private Reply  


#10. To: Lod, Esso (#9)

From good reliable sources, I have heard that olde Lod is big in the awl bidness.

Cynicom  posted on  2009-09-19   16:15:45 ET  Reply   Trace   Private Reply  


#11. To: Cynicom (#10)

Yes, I'm reduced to punching holes in my belts with all the budget cuts here.

Outta here to run errands for Mrs.L.

Iran Truth Now!

Lod  posted on  2009-09-19   16:21:03 ET  Reply   Trace   Private Reply  


#12. To: Lod (#11)

You're lucky, I had to pawn my belt.

Godfrey Smith: Mike, I wouldn't worry. Prosperity is just around the corner.
Mike Flaherty: Yeah, it's been there a long time. I wish I knew which corner.
My Man Godfrey (1936)

Esso  posted on  2009-09-19   16:57:41 ET  Reply   Trace   Private Reply  


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