FDIC Troubles Home Loan Sales: Correction and Clarification

David Merkel pointed me to an article with more information about the FDIC home loan sales I wrote about yesterday.

"RoundPoint Mortgage Servicing Corp. successfully bid for an equity interest stake in the assets of failed banks in an auction held by the Federal Deposit Insurance Corp. (FDIC).

The equity interest stake, pooled together from 19 failed banks in FDIC receivership and titled Multibank Structured Transaction Single Family Residential 2010-1, sold for $34.4m.

Collectively, the loans have an unpaid principal balance of approximately $490.7m...."

"The RoundPoint bid equates to 42% of the unpaid principal balance of the portfolio, and the servicer will be responsible for managing the loans. 

The 19 participating FDIC receiverships provided financing to Multibank by issuing approximately $137.5m of corporate guaranteed notes. The FDIC guaranteed notes will receive payments of interest and principal on a monthly basis."

As David, and commenter Mr_A11is noted, the 14c on the dollar is the equity contribution for the deal - the FDIC is leveraging that. It sounds a lot like the PPIP to me.  Note, however, that the buyer, RoundPoint, didn't put up 14c on the dollar - they put up half that - or 7c on the dollar.

EDIT:  from commenter Linus Wilson:  


"This is one of the legacy loans program sales with 2 to 1 leverage. The FDIC provides a guaranteed non-recourse loan of $137.5 million and puts up an equity stake of $34.4 million. The private investor Roundpoint Mortgage Servicing puts up $34.4 million. The total purchase price is $34.4 + $34.4 + $137.5 = $206.3 million. Since par is $490.7, then the sales price is $206.3/$490.7 = 42% of par. See my paper about these FDIC transactions at ssrn.com/abstract=1476333

In other words, the sales price is 42%, not 14%.    Since the FDIC guarantees the loan, it's more like 6-1 leverage, but let's not quibble...

Let's talk about one more thing, though... the article concludes, "The FDIC continues to find ways to offload assets from banks in receivership."

How is the FDIC offloading these assets?  They are getting 7c on the dollar ($34.4MM) on the unpaid value of the assets,  and guaranteeing debt on another $137.5MM of notes being written by the 19 participating receiverships!  From my seat, it looks like the risk to the FDIC is only reduced by the 7c on the dollar of equity that RoundPoint contributed!  The balance is either financed by, or guaranteed by the FDIC.  But maybe the FDIC gets to move these assets off their balance sheet now?  Probably... And people were all over Lehman Brothers for the Repo 105 transactions... This FDIC smoke and mirrors game does little to reduce their exposure.

Does anyone remember when Merrill Lynch sold their CDO portfolio to Lonestar for 20c on the dollar?  Merrill also provided 75% financing for that deal, collateralized by the very CDO portfolio they were selling, so the buyer really only put down 5%!

In summary, this deal is not as bearish for real estate as I initially interpreted, but it's more bearish for the FDIC - who is bearing the risk in the deal.

Linus Wilson also commented: "These legacy loans sales means that the FDIC is bullish because they are selling a guarantee on a loan that they don't want to honor and they are retaining a 50 percent equity stake. The real estate bull is the FDIC. The sales price is inflated by the guaranteed non recourse loan"

I think that's another way of saying what I said - that the FDIC's risk is not being reduced here - they still have massive exposure and need these loans to perform well.

-KD