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Loan Sale Tips
The volume of purchase and sale of performing and non-performing real estate loans has picked up dramatically over the past year as banks seek to shrink their balance sheets as their capital base falls and other banks and investors seek to take advantage of the sale of assets from failing banks. What are the typical features of such agreements and what are the interests of buyers and sellers in such transactions?
Sellers
The bank which is selling a loan, whether it is performing or non-performing, seeks to cut itself off from the borrower and the collateral just as if it had never made the loan to begin with. To evidence such a transaction, the seller would essentially like to enter into the equivalent of a quit claim or limited warranty deed containing very few warranties and representations. The structure of such an agreement would typically provide for the following items:
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On June 3, 2009, the FDIC announced a postponement of the Legacy Loans Program component of the Public Private Investment Partnership for open banks to sell loans. Formally, development of the Legacy Loans Program will continue, but the previously planned pilot sale of assets by open banks will be postponed. Accordingly, the government is once again exploring whether the purchase of troubled assets should be part of the Troubled Asset Relief Program. The federal government appears to have now completed a 540 degree rotation under the Troubled Asset Relief Program. Observers are keen to determine whether the government will land an unprecedented 720, possibly earning an X Games gold medal in the process.
Chairman Bair explained, “Banks have been able to raise capital without having to sell bad assets through the Legacy Loans Program, which reflects renewed investor confidence in our banking system. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector.”
As a next step, the FDIC will test the funding mechanism contemplated by the Legacy Loans Program in a sale of receivership assets this summer. This funding mechanism draws upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage. The FDIC expects to solicit bids for this sale of receivership assets in July.
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896). Among other things, the Act:
- extended the $250,000 deposit insurance limit through December 31, 2013;
- extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
- increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
- increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
- removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments. The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.
This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee. The Transaction Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.
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SunTrust Robinson Humphrey has created a depressing slideshow of Atlanta’s residential and CRE properties in development (or in lack of development). From the SunTrust Robinson Humphrey report:
While the city’s residential real estate lot inventory woes are well known to the investment community, we believe the extent of inventory in CRE property types like office and retail centers is not fully appreciated. We took some photos of residential and CRE properties around Atlanta, which is admittedly a small sample. Based on our observations and the statistics, we believe there are significant and growing vacancies around the city, particularly in the outer suburban areas like Alpharetta and Cumming (North of Atlanta). We witnessed particularly high vacancy rates in numerous outer suburb strip and neighborhood retail centers. Atlanta’s retail vacancy rate was 9.9% at the end of 1Q09, compared to the national average rate of 7.2% and Atlanta’s 4Q08 level of 9.0%. This is the sixth highest level of retail vacancy among the 63 major U.S. retail markets. Moreover, Atlanta led all major U.S. markets in aggregate retail space delivered during 1Q09, with 1.7 million square feet hitting the market.
On Thursday, April 9, 2009, the FDIC held its second telephone conference call to discuss the PPIP Legacy Loans Program. The first such call (audio replay|transcript) was primarily for bankers, while today’s call was primarily for investors. A transcript of the investor call is also available on the FDIC site.
Investors wishing to participate in the Legacy Loans Program should complete the preliminary application. The Legacy Loans Program Summary, Fact Sheet, and FAQ are also available.
At the outset, the FDIC repeatedly advised that this call was for information and discussion purposes only and specifically “not for attribution” to the FDIC.
The FDIC Chairman, Sheila Bair, presented very brief opening remarks, and gave certain background information. She reminded callers that on March 23, 2009, Mr. Geitner announced the Legacy Loans Program, to be administered by the FDIC. The FDIC’s Proposed Term Sheet regarding the Legacy Loans Program is currently on the FDIC’s website, where the FDIC is currently still seeking comment and input, until tomorrow, April 10, 2009. The Term Sheet provides the FDIC’s 17 initial questions. Ms. Bair confirmed that the Legacy Loans Program is intended for all banks, large and small and that today’s call focuses on the investor perspective.
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On March 23, 2009, the U.S. Treasury Department (“Treasury”) announced the details of the Public-Private Investment Program (“PPIP”). The program is designed to purchase mortgage backed securities and certain troubled loans from U.S. banks. PPIP is part of the broader “Financial Stability Plan” introduced by President Obama. The goal of PPIP is to cleanse the balance sheets of U.S. banks of troubled assets as part of the Troubled Asset Relief Program (“TARP”) and to create access to liquidity for banks and other financial institutions in order to cause the extension of new credit. PPIP is broken up into two key components – the Legacy Loans Program and the Legacy Securities Program.
Legacy Loans Program
The Legacy Loans Program will be launched by Treasury and the Federal Deposit Insurance Corporation (“FDIC”). The intent of this joint program is to combine (i) private capital, (ii) equity co-investment from Treasury and (iii) FDIC debt guarantees in order to assist market priced sales of distressed assets and improve the private demand for distressed assets. The FDIC will supervise the formation, funding and operation of a series of Public-Private Investment Funds (“PPIFs”) which will purchase assets from U.S. banks. Each PPIF will be comprised of a joint venture between private investors and the Treasury. Treasury will manage its investment in the PPIF to ensure that the interest of the public is protected and preserved. However, private investors will retain control of the asset management subject to “rigorous supervision” of the FDIC.
Private investors in the Legacy Loans Program are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, hedge funds and other long-term real estate investors. U.S. banks of all sizes will be eligible to participate in the program. U.S. banks participating in the program will consult with the FDIC, banking regulators and Treasury to identify assets that they propose to sell. Eligible assets are required to be predominately situated in the United States. The FDIC will hire third party valuation consultants to analyze the assets and determine the level of debt that the FDIC will be willing to guarantee on such properties. The debt guaranteed by the FDIC will not exceed a 6 to 1 debt-to-equity ratio. The FDIC will receive an annual fee for providing the guaranty and such guaranty will be collateralized by the pool of assets purchased.
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On March 31, 2009, the Treasury Department unveiled a completely updated site for the Financial Stability Plan programs (FinancialStability.gov). Besides requiring visitors to learn an entirely new navigation system to find documents on the site, the new site contains a number of new features that may be of interest to BankBryanCave.com readers:
- a map showing the local impact of the TARP Capital Purchase Program (larger view). Like BankBryanCave.com, the Treasury also provides a Google Map of TARP Recipients. Unfortunately, the Treasury’s Google Map suffers from a “feature” of Google Maps that limits the number of pins shown on the map; as a result, only the first 100 or so recipients (alphabetically) are included on the map. The BankBryanCave.com Map of TARP Capital Infusions shows all TARP Capital Purchase Program recipients, and also differentiates between recipients based on when the TARP Capital funds were received. (For comparison purposes, the Treasury’s map was created on March 11, 2009 and, as of March 31, 2009, has been viewed 265 times. Our map was created on November 25, 2008 and has been viewed over 11,294 times.)
- simplified economic data, which may help citizens (and bank customers) understand and monitor the need and impact of TARP.
- a secret decoder ring* to help translate the various terms and acronyms used under TARP. ABS, AGP, CAP, CPP, EESA, MBS, SSFI, TIP and TARP are all included.
*It’s not actually a decoder ring, but is called the “Decoder.”
The website appears to still be actively being developed and revised, as links to various documents from the previous website have appeared while this post was being edited.
Since the collapse of Wall Street in October, 2008, and the immediate and severe deleveraging of available capital, the life-blood of the US economy has contracted from a torrent to a trickle. The so-called “shadow market” that funded the crippled investment banks are no longer able to leverage their assets at a 40:1 ratio. Many of the very large national banks are reeling, seeing their share prices drop from 50% to 90% in the last six months. We have often heard questions from those outside of the banking industry asking us “what do the bankers want?” The answer is simple. Banks want borrowers that can repay loans. It’s that simple and that difficult. If only there was an influx of credit-worthy borrowers. If only there were purchasers of the consumer loans. These exact issues were raised during Chairman Bernake’s 60 Minutes appearance on Sunday, March 15, 2009.
In stepped the Federal Reserve. As opportunity funds and hedge funds across the country and across the world begin to digest the parameters, requirements, and restrictions relating to the Fed’s $1 Trillion lending initiative known as TALF (Term Asset-Backed Securities Loan Facility) attempting to revitalize the stagnant credit markets, several issues have begun to emerge.
The most important criterion for many of our clients is eligibility. TALF was announced in November as an attempt to create a market for small business loans. It has been enlarged to include equipment financing, auto paper, and other consumer credit.
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While many community banks still have not received any TARP Capital investment, many of those that have may be able to demonstrate to Congress why investments in community banks are key to getting money circulating on main street again. One such community bank, Citizens South Bank in Gastonia, North Carolina, and its President, Kim Price, were highlighted in a recent opinion piece in the Washington Post.
And that got Price to thinking: What if Citizens were to use its federal bailout money to offer below-market mortgage rates with no closing costs to consumers who would buy a house, or a house lot, from builders and developers who had borrowed money from Citizens?
Price asked some of his loan officers to check with the builders and developers, who not surprisingly were excited enough about the project to be willing to chip in some money to help cover a portion of the forgone closing costs. So last week, Citizens launched its marketing campaign for the $20.5 million program, in collaboration with its builder-developer customers, offering 30-year loans with an initial teaser rate of 3.5 percent for the first two years, rising to a fixed 5.5 percent rate (the current market rate) for the balance of the loan.
“As we see it, it’s a win-win-win situation all round,” Price explained to me. The builders and developers win by having a tool to help move their unsold inventory. The consumer wins by getting a cut-rate loan. And Citizens wins because it lowers the risk that it will have to write off even more of its commercial loans while taking a modest step to help stimulate the local economy. And, of course, the public relations bump isn’t bad either.
Offering special mortgage rates to consumers who buy lots from the bank’s builders can be a great way to address the slowing real estate market generally, with or without TARP Capital.
