FDIC Sells Troubled Home Loans

 |  Includes: KBE, KME, KRE, XLF
by: Kid Dynamite
It's possible that I'm misinterpreting this (anyone disagree with my math? it seems pretty simple) - let's look at the story:

WASHINGTON (AP) -- The Federal Deposit Insurance Corp. has sold $490.7 million in troubled mortgage loans from 19 banks that failed between August 2008 and March 2009 as it works through an inventory of assets from the institutions it has taken over.

The FDIC said Thursday that the winning bidder in its auction, Charlotte, N.C.-based Roundpoint Mortgage Servicing Corp., paid $34.4 million for a 50 percent stake in a new company set up to hold the home mortgage loans. The FDIC has the other 50 percent.

I whipped out my HP-12C (yeah mofo's - I still have it!) and did some math.. If $34.4MM bought 50% of the holding company, that implies that the total value is $68.8MM. If the face value of the assets is $490.7MM, then $68.8MM is 14c on the dollar! Also known as 14%.
Now what's the point? For me it's this: the crisis was never about liquidity - it was about SOLVENCY! If it had been a (temporary) liquidity problem, these loans would be worth a whole lot more than 14c on the dollar now, two years later. So called temporarily dislocated "fire sale prices" that people were blaming for driving financial firms to bankruptcy were not fire sale prices. They were real, true, prices.
So, the article notes that these loans in question were mostly in Arizona, Florida and Georgia, some of the worst areas of the housing bust, with the highest numbers of failed banks. Again, I interpret two things: 1) I find it impossible to believe that banks have taken all the losses they will need to take on real estate loans and 2) I can't imagine we've seen the bottom in home prices.
Author's correction: David Merkel pointed me to an article with more information about the FDIC home loan sales.

"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.
And 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 ($34.4M) on the unpaid value of the assets, guaranteeing debt on another $137.5M of notes being written by the 19 participating receiverships, and providing financing for the balance! 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 its 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.
Disclosures: Short XLF, long a house.