BY JIM FREER
Special Correspondent

The Federal Deposit Insurance Corp. has set next month as the target date to launch its program where banks will sell pools of problem loans to partnerships of private investors and the U.S. Department of the Treasury.

The regulators hope that participating banks will be able to put more focus on lending, including money from loan sales, and spend less time and expense managing delinquent loans.

However, information from banking and real estate sources indicates that the long-awaited Legacy Loan Program might not get off to a fast start.

Some bankers are concerned that prices for many delinquent loans sold in the program might be lower than the discounted prices at which they are carrying them on their books.

Interest in the program appears stronger from investors, such as large institutional funds and Florida-based real estate developers, than from banks that have delinquent loans.

Several, most notably Wells Fargo predecessor Wachovia Corp., were active earlier this decade in making loans for building and renovating condominium projects in South Florida and other markets.

The chance for investors to put as little as seven percent down on some loans with partial FDIC guarantees is a main attraction, said Nina Gordon, a partner in the Boca Raton office of law firm Broad & Cassel.

“They think they could have access to some treasures buried in vaults,” Gordon said.

Those “treasures” would be loans for now-troubled condominium conversions or construction of condo complexes and apartment buildings that could become viable projects after the economy recovers.

Numerous banks with offices in South Florida have loans on those properties that are 90 days or more delinquent. Many have been restructuring loans by cutting monthly payments or interest rates. They have had hopes, now fading, that borrowers can catch up on payments and avoid foreclosures.

Gordon said Broad & Cassel’s clients are interested in loans on those types of projects in Florida and other states. 
Most of her clients are not interested in buying loans on condo units and single-family homes, she added.

Once the FDIC releases full details of the program, some private equity funds and hedge funds likely will be interested in buying loans on condo units in bulk deals.

Many hedge funds and foreign investors are cautiously interested in the FDIC program, said Michael Cannon, South Florida managing director for Integra Realty Resources.

“They have what we call patient capital, and are waiting to see what the program looks like,” Cannon said.

Those investors need details about the types of loans the FDIC will place into each pool and the methods it will use to appraise values of underlying properties, he said.

According to FDIC officials, the agency expects to launch a pilot for its Legacy Loan program in June. Otherwise, it is not releasing details beyond what it presented in a program description on March 26.

The program would revolve around Public Private Investment Funds (PPIFs) that would buy loans and pools of loans from banks. The Treasury Department would match up to 50 percent of equity of private investors, and the FDIC would provide guarantees on any debt issued by PPIFs. The maximum guarantee would be a 6-to-1 debt-to-equity ratio.

In late March, the FDIC said the program would be open to real estate loans and other types of loans.

The FDIC and Treasury Department announced the Legacy Loan program in tandem with their Legacy Securities program, in which PPIFs would buy holdings of mortgage securities from banks and other financial companies. The securities program will focus on packages of sub-prime mortgages, where heavy defaults have led to huge declines in security prices.

The Treasury Department said it expects to provide between $75 billion and $100 billion in funds for the two programs. That money would come from its Troubled Asset Relief Program (TARP).

On April 21, the inspector general for the TARP warned Treasury Department that the Legacy programs could be subject to fraud and abuse, including potential conflicts of interest among loan sellers and investors.

The FDIC subsidies could expose taxpayers to high losses on some loans on properties that wind up in foreclosure, the inspector general added.

Many investors who sent comment letters to the FDIC also mentioned concerns about fraud and possible government/taxpayer losses on some problem loans.

The FDIC took comments through April 10 and received 419--mostly from potential investors and some from banks.

Many investors asked the FDIC to issue guidelines that would open the Legacy Loan program to so-called small investors, who would place $5 million or $10 million into PPIFs with total assets of less than $100 million.

In her April 10 letter, Gordon suggested that “investor qualifications for the PPIFs should emphasize hands-on experience with assets of the type in question, in addition to financial wherewithal.”

Gordon also asked the FDIC to assure that investors with real estate workout experience who would hold and manage loans to completion of properties “should be favored at least as much as, if not more than, financial investors simply seeking to purchase pools with a view to repackaging and reselling the pool assets.”

Gordon said several Broad & Cassel bank clients do not plan to participate in the Legacy Loan program because they are concerned that they would be required to sell loans at discounts that would lead to reductions in capital.


Sun American Bank, which is based in Boca Raton, does not plan to participate because of that capital-related reason, said Michael Golden, the bank’s chairman and CEO.

Banks prepare for losses on problem loans by placing money in their loss reserves, with specific amounts designated for each loan when it is sold or written off.

Sun American is among banks that anticipate that the FDIC program might require further write downs on some loans and thus require banks to set aside more capital for them, Golden said.
Sun American has reported losses for each quarter since the second quarter of 2008, due mostly to additions to its loan loss reserves. It continues to have capital-to-asset ratios that meet regulators’ standards for being well capitalized.

Sun American is among banks that have sold delinquent loans to investors at prices that have not required booking of additional reserves, Golden said.

However, some banks in Florida and other states might find the FDIC Legacy Program to be their only outlet for selling delinquent loans.

Thus, they are joining investors in waiting for the FDIC to launch the program. When it does, Condo Vultures® will report on the details and on plans of banks and investors.

Jim Freer is a special correspondent for CondoVultures.com. He is a veteran banking reporter and a consultant to the finance industry in South Florida.