01/08/2010

Dealers Circulate FDIC Mortgage Holdings

Barclays, RBS Greenwich and Stifel Nicolaus are separately arranging sales of home loans that the FDIC took on amid the global financial crisis.

The so-called structured sales, which industry players have been anticipating for months, would be part of a multi-pronged plan by the FDIC to unload a mix of assets held by some of the 168 depository institutions it has seized since mid-2007.

Details of the mortgage sales are just coming to light. In many instances, the FDIC would transfer a portfolio of prime-quality or subprime loans to a special purpose vehicle and then sell a senior interest in the entity to the highest bidder. The buyer would also take an equity stake of 30-50%, with the deposit insurer keeping the remaining equity.

In some cases, the FDIC would offer low-cost financing to the winning investor.

RBS is currently shopping $500 million of mortgages from several failed banks, while Stifel Nicolaus works to bring two offerings of some $500 million and $1 billion to market by March 31. Barclays' auction has similar characteristics.

The offerings could help clarify the FDIC's overarching strategy for shedding seized assets. Barclays, RBS and Stifel Nicolaus were among a number of institutions designated by the insurer to help unload various holdings from failed banks following the credit-market blowup, as were Deutsche Bank, HSBC, Keefe Bruyette & Woods and Pentalpha Funding. So far, eight structured sales have taken place under the initiative.

Each entailed only a single type of asset, with just two focusing on residential mortgages: a Sept. 30 sale of loans from Franklin Bank, led by RBS, and Stifel Nicolaus' Dec. 29 sale of holdings from First National Bank of Nevada. Sources said the FDIC was satisfied with the results, and will likely roll out a number of repeat offerings this year.

In doing so, the insurer is expected to continue parsing up the portfolios along asset-class lines. However, it would combine the portfolios of multiple institutions for each sale.

The FDIC has also been looking into securitizations of some of the mortgages it holds, although that project seems to be moving slowly. Ultimately, the organization will favor the tactic that brings the highest possible prices.

It is difficult to determine how many home loans the insurer controls right now, but the already-large figure is expected to continue growing this year as more banks succumb to credit-crisis pressures. That might add a sense of urgency to the sales initiative, especially given recent questions about the operation's solvency.

Other assets the FDIC has taken on include commercial mortgages, business loans, agricultural loans and various types of consumer credits. Industry players are also projecting more failures by banks holding large interests in collateralized debt obligations backed by trust-preferred shares and collateralized loan obligations.

Investors must secure FDIC approval to bid on the structured asset sales, and must put down cash deposits before gaining access to marketing materials. They must also sign confidentiality agreements. Some bidders have been joining forces to meet all of the conditions.

Investor interest appears to be strong, in part because many buyside shops have yet to deploy capital they raised for purchases of troubled assets amid the credit crisis.

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