By W. Bernard Mason
On July 31, 2009 the Federal Deposit Insurance Corporation announced commencement of the first test of the Legacy Loans Program funding mechanism. Using this funding process, the FDIC will transfer a receivership portfolio of residential mortgage loans (servicing released) to a limited liability company (LLC) in exchange for an ownership interest in the LLC. The LLC will also sell an equity interest to an approved investor, who will manage the loan portfolio. Other investors will be offered equity interests in the LLC under two options: (1) an all cash basis, with an equity split of 80 percent (FDIC) and 20 percent (investor); or, (2) a sale with leverage, under which the equity split will be 50/50.
Under the funding mechanism, financing will be offered by the receivership to the LLC using an amortizing note guaranteed by the FDIC. The FDIC will be protected against losses on the guarantee by leverage limits (both a maximum ratio and a dollar amount), the mortgages collateralizing the guarantee, and a guarantee fee.
The FDIC will analyze the results of this sale to determine how the Legacy Loans Program can best further the removal of troubled assets from bank balance sheets. The FDIC said this announcement was for informational purposes only, and not an offer for the sale of securities. A formal offering will be made to accredited investors in accordance with applicable securities laws.
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