Distress Investor Tool Kit - Buying Failed Bank Whole Loan Pools from the FDIC

BUYING WHOLE LOAN POOLS

F. D. I. C.

DISTRESS INVESTOR TOOLKIT SERIES VOL. II, NO. I OLIVER WRIGHT ESQ.

Rescom strat. RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

FDIC LOAN POOL SALES.

administered   by   its   Division   of   parQcular   loan   pool’s   projected   cash   ResoluQons   and   Receiverships.   In   flows. discharging   its   statutory   duty   as   receiver,   the   FDIC   must   resolve   bank   liquidaQons  in  the  ‘least-­‐cost  manner.‘

by  Oliver  Wright  Esq.   Performing  and  Non-­‐Performing   Loans   dwarf   all   other   asset   categories   held   by   failed   banks.   MulQply   this   by   a   historic   number   of   failed   banks   and  

THE  BACKGROUND.

THE   FDIC  ASSET   MARKETING   PROGRAM The   FDIC’s   first   stab   at   selling   loans  

you   have   a   once   in   a   lifeQme   from  failed   banks   as   receiver   was   the   inverstment  opportunity. Asset   MarkeQng  Program   in   the   early   ‘ 8 0 s ,   w h i c h   b e g a n   m a r k e Q n g   In   its   receivership   capacity,   the   FDIC   performing   loans   and   then   expanded   sells   the   performing   and   non-­‐ into   nonperforming   a/k/a   ‘scratch-­‐ performing   notes   it   inherits   from   and-­‐dent’   loans   as   well.   These   were   failed   banks   to   the   private   sector   packaged   into   whole  loan  pools  based   through   a   number   of   loan   sale   on   demographics   and   were   assigned   p r o g r a m s   values   and   minimum   reserve   prices   b a s e d   o n   t h e  

THE  RTC  BULK  SALES   PROGRAM In   the   late   ‘80s,  the   ResoluQon   Trust   CorporaQon,   be^er   known   by   the   acronym   RTC,   started   its   Bulk   Sales   Program   in   the   wake   of   the   Savings   and   Loan   crisis,  whose   epicenter   was   in   Texas,   but   enveloped   the   country.   Just   as   fortunes   were   lost   overnight,   so   too   were   millionaires   minted,  as  a   privileged   network   of   private,   third   party  bulk   sale   trade   pla`orms   raked   in   fortunes  coordinaQng  the   purchase   and   sale  of   failed   S  &  L   debt   at   steep   discounts   to   par.   Like   the   Asset   MarkeQng   Program,   the   Bulk   Sales   Program   uQlized   a   straight   forward   markeQng   process,   whereby   each   agency   aggregated   and   valued   similar   loans   into   por`olios;   published   a   loan   p o r ` o l i o   b i d d e r ' s   informaQon   packet   outlining   b i d   p r o c e d u r e s ,   b i d d e r   cerQficaQon   protocols,   and   confidenQality   requirements;   and   ulQmately   sold   the   loan   por`olios,   either   through   an   aucQon   format   or   a   sealed   bid   process.  As  the  volume   of  loans   processed   through   both   the   FDIC’s   Asset   MarkeQng   Program   and   the   RTC’s   Bulk  Sales  Program   reached   the   Qpping   point,   the   FDIC   and   RTC   delegated   (while   retaining   oversight)   much   of   the   d i s p o s i Q o n   p i p e l i n e   t o   t h e   aforemenQoned  third  parQes.

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

THE PROCESS. FDIC BULK LOAN SALES THROUGH THE PUBLICPRIVATE PLACEMENT PROGRAM

1. Contributes   a  pool   of   performing   recovery-­‐-­‐equalling   the   sum   of   (i)   the   and   non-­‐performing   scratch-­‐and-­‐

iniQal   sale   price   paid   by   the   winning  

dent   loans   to   a   Loan   Pool   SPE   bidder   (ii)  plus  the  FDIC’s  ParQcipaQon   Limited  Liability  Company. Interest   i.e.,  its   porQon   of  the  ongoing   revenue   stream   from   the   loan   pool   2. Holds  back  a  parQcipaQon  interest   c o n t r i b u t e d   t o   t h e   L L C .   T h i s   in   the   future   cash   flows   of   the   alternaQve   provides   liquidity   for   the   loan   pool   under   a   ParQcipaQon   FDIC's   Deposit   Insurance   Fund   and   Agreement   executed   with   the   buffers   the   FDIC   and   American   tax   Loan  Pool  SPE  LLC. payer   from   underpayment   in   a   depressed   and   uncertain   economic   3. Sells  a  100%  Membership  Interest   climate,  without  which  the  FDIC   might   in   the   Loan   Pool   SPE   LLC   (which   be   forced   by   circumstance   to   accept  

represents  the  remaining   interest   unreasonably   consideraQon   due   to   in   the   loan   pool   revenue   stream)   lack   of   price   discovery,   inefficient   to  a  single  investor. asset   valuaQon,   and   opportunisQc  

4. Reduces   its   parQcipaQon   interest   to   a   lower   payout   percentage  

vulture  investors.

once  it  recovers  a  certain  pre   s e t   a m o u n t ,   t h u s   increasing   the   future  

Under   the   FDIC’s   current   bulk   loan   sale   process,   it   sells   its   very   largest   loan   pools   under   an  alternaQve  to   the   direct   sale   program,  whereby   it:  

amounts   received   by  the   Loan  Pool  Buyer. This   method   yields   the   FDIC   a  higher   return-­‐-­‐or   ‘ l e a s t   c o s t ’  

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

THE PARTICULARS. Deal Structure & Execution

contract   servicer,   who   is   hired   by   the   terminates     one   year   aker   Loan   Pool   Loan   Pool   Buyer   (subject   to   FDIC   Purchase,  with  the   Purchaser   and  FDIC   approval)  as  part   of  the  loan   pool  bid   splilng   any   remaining   Advance   process.   The   Loan   Pool   Buyer   must   Account   funds   proporQonate   to   their   provide   the   FDIC   with   aform   of   iniQal  cash  contribut  ions. Guaranty   from   a   financially   sound   source   to  secure  the  obligaQons  of  the   Costs   incurred   by   the   Loan   Pool   SPE  

The   winning  bidder   (Loan   Pool   Buyer)   Loan  Pool  SPE  LLC  and  of  the  the  Loan   LLC   under  the  servicing   agreement  are   must   form   its   own   special   purpose   Pool   Buyer   as   the   sole   Loan   Por`olio   the   sole   responsibility   of     the     Loan   Pool  Buyer   and  may  not  be   passed   on   vehicle   (Pool   Purchase   SPE   /   Loan   Managing  Member. to   the  FDIC.   But   the   Loan   Pool   Buyer,   (i)   buy   the   aforemenQoned   100%   If   the   Loan   Pool   consists   of   e.g.,   acQng   as   Loan   Por`olio   Managing   membership   interest   in   the  Loan   Pool   c o n s t r u c Q o n   l o a n s   o r   o t h e r   Member,   can   take   a   monthly   pool   Por`olio   Managing   Member)  to   both:  

SPE   LLC   (and   the   corresponding   loan   performing   loans   with   advance   management   fee.   Cash   advances   pool’s   monthly   cash  flows)   and  (ii)   act   commitments,   the   Bidder/Purchaser   made   by   the   Loan   Pool   SPE   or   the   as   the   LLC's   sole   Loan   Por`olio   and   the   FDIC   deposit   the   required   Servicer  for   e.g.,  foreclosure  expenses,   Managing   Member.   Among   the   Loan   funds  into   an   Advance  Account   in   the   p r o p e r t y   p r e s e r v a Q o n   a n d   Por`olio   Managing   Member’s   duQes   same   raQo   as  their   iniQal  parQcipaQon   maintenance  costs,  property  taxes  and   iis  ensuring  that  the  loans  are  serviced   interests,  accessbible  to  the   Loan  Pool   costs  of  sale  are  reimbursed  according   properly   by   an   FDIC   SPE   LLC,  in   accordance  with  the   terms   to  the  ParQcipaQon  Agreement.   specified.   The   Advance   Account   t y p i c a l l y   The  Loan  Pool  SPE  LLC  must   pay  out   the   FDIC’s  share   of   all   cash   flows   received   from   the   loan   pool   on   a   monthly   basis   (net   of   any   expenses   authorized   to   be   paid   or   reimbursed   under   the   terms   o f   t h e   P a r Q c i p a Q o n   A g r e e m e n t   ) ,   a n d   m a y   distribute   any   or   all   of   the   remaining  cash  to  the   Loan  Pool   Buyer   Purchaser,  as   it   deems  fit.   The   Loan   Pool   Buyer   must   provide   monthly   reports   to   the   FDIC   concerning   pool   level   and   loan  level  acQviQes.

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

THE  REQUIREMENTS.

provides   the   Bidder’s   RepresentaQve   Bidderl  remains  eligible   to  submit   bids  

FDIC  LOAN  POOL  BIDDER   CERTIFICATION,   QUALIFCATION  &   DOCUMENTATION

electronic   copies   of   the   due   diligence   right  to  revoke  such  access.   documents  and   underwriQng   files,   including   Any   bids   submi^ed   by   the   Loan   Pool  

or   Agent  password  protected   access  to   on   future   sales,   subject   to   the   FDIC’s  

Bidder   must   be   best-­‐and-­‐final,   nonconQngent,   and   submi^ed   on   an  

PotenQal   bidders   mus   t   first   be   qualified   by   the   FDIC   in  

all-­‐or-­‐nothing   basis,   meaning   that   the  

order   t   o   receive   informat  

FDIC   will  not  accept   anythng  short  of  a   bid  on   all   the  loans   in  the  loan   pool   to  

ion   regarding   sales   and   part   icipate   in   the   bid  

be   contributed   to   the   Loan   Pool   SPE   LLC.   Nor   will   FDIC   permit   any   sale  

process,   which   requires   t   he   complet   ion   and  

structure   other   than  that  proposed  by   the  FDIC.  

submission   of   then  

t h e  

following  documents  to   t h e   F D I C :   C o n fi d e n Q a l i t y   Agreement  Purchaser  El  igibi  l  i  t  y  Cert   ifi  cat  ion  -­‐   t  h   i  s  document  establishes   t   h   a  t  t   h  e  potenQal  bidder   is  eligible   to   purchase   assets   f   rom   the   FDIC   or   any   enQty   controlled   by   the   FDIC,   Bidder   QualificaQon   Request   —   this   document  establishes  t  hat  t   he  potent   ial  bidder  is  an  "accredited   inv  es   t   or  "   u  n   d   e  r    t  h  e    federal   securiQes  laws   and   has   (i)   t   he   knowledge   and   experience  i   n   financial   a  n   d  business   ma^ers   so   as   to   be   capable   of   evaluaQng  the  merits  a  n   d     r  is  k  s    o  f   purchasing     t  h  e  L  L  C  interest  and  (ii)   t   he   resources   t   o   purchase   such   interest.  

THE  PURCHASE.  

F D I C   L O A N   P O O L   D U E   DILIGENCE,BID   SUBMISSION   &  PURCHASE Once   the   FDIC   approves   the   above   documents,   and   upon   the   Loan   Pool   Bidder’s   Agent   or   RepresentaQve   e x e c u Q n g   a   C o n fi d e n t a i l i t y   Agreeement,   the   FDIC   typically  

originaQon   documents,   credit   files  

l o a n   a

n

d  

servicing   records.   The   Loan   Pool  

OLIVER   WRIGHT   ESQ.   is   an   arbitrageur,   lawyer,   author   and   real  estate  investor   who  acquires,   manages   and   liquidates   scratch-­‐ and-­‐dent   whole   loan   pools   and   bulk   REO   asset   por=olios   for   high   net   worth   and   private   equity   investors.   As   a   principal   and   co-­‐ investor,  Oliver  has  executed  dozens   of  bulk  REO  asset   &   mortgage  note  pool  trades  with  large   naDonal  banks,  servicers  and  GSEs.  He  holds  Doctor  of  Law   and  Master  of  Law  degrees  from  Cornell  Law  School,  where   he   graduated   with   honors   and   was  Editor   of   the   Cornell   Law   Review.   He   holds   a   Bachelor’s   Degree   from   UCLA   where   he   was   class   major   valedictorian   and   graduated   Summa  Cum  Laude,  Phi  Beta  Kappa.   He  is  coming  off  of  a   publishing   deal   with   Grove   (Cold   Mountain,   Black   Hawk   Down,   American   Psycho),   and   his   academic   research   &   wriDngs  have  appeared  in  publicaDons  such  as  the  Harvard   InternaConal   Journal   of   Press-­‐PoliCcs.   Oliver   is   a   former   Gibson  Dunn  &   Crutcher   corporate  and  trial  lawyer,   which   was  recently  voted  the  No.  1  LiDgaDon  Firm  in  the  Country.   Oliver’s   corporate,   regulatory,   debt   &   equity   capital   market,   and  real  estate  investment   clients  over   the  years   have  ranged  from  Barron  Hilton  to  PIMCO  to  Amazon.com.  

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

www.rescomstrat.com 855.699-6600 ext. 100 - MBS Desk ext. 200 - Portfolio Management

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ