Some Failed Institutions Always Foreclose

Some Failed Institutions Always Foreclose - FDIC Sponsored Fraud

SunSentinel.com - Noelle Nikpour

In the wake of the recent real-estate meltdown, the borrower of a nonperforming loan called his lender with promising news: "I have a buyer looking to make an all-cash offer for my Florida property. Will you meet with us tomorrow?" The lender's answer: "No."

Disturbingly, this implausible response is not uncharacteristic of lenders who exploit FDIC loss-share agreements by seeking to foreclose on nonperforming loans, even when prudent business judgment calls for short sale or loan modification solutions.

By perverting the terms and spirit of loss-share agreements, these lenders are reaping windfalls while prolonging the foreclosure crisis, depressing real-estate values and sticking taxpayers with the bill.The

FDIC uses loss-share agreements to encourage lenders to buy the loan portfolios of failed banks. The loans are sold at discounts of up to 65 percent and deals are "sweetened" with loss protection guarantees of up to 95 percent (including legal fees). "Losses," however, are not based on the discounted price paid for the loans, but on their original value.

For instance, let's say the FDIC transfers a $350,000 home loan to Bank A at a 30 percent discount ($245,000) with a 90 percent loss-share guarantee. Bank A then sells the home at foreclosure for $150,000. According to the FDIC, Bank-A's "loss" is $200,000 ($350,000 minus $150,000) and a check for $180,000 is cut to cover 90 percent of the "loss."

With sale proceeds of $150,000 and loss reimbursement of $180,000, Bank A just made $85,000 by foreclosing on an American family with taxpayers paying the expenses and much of the profit.

If a lender can make $85,000 by foreclosing without regard to costs, there remains little incentive to deal with the uncertainty and negotiating pains of a short sale and zero incentive to modify loans. In other words, the exploitation of loss-share turns traditional collection practices upside-down.

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Comments from Patrick Pulatie at LFI Analytics

Shared Loss Agreements were executed by the FDIC with the banks that took over failed institutions. Some had the terms that the author describes. Others did not have the same terms, and were much more restrictive. The author is referring to the Shared Loss Agreements similar to OneWest Bank/IndyMac, which I wrote about.

The SLA for OneWest Bank worked in the following manner:

It only applied to the Portfolio Loans being purchased. It did not apply to servicing rights. 1st Mortgage Loans were purchased for 70% of the original balance. Second Mortgage Loans were purchased at a much lower rate, at 55% or lower at times. I shall only mention First's from here on out, but Seconds apply as well.

IndyMac had a large portfolio of Neg Am loans, so the 70% purchase price of individual loans might be "lower" if the loan had accrued a Neg Am balance above the original loan amount. If there were a large number of 30 year fully amortized loans, then there might be a greater than 70% purchase price. There is no way to break down the proportion of each.

The first 20% of losses on the "Total Portfolio" purchase would be absorbed by OneWest Bank. There would be no reimbursement on those losses.

The next 10% of losses, up to 30%, are reimbursed at 80%. So to begin to make claims, the 20% level must be reached.

From 30% on, the reimbursement rate is 95%. But the 30% loss level must be reached before the 95% can be claimed.

The total purchase of Portfolio loans was approximately $12.5 billion, so a 20% loss would be $2.5 billion before claims could begin.

If every single loan (first mortgage) had defaulted on the first day of purchase, and after reimbursement, the agreement, every $.70 spent would have resulted in $.778 being returned. Not bad! But that is not all.

Most of the loans were not in default. Therefore, interest would continue to be earned until the loan refinanced, or defaulted, so they were making a profit, and as their filings have shown, they made very good profits on these loans.

As you can see, it is always in the best interests of OneWest Bank to foreclose on defaulted properties. The sooner that the 20% loss is reached, then the quicker that they can make claims for reimbursement.

Has OneWest Bank reached the 20% threshold? That has not been announced. However, it has been 2.75 years since the Shared Loss Agreement went into effect in March 09. One would think that the 20% level has been reached.

In Feb 2010, a person I know claimed to have seen the paperwork on one loan showing that reimbursement had occurred on that loan. I did not see the paperwork, but since this person did the Good Bank/Bad Bank scenario for the FDIC in the early 90's, I have to accept that he knew what he was looking at.