U.S. FDIC picks winner for test of toxic-loan plan

September 16, 2009

By Karey Wutkowski
WASHINGTON, Sept 16 (Reuters) – The Federal Deposit Insurance Corp has selected a Texas-based mortgage servicer as the first buyer in a test of its program aimed at cleansing toxic loans from banks’ balance sheets.

Residential Credit Solutions (RCS) had won the right to buy a stake in a portfolio of residential mortgage loans from Franklin Bank, a Texas bank that failed last year, the FDIC said on Wednesday.

The portfolio has an unpaid principle balance of about $1.3 billion, and RCS will pay $64 million in cash for a 50-percent stake in an entity that holds the portfolio of loans, the agency said.

RCS will also issue a note of $728 million to the FDIC to finance the sale.

The agency estimates that the value of RCS’s bid equals about 70 percent of the balance on the loan portfolio.

The FDIC said the pilot sale is a test of the funding mechanism of the so-called Legacy Loans Program.

It will analyze the results of the test sale to determine if the program should be expanded to include the troubled assets from open banks, and not just assets that the FDIC has collected from failed banks.

The FDIC announced in July that it had launched its first test of the LLP, which had been scaled back after banks proved they could raise capital without first cleansing their balance sheet of troubled assets.

The agency’s tentative start to the program reveals how far the financial markets and banking sector have recovered since September 2008 when government officials unveiled a $700 billion plan to buy up banks’ toxic assets.

That plan was shifted to capital injections in banks, but officials said they would still launch programs to buy up troubled assets.

In March, government officials detailed a plan that would provide financing through the Federal Reserve and the FDIC to aid public-private investment partnerships that would buy up to $1 trillion in distressed loans and securities.

The FDIC portion was designed for whole loans while the Treasury and Federal Reserve portion targets securities
tied to distressed loans.

A Treasury official recently said the first purchases of toxic securities should occur by early October.

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