Want to Buy Your Loan?: Toxic Asset Plan Foresees Big Subsidies for Investors

To start the program, Treasury will ask banks, like Citigroup or JPMorgan Chase, to identify pools of residential and commercial real estate loans that they will be willing to sell through an auction. Private investors will bid against each other, setting a market price. No bank will be required to participate.
Editor’s Note: it’s starting. Principal reductions are coming. The original plan I proposed in which everyone shares the loss is falling into place. Make sure you get a judgment quieting title as part of your mortgage modification or settlement.
March 21, 2009

Toxic Asset Plan Foresees Big Subsidies for Investors

This article is by Edmund L. Andrews, Eric Dash and Graham Bowley.

WASHINGTON — The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks.

The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.

To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.

The uproar over the American International Group’s bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.

The three-pronged approach is perhaps the most central component of President Obama’s plan to rescue the nation’s banking system from the money-losing assets weighing down bank balance sheets, crippling their ability to make new loans and deepening the recession.

Industry analysts estimate that the nation’s banks are holding at least $2 trillion in troubled assets, mostly residential and commercial mortgages.

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

But the details have been treacherously difficult, politically and financially, and some of the big decisions are the same as those that bedeviled the Treasury Department under President George W. Bush last year.

Timothy F. Geithner, the Treasury secretary, provoked scathing criticism from investors in February by announcing the broad outlines of the plan without addressing the tough questions, like how the government planned to share the risk with investors or arrive at a fair price for the assets that would neither cheat taxpayers nor harm the banks.

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.

The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.

Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.

To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

The government would receive interest payments on the money it lent to a partnership and it would share profits and losses on the equity portion of the investment with the private investors.

Ever since last fall, industry analysts and policy makers in Washington have argued that the banking system’s biggest problem was the huge pile of troubled mortgages and other loans on bank balance sheets.

Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.

The result has been a paralyzing impasse. Banks, unwilling to sell their loans at fire-sale prices, have had less capital available to make new loans. Mortgage investors, unable to leverage their investments with borrowed money, have been unwilling to pay more than fire-sale prices.

To break that impasse, the government’s crucial subsidy is meant to provide investors with the kind of low-cost financing that has been utterly unavailable in today’s credit markets.

Administration officials refused to comment on the details of the plan, and refused to say what kind of interest rates the government would be charging investors. But government officials have long maintained that they could charge slightly more than the Treasury’s own cost of money and still offer rates far less than the private markets would demand.

To start the program, Treasury will ask banks, like Citigroup or JPMorgan Chase, to identify pools of residential and commercial real estate loans that they will be willing to sell through an auction. Private investors will bid against each other, setting a market price. No bank will be required to participate.

Analysts worry whether the prices investors offer will be high enough to induce the banks to sell assets. The hope is that high valuations at the auctions will increase the price of assets that remain on the books of banks, bolstering confidence in the sector.

Still, the Treasury Department’s biggest obstacle may be the current political environment in Washington, where Democratic lawmakers are furious about the pay packages and bonuses received by executives at companies being rescued by taxpayers.

Many investment executives said they were worried that participating in any bailout program would expose them to political wrath and potentially steep new restrictions on their own pay.

Treasury and Fed officials have remained firmly against imposing any restrictions on pay for companies investing money in the rescue effort rather than receiving money from it.

The plan comes as financial institutions continue to fail. Federal regulators Friday seized control of the two largest wholesale credit unions — U.S. Central Federal Credit Union and Western Corporate Federal Credit Union — which together had $57 billion in assets. They provide financing, check-clearing and other tasks for retail credit unions.

Michael J. de la Merced contributed reporting from New York.

19 Responses

  1. […] Want to Buy Your Loan?: Toxic Asset Plan Foresees Big Subsidies for Investors Posted on March 27, 2010 by Neil Garfield To start the program, Treasury will ask banks, like Citigroup or JPMorgan Chase, to identify pools of residential and commercial real estate loans that they will be willing to sell through an auction. Private investors will bid against each other, setting a market price. No bank will be required to participate. Editor’s Note: it’s starting. Principal reductions are coming. The original plan I proposed in which everyone shares the loss is falling into place. Make sure you get a judgment quieting title as part of your mortgage modification or settlement. March 21, 2009 […]

  2. This is such old news it’s ancient and almost useless.
    It wasn’t a bad plan, since a plan was better than none.
    But it didn’t happen and things kept right on imploding.
    It’s been like watching the World Trade Towers fall again in slow motion. Nothing you can do to stop it, unbelievable, inconcievible that our world has crumbled like this and all we are left with is a huge pile of rubble to clear up. And all the while that little voice in the back of your head is screaming “How did this ever happen?”
    The whole mortgage, banking and lending industries need to be remade and not by the bankers this time.

  3. Hi Ian.

    This is why Mr. Garfield’s forensic workshops are so important.

    Your time lines appear right – although there may be some flexibility – and once removed, the bank does not have to sell it a third party – though that is common practice. I cannot answer why this is not getting across in courts. It appears to be that the “trustee” is acting for real party who remains unidentified in court. What the trustee first has to do – in order to get through the foreclosure, is first get the mortgage loan assigned to the trust (because this was never done). Once they do that, even if done years later and fraudulently, unfortunately, most of the time the judge will just buy that there is where it currently is – and never question what has happened since. Further, even if you can get to discovery – the attorneys may balk and say that this is private information – that they do not have to disclose the real creditor. This is question I constantly think about – is there a constitutional violations of rights when your actual and current creditor is withheld from you? Somehow can this be derived from the constitution?

    The new Federal Reserve in it’s Interim Opinion for TILA May 2009 amendment state that the creditor is not security investors in REMICs or pass-throughs. And that the creditor must account on balance sheet for loan ownership. This law – in which the congressional purpose was identification of the creditor – so you could negotiate, however, is not retroactive. We also have FASB 166 and 167 , which Fannie Mae is already doing, but others are slow.

    But even if you do all this – you may still get a judge who says “So what.” Unfortunately, Congress well protected the financial industry. Some reform will be done – but too late for many.

    Usually, when courts are so separated on issues – the issues will someday get to the Supreme Court – but we only have Schack – not too many others. I have been looking at bankruptcy cases, in which there is more success. This is because identification of the actual creditor is essential for discharge. I sometimes think this is a better way to go – and attorneys, I believe, are less costly for this process.. It is this forum that challenges to creditor must, or should be addressed. – This is why Congress, at financial institutions urging – refused to pass the bankruptcy bill.

    I think this blog is so important for people – and thank Mr. Garfield immensely, but where are the attorneys who will take on these cases? Need to get a good case into a District Court – with a judge like Schack – who knows fraud when he sees it.

    Disclaimer – I am not an attorney and this is not meant to be construed as legal advise but only for educational purposes.

  4. Anonymous- thanks for taking the time to respond to my query. Here is another one- is there a timeline for a loan to be placed in non-accrual status? At which point it is out of the Trust, correct? I see 90 days for GSEs, up to 180 days for private MBS pools. Why then are so many assignments of mortgage taking place years afterward? Granted, alot of these are through MERS- is the foreclosing entity just hoping that no-one is another Judge Schack, who keeps asking ” why would a bank assign a loan which is in default 6mos (3 years or whatever) to a Trust- this is a breach of fiduciary duty” and so on. What are the actual legal, accounting or SEC rules for such matters? (briefly)

  5. Ian

    First, I want to emphasize that not everyone’s loan was purchased by hedge fund/private equity. However, this commonly happens especially when loans are placed on “non-accrual” and the servicer stops making payments to the trust. In addition, I have spoken to a hedge fund in CA – that does this – purchases mortgages at 65% of value – then tries to negotiate a new refinance for homeowner. This is called a short refinance. Other times, the new creditor simply feels it is more profitable to foreclose. Personally know that my own loan is not in the trust they recently assigned to (and I am not in foreclosure). All I can say here.

    As far as MERS, MERS will cover anything up. MERS itself is a sham. What homeowners need is discovery in court – this is rarely given to pro se – or small law firms. Judges are either clueless – or just do not care.

    New article out in WSJ today that Americans are losing faith in American Institutions – and this includes our courts. Courts are no longer for the people – but for the powerful. Do not know how to fix any of this – and let homeowners really know who their creditor is. Homeowners have a right to know their creditor – especially if that creditor is taking away their home.

  6. Anonymous —

    First, Thank you for all that you are doing.

    We are in the process of drafting our ‘Motion to Dismiss for Lack of Capacity’. As we are attacking this pro se, we would greatly appreciate your input.

    Would you be willing to contact me at MrsDiamond@msn.com … so that we might have a more specific and private communication?

    Thank you in advance for your time.

  7. Anonymous- while we know with certainty that all assignments haven’t been recorded, would these recordings be through MERS, or the county courthouse, or both? Where should they legally be and why? Is MERS producing documents when requested by plaintiffs suing their “lenders” or by defendents reqesting such evidence? I don’t see that they (mers) is doing that. What gives?

  8. Mary

    Yes – the purchase of distressed loans/notes goes on all the time – it has transpired and continues to transpire. Because these distressed debt buyers (hedge funds/private equity) are “private” they do not have to publicly disclose their financial statements. Financial reform is considering that hedge funds disclose their assets – but critics are fighting that it exposes hedge funds “investment strategy” to competitors and is therefore, counter-productive..

    Also see my post to “U.S. Plans BIg Expansion to Aid Homeowners” on this blog.

    Here is my big problem – as this distressed debt buying occurs, the (hedge fund/private) “investors” are making big profits – all on homeowners hardships. Courts are not made aware of this – and do not even question who attorneys really represent. Some time ago, I wrote here to make sure in court, when they produce “invalid” assignments, that it was the LAST assignment made. All that SPV trustee produce is invalid assignments that are suppose to show that the loan went to some trust – years ago!. Assignments that occur after this are never produced.

    SPV trusts have been dissolved and torn apart – and no longer survive in the form that was originally set up.

  9. How can you compete with investors or banks when you have to pay cash at an auction?

  10. I’m confused ;-0 This article is from a year ago. Did what they say in the article ever transpire?

  11. old article – but some might find this article on “pool” sales interesting.

    http://www.propertyvestors.com/article_i20-08.pdf

  12. OK, IF you have the name of your MBO, how do you find out if it is forsale…I want to buy my toxic loan, how do i do it? How do you get a cusip number to find out what the XYZ trust 2007-A5R is trading at?

  13. Aahhhh – so the sale is for “pools” – not securities – because mortgage-backed securities must have a triple A rating in order to be classified as mortgage-backed. This is long gone.

    All that is is being sold is the “pool” remnants of once “organized” trusts for securities. Problem is when will the courts get it – when will they understand that the once “organized” trusts are dissolved with only “pools” left for sale at firesale sale prices??? When will they get it that the trustee no longer represents the original trust that has been torn apart – it’s waterfall tranches dissolved and structure non existent and, in effect, an “event of default” – covered by already executed default swaps, already having occurred by default of the “organized” trust? (I love the word “organized)

    What needs to be done is expose the “trustees” for what they are – a representative to a once “organized” trust – that is gone – dissolved – bankrupt – insolvent – with only “pools” left for distressed debt buyers who will purchase default mortgages in the hopes of making a big profit. The trustee does not – and cannot, represent a dissolved bankrupt “organized” trust..

    Further, the new government program – in order to be effectuated – is left up to the “lender” to decide. In these cases – your “current” lender/creditor – may very well be a hedge fund/private equity – in cahoots with the US government to prop up “big banks” balance sheets by removal of “toxic” assets.

    Title?? – forget it. And forget any real modification or principal reduction. Up to the lender??? Yeah – Right. – the hedge funds are out to make money – you will not survive – and if you do – you will never find “title”.

    Class action, Mr. Garfield? If anyone can do it – you can!!
    Government immunity is the question. At what point is fraud by government agencies not exempt from immunity?

    Disclaimer – not a lawyer – blah blah – and this is not meant for legal advise but only for educational purposes.

  14. bur most of the present pools have been transfered to private trusts overseas like in the cayman Islands

  15. So basically the plaintiff will dismiss the foreclosure case against the home owner, and another company or individual even from another country will come to the home as a true buyer who did provide consideration by paying cash for the home and seek eviction.

  16. I already see major flaws in this plan … because of full disclosure problems. The banks cannot even begin to fully identify the PSA’s and SPV’s let alone make sure the paperwork is perfected to enforce security interest of the potential investors. I wouldn’t touch these auctions with a 10-foot pole.

  17. How do I find Lehman’s pass through mortgage certificates?
    US Bank National Association, as
    Successor Trustee to Bank of America,
    National Association, as successor by
    merger to LaSalle Bank National Association
    as Trustee for Lehman XS Trust Series 2007-9
    Instead of an Allonge the Plaintiff is using nunc pro tunc to get an assignment of judgement and rights through summary judgement (granted) from LaSalle to BA to US BANK. The note I can not find but there is no assignments with the Register of Deeds

    Stanley Putra
    Racine WI

  18. In other words some stranger will come to the door of the homeowner with some paper and claim that they are the new owners and this person or company will seek to make some deal with the homeowner.

  19. So, Neil, are you now advocating modification versus fighting all the way?

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