whole loan pool and bulk reo investor toolkit: buying fdic whole loan pools of failed banks
DESCRIPTION
Whole Loan Pool and Bulk REO Investor Toolkit: Buying FDIC Whole Loan Pools of Failed Banks by Oliver Wright Esq., Managing Partner of Private Equity and Lead Portfolio Manager at RescomStrat. Oliver has executed dozens of note and reo portfolio trades the the major banks, servicers and GSE's.TRANSCRIPT
RESCOM STRAT. -‐ INVESTOR TOOLKIT VOL. II, NO. I: BUYING FDIC WHOLE LOAN POOLS by OLIVER WRIGHT ESQ
Rescom strat.
BUYINGWHOLE LOAN
POOLSF. D. I. C.
D I S T R E S S I N V E S T O R T O O L K I T S E R I E SV O L . I I , N O . I
O L I V E R W R I G H T E S Q .
RESCOM STRAT. -‐ INVESTOR TOOLKIT VOL. II, NO. I: BUYING FDIC WHOLE LOAN POOLS by OLIVER WRIGHT ESQ
FDIC LOAN
POOL SALES. 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
you have a once in a lifeQme inverstment opportunity.
In its receivership capacity, the FDIC
sells the performing and non-‐performing notes it inherits from
failed banks to the private sector through a number of loan sale
p r o g r a m s
administered by its Division of
ResoluQons and Receiverships. In
discharging its statutory duty as receiver, the FDIC must resolve bank
liquidaQons in the ‘least-‐cost manner.‘
THE BACKGROUND.THE FDIC ASSET MARKETING PROGRAM
The FDIC’s first stab at selling loans
from failed banks as receiver was the
Asset MarkeQng Program in the early ‘ 80 s , wh i ch began markeQng
performing loans and then expanded into nonperforming a/k/a ‘scratch-‐
and-‐dent’ loans as well. These were
packaged into whole loan pools based on demographics and were assigned
values and minimum reserve prices b a s e d o n t h e
parQcular loan pool’s projected cash
flows.
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 id procedures , b idder 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 po s i Qon p i pe l i ne t o t he 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 PUBLIC- PRIVATE
PLACEMENT PROGRAM
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:
1. Contributes a pool of performing
and non-‐performing scratch-‐and-‐
dent loans to a Loan Pool SPE Limited Liability Company.
2. Holds back a parQcipaQon interest in the future cash flows of the
loan pool under a ParQcipaQon
Agreement executed with the Loan Pool SPE LLC.
3. Sells a 100% Membership Interest in the Loan Pool SPE LLC (which
represents the remaining interest
in the loan pool revenue stream) to a single investor.
4. Reduces its parQcipaQon interest to a lower payout percentage
once it recovers a certain pre
s e t a m o u n t , t h u s increasing the future
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 ’
recovery-‐-‐equalling the sum of (i) the
iniQal sale price paid by the winning
bidder (ii) plus the FDIC’s ParQcipaQon Interest i.e., its porQon of the ongoing revenue stream from the loan pool con t r i bu ted to the L LC . Th i s
alternaQve provides liquidity for the
FDIC's Deposit Insurance Fund and buffers the FDIC and American tax
payer from underpayment in a depressed and uncertain economic
climate, without which the FDIC might
be forced by circumstance to accept unreasonably consideraQon due to
lack of price discovery, inefficient asset valuaQon, and opportunisQc
vulture investors.
RESCOM STRAT. -‐ INVESTOR TOOLKIT VOL. II, NO. I: BUYING FDIC WHOLE LOAN POOLS by OLIVER WRIGHT ESQ
THE PARTICULARS. Deal Structure &
Execution The winning bidder (Loan Pool Buyer)
must form its own special purpose
vehicle (Pool Purchase SPE / Loan Por`olio Managing Member) to both:
(i) buy the aforemenQoned 100% membership interest in the Loan Pool
SPE LLC (and the corresponding loan
pool’s monthly cash flows) and (ii) act as the LLC's sole Loan Por`olio
Managing Member. Among the Loan Por`olio Managing Member’s duQes
iis ensuring that the loans are serviced
properly by an FDIC
contract servicer, who is hired by the
Loan Pool Buyer (subject to FDIC
approval) as part of the loan pool bid process. The Loan Pool Buyer must
provide the FDIC with aform of Guaranty from a financially sound
source to secure the obligaQons of the
Loan Pool SPE LLC and of the the Loan Pool Buyer as the sole Loan Por`olio
Managing Member.
If the Loan Pool consists of e.g.,
c o n s t r u c Q o n l o a n s o r o t h e r
performing loans with advance commitments, the Bidder/Purchaser
and the FDIC deposit the required funds into an Advance Account in the
same raQo as their iniQal parQcipaQon
interests, accessbible to the Loan Pool SPE LLC, in accordance with the terms
specified. The Advance Account t y p i c a l l y
terminates one year aker Loan Pool
Purchase, with the Purchaser and FDIC
splilng any remaining Advance Account funds proporQonate to their
iniQal cash contribut ions.
Costs incurred by the Loan Pool SPE
LLC under the servicing agreement are
the sole responsibility of the Loan Pool Buyer and may not be passed on
to the FDIC. But the Loan Pool Buyer, acQng as Loan Por`olio Managing
Member, can take a monthly pool
management fee. Cash advances made by the Loan Pool SPE or the
Servicer for e.g., foreclosure expenses, p r o p e r t y p r e s e r v a Q o n a n d
maintenance costs, property taxes and
costs of sale are reimbursed according to the ParQcipaQon Agreement.
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 eme 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.FDIC LOAN POOL BIDDER CERTIFICATION, QUALIFCATION & DOCUMENTATION
PotenQal bidders mus t first be qualified by the FDIC in
order t o receive informat
ion regarding sales and part icipate in the bid
process, which requires t he complet ion and
submission of then
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. FD I C LOAN POOL DUE DILIGENCE,BID SUBMISSION & PURCHASEOnce 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
provides the Bidder’s RepresentaQve
or Agent password protected access to
electronic copies of the due diligence documents and underwriQng
files, including
t h e
originaQon l o a n
documents, credit files a n d
servicing records. The Loan Pool
Bidderl remains eligible to submit bids
on future sales, subject to the FDIC’s
right to revoke such access.
Any bids submi^ed by the Loan Pool
Bidder must be best-‐and-‐final , nonconQngent, and submi^ed on an
all-‐or-‐nothing basis, meaning that the
FDIC will not accept anythng short of a bid on all the loans in the loan pool to
be contributed to the Loan Pool SPE LLC. Nor will FDIC permit any sale
structure other than that proposed by
the FDIC.
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
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