FDIC Begins Legacy Loans Program

deral Deposit Insurance Corp. (FDIC) [link=http://www.fdic.gov/news/news/press/2009/pr09131.html][u]announced[/u][/link] last week that it had begun using the Legacy Loans Program funding mechanism, which was originally announced as part of the Treasury's Public-Private Investment Program in March. According to the FDIC, the first transaction involves the transfer of a residential mortgage portfolio to a limited liability company (LLC) in exchange for an ownership interest in the LLC. The transaction will be on a servicing-released basis. "The LLC also will sell an equity interest to an accredited investor, who will be responsible for managing the portfolio of mortgage loans," the FDIC statement says. "Loan servicing must conform to either Home Affordable Modification Program guidelines or FDIC's loan modification program." Accredited investors will be offered an equity interest in the LLC either under an all-cash basis (with an equity split of 80% for the FDIC and 20% for the investor) or a leveraged basis (under which the equity will be evenly split. The funding mechanism is financing offered by the receivership to the LLC using an amortizing note that is guaranteed by the FDIC, the regulator says. Financing will be offered with leverage of either 4-to-1 or 6-to-1, depending on certain elections made in the bid submitted by the private investor. If the bid incorporates the 6-to-1 leverage alternative, then performance of the underlying assets will be subject to certain performance thresholds, including delinquency status, loss severities and principal repayments. If any of the performance thresholds is triggered over the life of the note, then all of the principal cashflows that would have been distributed to the equity investors would be applied instead to the reduction of the note, until the balance is zero. The performance thresholds will not apply if the bid is based on the lower leverage option. SOURCE: [link=http://www.fdic.gov]FDIC


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