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Page I of3FDIC testing market on outstanding RTC loans - 2000-12-04 - Atlanta Business Chronicle

Atlanta Business Chronicle - December 4, 2000http;/lntlnnta,bi7.io1s1nals,qonlatlantalsto-rier12000ll2/041focus I4.htm I

From the December 1, 2000 print edit ion -r More Print Edition Stories

FDIC testing market on outstanding RTC loans

Anne Melfi Confibuting Writer

The FDIC is testing the market to see whether two of its mortgaged-backed securities will fetch a higheryield as an outright whole loan sale. It expects the aggressive mood of loan buyers will boost the price.

"We have an obligation to maximize the return," said George Alexander, manager of the FDIC'sMortgage Backed Securities Administration in Washington, D.C.

The loans are among the last left from the Resolution Trust Corporation (RTC), defunct since 1996 afterCongress decided the RTC had done its job of cleaning up after the savings and loan crisis. Establishedin 1989, the RTC had securitized $40 billion in mortgages by 1991, in addition to other strategies fordisposing of the debts, Alexander said.

Dwindling balance

"There's only a $1.9 billion loan balance left on commercial property, and a bond balance of $1.2billion, about one percent of which is related to Georgia," he said. "That makes several hundred milliondollars left for the government once the securities are terminated."

The termination dates have come up for 10 of the loan securities - and the market has shifted. In acleanup call, the trust decided to pay down the underlying collateral, pay offthe bonds early andconsider how to take advantage of market conditions to get the highest yield.

"There aren't as many commercial mortgage loans being made in the last couple of years," said RexVeal, a partner at Kilpatrick Stockton LLP.

Alexander said the FDIC knows that investors who like to buy commercial loans are looking for them,which could drive up the asking price and put outright sale of a whole loan on par with securitiesincome.

Testing the market

"The FDIC asked the trust to sell two of the securities to see if the prices turn out better than the residualincome that securities could produce," he said.

If the results are favorable, loan buyers could have 16 more offerings to pursue.

"The inventory is low and we want to see it get lower," Alexander said. Eight loans are coming to termhttp:i/atlanta.bizjournals.com/atlanta/stories/2000lI2l04lfocus14.htrnl?Fprintable 4t2u2002

FDIC testing market on outstanding RTC loans - 2000-12-04 - Atlanta Business Chronicle Page 2 of 3

now and the last eight loans will reach the trigger point and qualiff for a termination call in a few years.

"There are a limited number of investors who buy this stuff," Veal said. "Life insurance companies andtrusts will buy the highest quality loans, the high-performing, low-risk ones, to include in theirportfolios. Others will buy the loans to securitize them."

Alexander said the FDIC conceivably could create a new trust, which would buy the loans, resecuritizethem and issue new bonds. Risk is perceived to be less now, making whole loans more atfiactive.

"The ultimate net proceeds is what we're concemed with," he said.

"Securitization atfacted buyers who would not buy loans but who would buy bonds," Alexander said. Itattacted the money and the competition to do the job fast.

"When the S&Ls crashed there was an enonnous amount of property, and many people thought theyshould get rid of it as quickly as possible to people who knew what to do with it," said George Benston,professor at Emory University Goizueta School of Business. "And for the most part, they did and did agoodjob.

"They were lucky," he said. Grouping commercial mortgages in a loan package is tricky, he said,because each commercial mortgage is too individual, with its own history and problems.

Target market experts

"You put like loans together because you can sell to people who know those markets," Alexander said.RTC's tnrst sold strip mall loans as a package to people who know about strip malls, and they putapartrnent buildings, hotels and distressed properties each in their own packages to atfiact buyers whodeal in these areas.

A buyer who specializes in, say, strip malls or hotels knows how to analyze the offer, Veal said.

"The buyer will look at each loan in the pool, price it and make a bid on the whole package based onwhat's in it," Veal said. "The investor may even do a site visit on a significantly large property. They'lllook at the payment history, the value of the collateral and the credit risk.

"The buyer has to do due diligence."

Residential loans simpler

On the residential side, he said, mortgage loans are more cookie cutter, formulaic and simpler to trade.

"Ordinary investors should be cautious," Benston said. They will tend to buy the cheaper bonds at thehigher-risk end of the spectrum.

"The Triple-A bond holders are frst in line to get the cash flow, Alexander said. "There would have tobe a total catastrophe for you to lose."

But a security is not a guarantee, he said. The Double-B bond holders trade a lower price for higher risk.In case a loan isn't performing, they're the last to get paid.

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FDIC testing market on outstanding RTC loans - 2000-n-A4 - Atlanta Business Chronicle Page 3 of 3

The trust's early call for termination will help the FDIC close the books on old RTC business, but it willalso terminate interest income that bond holders could have received.

The FDIC does not own the loans, it owns the residual interest. The loans are owned in effect by a legaldocument, the trust, which is administered by Chase Manhattan Bank, State Street Bank of Boston andBankers Trust, which recently was acquired by Deutsche Bank.

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