The Federal Deposit Insurance Corporation (FDIC) announced that Residential Credit Solutions was the winning bidder in a pilot sale of receivership assets conducted to test the funding mechanism for the Legacy Loans Program. The FDIC, as a receiver of Franklin Bank, SSB, owns a portfolio of residential mortgage loans with an unpaid principal balance of approximately $1.3 billion, which the FDIC will convey to a limited liability company. Residential Credit Solutions will pay $64,215,000 in cash for a 50% stake in the limited liability company using 6-to-1 leverage. The limited liability company will issue a note of $727,770,000, guaranteed by the FDIC in its corporate capacity, to the FDIC as receiver. The FDIC determined that this bid, whose present value equaled 70.63% of the outstanding principal balance of the portfolio, would result in the greatest return for the receivership. After the closing, which is expected to take place later this month, Residential Credit Solutions will manage the portfolio and service the loans under Home Affordable Modification Program guidelines. The FDIC anticipates that it will sell the note at a future date.
The Legacy Loans Program is part of the Public-Private Investment Program, announced in March by the Secretary of the Treasury, the Federal Reserve and the FDIC, which is being developed to help banks remove troubled assets from their balance sheets. The pilot sale was conducted as a part of the development of the Legacy Loans Program to test the funding mechanism. A total of 12 consortiums made bids to purchase ownership interests in the limited liability company in a sale involving financing offered by the receivership to the limited liability company with an amortizing note guaranteed by the FDIC. Bidders were given the chance to bid two different leverage options, 6-to-1 or 4-to-1, or to submit a cash bid. The FDIC will analyze the results of this pilot sale to determine whether the Legacy Loans Program can be used to remove troubled assets from the balance sheets of banks and, in turn, enable banks to raise new capital and spur lending to further economic recovery in the United States.