Today, the FDIC announced the next steps in further developing the government's Legacy Loan Program (LLP), by testing the LLP program's funding mechanism through the sale of a portfolio of residential mortgage loan receivership assets to a limited liability company (LLC) in exchange for an ownership interest in the LLC. The LLC will also sell an equity interest to an accredited investor, who will be responsible for managing the portfolio of mortgage loans, under the following two options:  

  • All cash basis with an equity split of 80 percent (FDIC) and 20 percent (accredited investor); or
  • Sale of loan portfolio involving partial leverage under which the remaining equity split will be 50 percent (FDIC) and 50 percent (accredited investor).

Under the second scenario, the receivership will offer financing to the LLC in the form of an amortizable note guaranteed by the FDIC at a leverage ratio of either 4-to-1 or 6-to-1 (debt to equity), depending on certain elections (to be determined) made in the bid submitted by the accredited investor for the mortgage assets. 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 one of the performance thresholds is triggered over the life of the note, then all of the principal cash flows 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 4-to-1 leverage option. The FDIC will be protected against losses on the note guarantee by the limits on the amount of leverage (both in terms of a maximum ratio and dollar amount), the mortgage loans collateralizing the guarantee, and any guarantee fee assessed.

The LLP was initially launched this past March to reduce the “overhang of troubled legacy loans stuck on bank balance sheets," and had been subsequently postponed in June in order to "assess the magnitude and timing of troubled assets sales" and prepare to test the LLP funding mechanism through the a sale of receivership assets in order to be "ready to offer the LLP to open banks as needed."