AMERICAS NEWS: Your loss, our gain

In the wake of the global financial crisis, some of the most high-profile and hotly pursued real estate investment opportunities in the US came from the Federal Deposit Insurance Corporation (FDIC), which began selling off large numbers of nonperforming property loans from recently failed banks in early 2008. Among the most significant buyers of the distressed loan pools were private equity real estate firms such as Colony Capital, Oaktree Capital Management and Rialto Capital Management.
Although the volume of structured transactions – as these partnerships between the FDIC and the private sector are known – has tapered off in the past couple of years, change could be in the air as private equity real estate firms prepare for what is expected to be a new batch of failed US bank assets. This time, however, the sellers would be banks that bought troubled mortgages from the FDIC beginning in 2008, with the assets covered under so-called loss-share agreements, whereby the federal agency reimburses 80 percent of losses that the bank incurs on the bad loans, up to a certain threshold.
With the coverage period for commercial assets typically lasting five years and 10 years for residential loans, some of the shared-loss agreements now are reaching expiration. According to one general partner that is planning to invest in loss-share assets, approximately $35 billion of assets currently covered under the agreements consequently are expected to hit the market over the next 12 months. Such assets, commonly referred to as covered assets or loans, currently total $78.2 billion, according to the FDIC’s website. 
In fact, one bank, BankUnited, already has sold off some of its covered assets in a portfolio sale earlier this year. In 2009, the Miami Lakes, Florida-based bank signed two loss-sharing agreements with the FDIC, covering approximately $11.7 billion worth of commercial loan assets, single-family loans, other real estate-owned assets and securities that previously were held by the defunct BankUnited FSB. 
In an April earnings call, Rajinder Singh, BankUnited’s chief operating officer, revealed that the bank had ended its commercial loss-share agreement with the FDIC by agreeing to sell half of its unresolved covered commercial loans in late March, with the intention of retaining the better-performing half of its covered commercial loan portfolio. While Singh did not reveal the identity of the buyer, bidders on the deal were believed to include Colony and Oaktree, according to sources familiar with the transaction.
“We got very good pricing for that portfolio,” said Singh during the call. “The numbers generated about $11 million [to the] bottom line on a pre-tax basis.” Meanwhile, BankUnited’s residential loss-share agreement, which accounts for the majority of the bank’s covered loans, will remain in effect for another five years.
BankUnited, whose commercial loss-share agreement was set to expire on May 21, is the first portfolio sale of covered assets to have been approved by the FDIC. However, future portfolio sales of such assets may be limited.
“We expect bulk sales will be the exception and only will be approved after other resolution strategies have been fully considered,” an FDIC spokesman wrote in an email to PERE. In a 2012 letter to banks with shared-loss agreements, Pamela Farwig, deputy director in the agency’s division of receiverships and resolutions, stated that the FDIC will consent to a portfolio sale only if the bank has demonstrated that such a transaction would be the least costly resolution as compared to alternative strategies, among other requirements. 
Instead, bulk sales are expected to pick up once the assets are no longer under the FDIC’s purview. “My sense is we’re going to see more product after these loss-share agreements expire and the provision against bulk sales go away, then banks can do what they want with them,” said one GP. He anticipated that window of opportunity for these portfolio sales will span the next two years in tandem with the expiration of the five-year shared-loss agreements, the bulk of which were drafted in 2009 and 2010. 
Lawrence Kaplan, an attorney in the corporate practice of law firm Paul Hastings, noted that, in addition to the looming expiration of the agreements, the banks now are in a better position to sell the loss-share assets because of improved real estate fundamentals. “If the market was going down, there would be no incentive to sell because the FDIC would cover 80 percent of their losses,” he explained. “Now that the market has stabilized, whatever you sell it for would be greater than what would it have been when you were given the loss-share agreement.”
Despite the strengthening US real estate market, however, investors in loss-share assets could benefit from a less competitive landscape. Fewer firms, after all, are bidding on distressed US bank assets than during the height of the FDIC’s structured transaction sales. According to the GP that plans to invest in loss-share assets, when the FDIC began executing structured transactions in 2009, there were approximately 25 bidders on those deals. Now, that number has dropped to about five.
With distressed debt portfolios costing as much as $500,000 to underwrite and requiring significant infrastructure and teams to both evaluate and manage, many former contenders now have dropped out of the running. “In this business, you have to be committed to do it,” the GP said.