The Return Of The RTC?
U.S. bank regulators are reconsidering the creation of an entity to sop up bad debt
By Aleksandrs Rozens September 4, 2009
Faced with increasingly brittle bank portfolios corroded by souring commercial real estate loans, U.S. bank regulators are reconsidering the creation of an entity modeled on the Resolution Trust Corp. to sop up bad debt from financial institutions, according to a source familiar with the situation.
The Federal Deposit Insurance Corp. has met with market participants ranging from real estate loan servicers to investors and bankers involved with the securitization of real estate debt. Most of the meetings took place this summer at the FDIC's headquarters in Washington, D.C., according to a source who attended the meetings. "They will create a structure where they take over banks and pursue a variety of avenues to rid themselves of [the bank] assets," the source told IDD.
The plans for bringing back a form of the RTC come amid a wave of bank failures. Eighty-four FDIC-insured institutions have closed their doors this year alone. The greatest number of bank failures handled by the agency -- which opened its doors in 1933 -- was in 1989, when 206 institutions were shuttered.
The original RTC was born of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which abolished the Federal Savings and Loan Insurance Corp. and created the RTC. That new government corporation became responsible for all management and sales of savings and loans' assets in receivership and all savings and loans in conservatorship since Jan. 1, 1989.
While it is unclear just how much the new RTC will resemble the old version, the source -- an industry participant in real estate finance -- says the FDIC may emulate the Treasury's Public Private Investment Program that has the U.S. government teaming up with investors who buy the loans. With the previous RTC, the federal government sold off bank debt at cents on the dollar in auctions and buyers who were able to cure the loans reaped generous returns.
In some cases, funds specializing in the bad debt earned compound annual returns of 40% to 50%, according to William Isaac, former head of the FDIC during the S&L crisis in the 1980s. Some of the funds were organized by Wall Street investment banks, he says.
"The RTC worked reasonably well. Investors made an awful lot of money," says Isaac, adding that bringing back an exact replica of the original RTC "would be a horrible idea" because the government would not share in gains made from the curing of bad debt or loans sold in pools at auctions.
"They are very, very keen to ensure it does not repeat itself," says the industry participant who attended meetings with the FDIC about the RTC. "My guess is they'll have the spirit of the PPIP investment plan where the investors share both upside and downside with the U.S. government."
If the FDIC goes through with the creation of an updated RTC, some of the debt it takes from seized banks likely will be sold off as whole loans and some could be sold as securitizations. The last RTC securitization, a deal known as RTC 1995-C2, was completed in the mid-1990s. Issues discussed in meetings between industry participants and the FDIC included the question of who will rate the RTC securitizations and who would buy the deals.
The participant said that the FDIC is most worried about growing problems with construction loans. Typically these loans would be paid off after a project is completed, but with the collapse of credit markets many developers cannot get another loan to pay off the loans.
The industry participant who attended the discussions with bank regulators was not sure when exactly the FDIC would unveil its new RTC program, but the source said the program could be introduced as soon as the fall and the first securitization could be done in the first quarter of 2010. "The need [for such a program] will grow as more institutions fail," says the source.
Many banks and financial institutions have been slammed by poorly performing residential mortgage loans, but lately commercial real estate debt has taken a huge bite out of bank balance sheets.
Within the universe of commercial real estate debt that has been resold into bonds known as commercial mortgage-backed securities, delinquency rates have hit 4% -- twice the pace of a year ago -- and they could hit 10% by year-end. Not only are there problems with loans to buy properties, banks are being hurt by badly-performing loans made to developers -- construction loans.
In the second quarter of 2009 commercial banks and savings institutions reported an aggregate net loss of $3.7 billion. Much of that was tied to increased expenses for bad loans that sapped earnings. Two out of three institutions reported lower quarterly earnings than a year ago and one in four reported a net loss for the second quarter.
Net chargeoffs rose to a record high in the second quarter. Most of the problem loans were commercial and industrial loans; net chargeoffs on these jumped 165% in the second quarter of 2009 from the second quarter of 2008.
Earlier this week, FDIC chief Sheila Bair acknowledged on CNBC that "commercial real estate is a looming problem" and will be a big driver of bank failures this year and next.
The RTC sold its first securitization in 1991. That deal pooled loans for single-family homes and multifamily homes from a Beverly Hills, Calif., thrift.
By the end of that year, the RTC had crafted more than $10 billion in mortgage-backed securities, and some $36.6 billion worth of assets -- such as single- and multifamily home loans as well as commercial and consumer loans -- were securitized between 1991 and 1993.
Meanwhile, some observers say that in spite of the discussions between the FDIC and market participants, nothing may come of the plans for a new RTC and regulators could opt for a completely different strategy.
"This is part of an ongoing process. It may go nowhere," says Nicolas Restinas, director of Harvard University's Joint Center for Housing Studies. He added, though, that "in the day and age we are in people have to explore lots of possibilities."
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