RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

Rescom strat.

BUYINGWHOLE LOAN

POOLSF. D. I. C.

D I S T R E S S I N V E S T O R T O O L K I T S E R I E SV O L . I I , N O . I

O L I V E R W R I G H T E S Q .

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

FDIC LOAN

POOL SALES. by  Oliver  Wright  Esq.

Performing  and  Non-­‐Performing  Loans  

dwarf   all   other   asset   categories   held  

by   failed   banks.   MulQply   this   by   a  historic   number   of   failed   banks   and  

you   have   a   once   in   a   lifeQme  inverstment  opportunity.

In   its   receivership   capacity,   the   FDIC  

sells   the   performing   and   non-­‐performing   notes   it   inherits   from  

failed   banks   to   the   private   sector  through   a   number   of   loan   sale  

p r o g r a m s  

administered   by   its   Division   of  

ResoluQons   and   Receiverships.   In  

discharging   its   statutory   duty   as  receiver,   the   FDIC   must   resolve   bank  

liquidaQons  in  the  ‘least-­‐cost  manner.‘

  THE  BACKGROUND.THE  FDIC  ASSET  MARKETING  PROGRAM

The   FDIC’s   first   stab   at   selling   loans  

from  failed  banks   as   receiver   was   the  

Asset  MarkeQng  Program   in   the   early  ‘ 80 s ,   wh i ch   began   markeQng  

performing   loans   and   then   expanded  into   nonperforming   a/k/a   ‘scratch-­‐

and-­‐dent’   loans   as   well.   These   were  

packaged   into  whole  loan  pools  based  on   demographics   and   were   assigned  

values   and   minimum   reserve   prices  b a s e d   o n   t h e  

parQcular   loan   pool’s   projected   cash  

flows.

THE  RTC  BULK  SALES  PROGRAM

In   the   late   ‘80s,  the   ResoluQon   Trust  

CorporaQon,   be^er   known   by   the  acronym   RTC,   started   its   Bulk   Sales  

Program   in   the   wake   of   the   Savings  

and   Loan   crisis,  whose  epicenter   was  in   Texas,  but   enveloped   the   country.  

Just   as   fortunes   were   lost   overnight,  so   too   were  millionaires  minted,  as  a  

privileged   network   of   private,   third  

party  bulk   sale   trade   pla`orms   raked  in   fortunes  coordinaQng  the   purchase  

and   sale  of   failed   S  &  L   debt   at   steep  discounts   to   par.   Like   the   Asset  

MarkeQng   Program,   the   Bulk   Sales  

Program   uQlized   a   straight   forward  markeQng   process,   whereby   each  

agency   aggregated   and  valued   similar   loans   into  

por`olios;   published   a   loan  

p o r ` o l i o   b i d d e r ' s  informaQon   packet   outlining  

b id   procedures ,   b idder  cerQficaQon   protocols,   and  

confidenQality   requirements;  

and   ulQmately   sold   the   loan  por`olios,   either   through   an  

aucQon   format   or   a   sealed   bid  process.  As  the  volume  of   loans  

processed   through   both   the  

FDIC’s   Asset   MarkeQng   Program  and   the  RTC’s  Bulk  Sales  Program  

reached   the   Qpping   point,   the  FDIC   and   RTC   delegated   (while  

retaining   oversight)   much   of   the  

d i s po s i Qon   p i pe l i ne   t o   t he  aforemenQoned  third  parQes.

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

THE PROCESS. FDIC BULK

LOAN SALES THROUGH

THE PUBLIC- PRIVATE

PLACEMENT PROGRAM

Under   the   FDIC’s   current   bulk   loan  

sale   process,   it   sells   its   very   largest  loan   pools  under   an  alternaQve  to   the  

direct   sale   program,  whereby  

it:  

1. Contributes   a  pool   of   performing  

and   non-­‐performing   scratch-­‐and-­‐

dent   loans   to   a   Loan   Pool   SPE  Limited  Liability  Company.

2. Holds  back  a  parQcipaQon  interest  in   the   future   cash   flows   of   the  

loan   pool   under   a   ParQcipaQon  

Agreement   executed   with   the  Loan  Pool  SPE  LLC.

3. Sells  a  100%  Membership   Interest  in   the   Loan   Pool   SPE   LLC   (which  

represents  the  remaining   interest  

in   the   loan   pool   revenue   stream)  to  a  single  investor.

4. Reduces   its   parQcipaQon   interest  to   a   lower   payout   percentage  

once  it  recovers  a  certain  pre  

s e t   a m o u n t ,   t h u s  increasing   the   future  

amounts   received   by  the  Loan  Pool  Buyer.

This   method   yields   the  

FDIC   a  higher   return-­‐-­‐or  ‘ l e a s t   c o s t ’  

recovery-­‐-­‐equalling   the   sum  of   (i)   the  

iniQal   sale   price   paid   by   the   winning  

bidder   (ii)  plus  the  FDIC’s  ParQcipaQon  Interest   i.e.,  its  porQon  of  the  ongoing  revenue   stream   from   the   loan   pool  con t r i bu ted   to   the   L LC .   Th i s  

alternaQve   provides   liquidity   for   the  

FDIC's   Deposit   Insurance   Fund   and  buffers   the   FDIC   and   American   tax  

payer   from   underpayment   in   a  depressed   and   uncertain   economic  

climate,  without  which  the  FDIC  might  

be   forced   by   circumstance   to   accept  unreasonably   consideraQon   due   to  

lack   of   price   discovery,   inefficient  asset   valuaQon,   and   opportunisQc  

vulture  investors.

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

THE PARTICULARS. Deal Structure &

Execution The  winning  bidder   (Loan   Pool  Buyer)  

must   form   its   own   special   purpose  

vehicle   (Pool   Purchase   SPE   /   Loan  Por`olio  Managing  Member)  to   both:  

(i)   buy   the   aforemenQoned   100%  membership   interest   in   the  Loan   Pool  

SPE   LLC   (and   the   corresponding   loan  

pool’s  monthly  cash  flows)   and  (ii)  act  as   the   LLC's   sole   Loan   Por`olio  

Managing  Member.   Among   the   Loan  Por`olio   Managing   Member’s   duQes  

iis  ensuring  that  the  loans  are  serviced  

properly   by   an   FDIC  

contract   servicer,  who   is  hired   by   the  

Loan   Pool   Buyer   (subject   to   FDIC  

approval)  as  part  of  the  loan   pool  bid  process.   The   Loan   Pool   Buyer   must  

provide   the   FDIC   with   aform   of  Guaranty   from   a   financially   sound  

source  to  secure  the  obligaQons  of  the  

Loan  Pool  SPE  LLC  and  of  the  the  Loan  Pool   Buyer   as   the   sole   Loan   Por`olio  

Managing  Member.

If   the   Loan   Pool   consists   of   e.g.,  

c o n s t r u c Q o n   l o a n s   o r   o t h e r  

performing   loans   with   advance  commitments,   the   Bidder/Purchaser  

and   the   FDIC   deposit   the   required  funds  into  an   Advance  Account   in   the  

same  raQo   as  their   iniQal  parQcipaQon  

interests,  accessbible  to  the  Loan  Pool  SPE  LLC,  in  accordance  with  the   terms  

specified.   The   Advance   Account  t y p i c a l l y  

terminates     one  year   aker   Loan   Pool  

Purchase,  with  the  Purchaser  and  FDIC  

splilng   any   remaining   Advance  Account   funds   proporQonate   to   their  

iniQal  cash  contribut  ions.

Costs   incurred   by   the   Loan   Pool   SPE  

LLC  under  the  servicing  agreement  are  

the   sole   responsibility   of     the     Loan  Pool  Buyer   and  may  not  be  passed  on  

to   the  FDIC.  But   the   Loan  Pool   Buyer,  acQng   as   Loan   Por`olio   Managing  

Member,   can   take   a   monthly   pool  

management   fee.   Cash   advances  made   by   the   Loan   Pool   SPE   or   the  

Servicer  for  e.g.,  foreclosure  expenses,  p r o p e r t y   p r e s e r v a Q o n   a n d  

maintenance  costs,  property  taxes  and  

costs  of  sale  are  reimbursed  according  to  the  ParQcipaQon  Agreement.  

The  Loan  Pool  SPE  LLC  must  

pay  out   the  FDIC’s  share   of  

all   cash  flows  received   from  the   loan   pool   on   a   monthly  

basis   (net   of   any   expenses  authorized   to   be   paid   or  

reimbursed   under   the   terms  

o f   t h e   P a r Q c i p a Q o n  A g r e eme n t   ) ,   a n d   m a y  

distribute   any   or   all   of   the  remaining  cash  to  the  Loan  Pool  

Buyer   Purchaser,  as   it  deems  fit.  

The   Loan   Pool   Buyer   must  provide   monthly   reports   to   the  

FDIC   concerning   pool   level   and  loan  level  acQviQes.

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

THE  REQUIREMENTS.FDIC  LOAN  POOL  BIDDER  CERTIFICATION,  QUALIFCATION  &  DOCUMENTATION

PotenQal   bidders   mus   t   first  be   qualified   by   the   FDIC   in  

order   t   o   receive   informat  

ion   regarding   sales   and  part   icipate   in   the   bid  

process,   which   requires  t   he   complet   ion   and  

submission   of   then  

following  documents  to  t h e   F D I C :   C o n fi d e n Q a l i t y  

Agreement  Purchaser  El  igibi   l   i  t  y  Cert  ifi  cat  ion  -­‐  t  h  i  s  document  establishes  

t  h   a  t   t   h  e  potenQal  bidder   is  eligible  

to   purchase   assets   f   rom   the   FDIC   or  any   enQty   controlled   by   the   FDIC,  

Bidder   QualificaQon   Request   —   this  document  establishes  t  hat  t  he  potent  

ial  bidder   is  an  "accredited   inv  es  t  or  "  

u  n  d   e  r    t  h  e    federal   securiQes  laws  and   has   (i)   t   he   knowledge   and  

experience  i   n  financial   a  n   d  business  ma^ers   so   as   to   be   capable   of  

evaluaQng  the  merits  a  n  d    r  is  k  s    o  f  

purchasing    t  h  e  L  L  C  interest  and  (ii)  t  he   resources   t   o   purchase   such  

interest.  

THE  PURCHASE.  FD I C   LOAN   POOL   DUE  DILIGENCE,BID   SUBMISSION  &  PURCHASEOnce   the   FDIC   approves   the   above  

documents,   and   upon   the   Loan   Pool  Bidder’s   Agent   or   RepresentaQve  

e x e c u Q n g   a   C o n fi d e n t a i l i t y  Agreeement,   the   FDIC   typically  

provides   the   Bidder’s   RepresentaQve  

or  Agent  password  protected  access  to  

electronic   copies   of   the   due   diligence  documents  and   underwriQng  

files,   including  

t h e  

originaQon   l o a n  

documents,   credit   files   a n d  

servicing   records.   The   Loan   Pool  

Bidderl  remains  eligible   to  submit  bids  

on   future   sales,   subject   to   the   FDIC’s  

right  to  revoke  such  access.  

Any   bids   submi^ed   by   the   Loan   Pool  

Bidder   must   be   best-­‐and-­‐final ,  nonconQngent,   and   submi^ed   on   an  

all-­‐or-­‐nothing   basis,  meaning   that   the  

FDIC  will  not  accept  anythng  short  of  a  bid  on  all   the   loans  in  the  loan  pool   to  

be   contributed   to   the   Loan   Pool   SPE  LLC.   Nor   will   FDIC   permit   any   sale  

structure   other   than  that  proposed  by  

the  FDIC.  

OLIVER   WRIGHT   ESQ.   is   an  arbitrageur,   lawyer,   author   and  real  estate  investor  who  acquires,  manages   and   liquidates   scratch-­‐and-­‐dent   whole   loan   pools   and  bulk   REO  asset   por=olios  for   high  net   worth   and   private   equity  investors.   As   a   principal   and   co-­‐

investor,  Oliver  has  executed  dozens  of  bulk  REO  asset  &  mortgage  note  pool  trades  with  large  naDonal  banks,  servicers  and  GSEs.  He  holds  Doctor  of  Law  and  Master  of  Law  degrees  from  Cornell  Law  School,  where  he   graduated  with  honors  and  was  Editor   of   the  Cornell  Law   Review.   He   holds   a   Bachelor’s   Degree   from   UCLA  where   he   was   class   major   valedictorian   and   graduated  Summa  Cum  Laude,  Phi  Beta  Kappa.   He  is  coming  off  of  a  publishing   deal  with   Grove   (Cold   Mountain,   Black   Hawk  Down,   American   Psycho),   and   his   academic   research   &  wriDngs  have  appeared  in  publicaDons  such  as  the  Harvard  InternaConal   Journal   of   Press-­‐PoliCcs.   Oliver   is   a   former  Gibson  Dunn  &  Crutcher   corporate  and  trial  lawyer,  which  was  recently  voted  the  No.  1  LiDgaDon  Firm  in  the  Country.  Oliver’s   corporate,   regulatory,   debt   &   equity   capital  market,   and  real  estate  investment   clients  over   the  years  have  ranged  from  Barron  Hilton  to  PIMCO  to  Amazon.com.  

RESCOM  STRAT.  -­‐  INVESTOR  TOOLKIT  VOL.  II,  NO.  I:  BUYING  FDIC  WHOLE  LOAN  POOLS  by  OLIVER  WRIGHT  ESQ

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