Securitizing Distressed Assets

One initiative the FDIC is expected to launch this year, however, might add some stability and transparency to distressed pricing. The agency has all but officially acknowledged it intends to securitize distressed assets that it has seized from banks.

In the long run, such a program could provide a strong sense of valuations, according to Patrick Sargent, a partner in the Dallas offices of Andrews Kurth LLP, and president of the Commercial Mortgage Securities Association.

"The FDIC has a lot of product, which is unfortunate for the system, but it's important to get really close to valuations that people will acknowledge as accurate," Sargent says.

"We're seeing widely varying appraisal amounts." He continues, "We've got to get 'price discovery' in order to find out where valuations really are. Once people are comfortable with that, there are many investors on the sidelines waiting for what they perceive to be the bottom and valuations that they can justify."

Much depends on the details of the program, which have not been released. Indeed, while the FDIC has discussed the likelihood of such transactions publicly, it has not officially unveiled such a program.

Many in the industry assume it will happen, though. "The FDIC was seeking a financial advisor as early as last August," says Kenneth Kohler, a partner at Morrison & Foerster. "So this has been percolating for some time. That tells me two things: it is not on a fast track and FDIC is serious about it."

Jumpstarting CMBS

Besides stabilizing distressed pricing, a FDIC-backed securitization would also give a much-needed boost to the barely-emerging CMBS market.

The agency, quite obviously, is borrowing a page from the RTC era, says Brian Olasov, managing director for the Atlanta office of international law firm McKenna Long & Aldridge LLP. "The CMBS market grew out of what had been these non-performing commercial loan securitizations by the Resolution Trust Corp.

"The securitizations of non-performing loans from failed thrifts proved to be very successful," he says. "Ultimately the bonds not offered to the marketplace at the time were offered up in later years when the market was more receptive. The government made quite a bit of money from the later sale of those certificates."

It is not that simple, though, to apply the old lessons. Much is dependent on two factors, Olasov says: "the rate of failed institutions and the cost of resolving those institutions relative to the cost of securitization. That is an analysis that FDIC has to make."

A successful FDIC securitization, Kohler and Olasov both say, would also deliver a strong psychological boost to the market. "There is still a certain amount of demonization of securitization that would be offset by the government's own endorsement of securitization," Kohler says.

That boost, though, might be more subdued if FDIC actually guaranteed the securities-essentially equating them to Fannie and Freddie, he adds. "In a way it would be a slightly different market proposition because they would seem to be more in the same class as government securities."

In the short run, Kohler speculates, it could have a slightly negative impact depending on the terms and rates of the securities. "What we are talking about here is putting more supply on the market, and that should put pressure on prices in the short term."

Other Options

There are other paths FDIC could through a structured sale rather than a securitization.

"You have to remember that a lot of stuff the community banks are dealing with is construction loans, land loans, and so on," Sher says. For a securitization to work, the majority of these assets have to be performing, which they are not."That's where you're going to see a bit of a difference between the late 90s and early 2000." He continues, "It's not going to be pooling a whole bunch of garbage, it's going to be really focused on performing loans because people don't want to get burned."

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