In the wake of over 400 bank closures since 2008, the current market for debt has been flooded with mostly real estate and asset-backed debts to deep-pocketed institutions willing to buy it from the FDIC at discounted prices. Originally patterned after the Resolution Trust Corporation (RTC) sales of the early 1990s, the sales took a different turn for several reasons – and with interesting consequences.
One of which has been unsecured/barely secured paper held back from the marketplace. Credit cards, automobile deficiencies, junior mortgages, small business loans, and similar paper have not been placed in large quantities into the marketplace by the FDIC.
If you look at the loan sales list found at FDIC and run a search starting in 2006-2007, what you see is that there are practically no sales of charged-off level paper within the last few years, which would be selling for less than 10%. There have been a few minimal sales from very small community banks, but not much paper from several of the older failed banks. Most sales that appear in the sub-10% range are single asset participation's which have typically only been sold to banking institutions. The period of 2008 – early 2009, where the paper SHOULD be appearing in the sales, is suspiciously lacking in the lower-end portfolios. Many of the sales before mid-2009 were near-complete liquidations of banks or partial takeovers with the bad debt sold off.
Originally it appears that the Public-Private Investment Program for Legacy Assets (PPIP) was supposed to take care of most of the toxic assets that were not mortgaged through the Legacy Loan Program, through the PPIP may have never been intended for charged-off debts.
In June 2009, the PPIP ran into some bureaucratic hurdles and was implemented under-the-radar and its accounting has more or less been hidden from public view. A report in October 2010 revealed that it only took in about $30 billion worth of assets (where the original amount planned was supposed to be $1 Trillion), and the companies involved were highly selective of the “toxic” assets which they purchased – which wound up being high-value real estate.
Skip forward after the lack of implementation of the 2009 PPIP plan, and the bank closures take a different slant. In 2009, the FDIC began structuring deals where larger banks or new entities are “buying out” the closed banks through a loss-share partnership. The FDIC is not allowing them to sell hardly any of their charged-off consumer or commercial paper for several years. The FDIC has practically instructed the banks that they must work them to their full conclusion, and are not allowing loan sales to be a part of the process (though there are rumors of talks to resell paper ongoing).
The problem that we are left with is the vast amount of charged-off paper which appears to have disappeared into the ether sometime in 2008-2009. The initial sales of the paper in 2007 were haphazard and disorganized – one sale in particular from a closed Arkansas bank was rife with incorrect balances, poor pooling, and general balance issues, and it yielded such a low price that the FDIC probably believed that selling the paper was a waste of time and resources. If someone is servicing the paper, it is a difficult task in figuring out who it is.
has a list of many of the contractors working for the FDIC, but most of them are working on what appears to be higher-end loans or mortgages; the section for “Awards and Contact Information for FDIC Loan Servicing Contractors” appears to describe the task of dealing with charge-offs, but all of the companies listed for the contracts are real estate mortgage servicing companies.
In conclusion: In the wake of over 400 bank closures since 2008, the current market for debt has been flooded with mostly real estate and asset-backed debts to deep-pocketed institutions willing to buy it from the FDIC at discounted prices. Originally patterned after the Resolution Trust Corporation (RTC) sales of the early 1990s, these sales took a different turn for several reasons – but with interesting consequences. Click here to read more about how this trend is impacting our economy today.