Bank failures generate fear and uncertainty, but also opportunities — including some that smaller investors can now get in on. Two new federal programs accept bids from smaller investors on loan pools the government has acquired from failed banks.
When a bank collapses, as 74 have this year, the Federal Deposit Insurance Corp. takes over. Usually it finds another bank to acquire the failed bank's deposits and business.
The FDIC may, however, pull assets out of that deal to sell to investors later. As the guarantor of people's bank deposits, it's in the agency's best interest to maximize the value of what a failed bank owned.
Loans and foreclosed properties are common types of assets the FDIC puts up for sale. It sells equity in pools of loans to investors and sells foreclosures separately, through the real estate market or at auction.
Access To Deals Over the past two months, the agency has created two programs to let smaller investors bid in equity sales of smaller loan pools.
The smaller pool sales, sometimes for loans in a specific region, take place via the FDIC's Small Investor Program. The FDIC offers financing for them. It has also started the database-driven Investor Match Program. This helps smaller investors get access to sizable deals by partnering with asset managers and larger investors, and helps the larger investors gain local expertise.
These structured equity sales are similar to those done by the Resolution Trust Corp. of the 1980s and early 1990s. Government-owned RTC liquidated real estate assets, mostly loans, after many savings and loan associations failed. With both the RTC and today's FDIC-created limited liability companies, the government shares in the profits from the management and sale of bank assets.
But the RTC was criticized for not selling smaller loan pools that could be bought by smaller investors and women- and minority-owned businesses. The SIP and Investor Match Programs address these concerns.
Using an LLC structure, the FDIC can "rely on experts to manage and dispose of the assets, but if investors win big so does the FDIC," said Pat Jackson, CEO of Sabal Financial Group. Newport Beach, Calif.-based Sabal is backed by Oaktree Capital Group Holdings, one of the winning bidders in the first SIP sale.
FDIC Plays Matchmaker The FDIC's matchmaking service is attracting interest. Phil Mangano, manager of special programs for the agency's resolutions and receiverships division, says "100 members have joined the Investor Match database in just three weeks.
In the first SIP deals, investors are already partnering.
Inverse Investments President Scott Carson, of Austin, Texas, has just registered with the Investor Match Program. He says by teaming up bigger investors, smaller investors and regional real estate knowledge, the program should help these parties accurately value assets, "present them to local investors" and "move a lot of assets a lot faster.
After the real estate bust and economic downturn, there are a lot of assets to move. The FDIC says 74 banks it insured have failed this year through September. Last year 157 failed. Zero failed in 2005 and 2006.
Structured Sales One successful bidder in the new SIP program is Hudson Realty Capital LLC, a women- and minority-owned business in New York. It won the bid for equity interest in an LLC that holds 97 performing and nonperforming residential acquisition, development and construction loans in Colorado. The loans are for land and lots, developments, condo projects, mixed-use commercial space and apartment buildings.
The FDIC is encouraging minority- and women-owned businesses to take part in the SIP, though an agency spokesman says this is not a mandate.
Hudson partnered with Soundview Real Estate, a private equity fund based in Stamford, Conn., and real estate investor JCR Capital in Denver. The loan portfolio the partners bought is valued at about $139 million, says Renee Lewis, Hudson's managing director.
"We develop a business plan for each loan, with a possibility of restructuring, foreclosure, sale of the notes or discounted payoffs," Lewis said. The FDIC restricts bulk selling of the loans by certain percentages over the first couple of years, she adds.
Hudson's investment in the FDIC assets was handled through Hudson Realty Capital Fund V, a fully subscribed (closed) investment fund.
"It's a fund that concentrates on originating commercial loans and purchasing distressed commercial real estate debt," Lewis said.
Many Players In Pools Another winning bidder in the recent SIP sale announced in August was Acorn Loan Portfolio Private Owner IV, in Los Angeles. This new holding company was created to buy the private owner interest in this LLC. The lead investor in Acorn is Oaktree. Sabal is the asset manager and servicer of the partnership. Other minority investors include FACP Mortgage Investments and Calista Corp., a minority-owned business.
This loan portfolio is valued at $158 million and holds 116 commercial acquisition, development and construction loans for Colorado retail, industrial and office space, apartments and undeveloped land.
Colony Capital in Los Angeles is the FDIC's largest buyer of loans, says Paul Fuhrman, a principal with Colony. He says Colony now manages more than 6,000 loans in 49 states, many through partnership LLCs with the FDIC.
It's a big player, but that doesn't prevent Colony from bidding on SIP sales, he says.
The company looked at one of the first SIP sales but "elected to pass on it," Fuhrman said. But it "will look at future SIP sales.
Colony already has a strong partnership with the Cogsville Group, a minority-owned business in New York, and has the "management expertise it needs," he said. Thus it is unlikely to participate in the FDIC's Investor Match Program.
Although FDIC officials would not name the date of the next SIP sale, investors expect it to occur in November or December.