As the November elections approach, the federal government is receiving plenty of criticism for everything from the deficit to the housing crisis.
But judging from the panelists at last week’s Urban Land Institute fall meeting in Washington, D.C., one effort that should be praised is the Federal Deposit Insurance Corp.’s (FDIC) program for disposing of the real estate assets from failed banks.
In the past three years, the FDIC has responded to the failure of nearly 300 banks, according to Greenberg Traurig’s Tom Galli, who moderated the Thursday afternoon session. That adds up to $620 billion in assets from the closed banks, of which $530 billion were transferred to acquiring institutions, explained James Wigand, who is deputy director of resolutions and receiverships at the FDIC.
The assets themselves have been a diverse bunch, ranging from massive portfolios of condo deals to single-family residential loans, REOs; and acquisition, development, and construction (AD&C) loans for residential and commercial projects.
As these banks failed, the FDIC assumed responsibility about $90 billion worth of such assets, of which $50 billion have been “conveyed” so far to buyers, which include Lennar’s Rialto subsidiary, Starwood Capital Group, Toll Brothers' Gibraltar Capital and Asset Management, and others. The FDIC still has $40 billion of such assets “in inventory,” according to Wigand.
“I do think it’s a great opportunity if you have the expertise,” Eugene S. Weil, CEO of Milestone Advisors, told the audience. (Milestone recently worked with Toll Brothers and Oaktree Capital Management on their acquisition of a $1.7 billion failed-loan portfolio from the FDIC.)
The FDIC has unloaded those troubled assets in variety of ways, depending on what the government feels will both minimize its risk and maximize its return on the deal. “We have been very adaptable” as far as determining the right approach for each transaction, explained Wigand, who expects the FDIC’s program to continue “evolving and changing our structures as the market changes.”
The deal options have typically included cash sales, loss-share agreements which limit the buyer’s potential losses on a deal, or structured transactions that offer successful bidders some type of leverage or financing to overcome the obstacles of what might otherwise be a very complex transaction.
That last option—a structured transaction, where the FDIC offered 0% financing to the buyers—was the choice for the failed Corus Bank’s $4.5 billion portfolio of condo loans, which was won by Starwood Capital Group in 2009.
“Providing 0% financing was genius,” said Barry Sternlicht, president and CEO of Starwood Capital. “We moved our bid $500 million. We can do math, you know.”
While expressing reservations about the loss-share agreements on other deals, the outspoken Sternlicht praised his experience working with the FDIC on the 102-asset Corus portfolio. “A lot of people didn’t want to do the Corus deal because of the FDIC. They have been a fair, responsive partner, and they haven’t asked us to do anything uneconomical.”
In fact, the FDIC “gave us the time to do the right thing by the assets,” said Sternlicht, whose firm chose not to dump the financially troubled properties, but to update and relaunch them, remarketing them as condos or rentals, depending on local demand.
Starwood’s strategy appears to be working. In Los Angeles’ Koreatown, one relaunched property recently sold 30 units in one weekend at prices of $558 per square foot, “so there is a market for residential,” Sternlicht asserted.
Of course, at $5 billion, the Corus deal certainly counts as an outsize transaction for the FDIC, which is also hoping to get smaller and middle-market investors in the mix. “We have been trying to penetrate the different levels of the market,” Wigand said.
To accomplish that, the FDIC has started creating smaller, geographically defined pools of assets that will be up for bid. “There’s some enhanced interest in some of these transactions because people have been able to be efficient in their due diligence,” Milestone Advisor’s Weil noted.
Panelists also suggested that other bundles of assets—REOs, residential mortgage-backed securities, AD&C loans, and others—could be put up for bid by the FDIC as it works through its ongoing inventory of distressed assets.
Alison Rice is senior editor, online, at BUILDER magazine.