A couple of readers asked me to comment on the Sun Sentinel article Are loss-share lenders gouging us?
November 27, 2011
In the wake of the recent real-estate meltdown, the borrower of a nonperforming loan called his lender with promising news: “I have a buyer looking to make an all-cash offer for my Florida property. Will you meet with us tomorrow?” The lender’s answer: “No.”
Disturbingly, this implausible response is not uncharacteristic of lenders who exploit FDIC loss-share agreements by seeking to foreclose on nonperforming loans, even when prudent business judgment calls for short sale or loan modification solutions. By perverting the terms and spirit of loss-share agreements, these lenders are reaping windfalls while prolonging the foreclosure crisis, depressing real-estate values and sticking taxpayers with the bill.
FDIC Sponsored Fraud
Rather than comment directly, I asked Patrick Pulatie at LFI Analytics to chime in. Pulatie writes ….
I wrote an article about IndyMac and the Shared Loss Agreement (SLA) two years ago, before I quit working with most homeowners. Essentially, here is what is going on.
Shared Loss Agreements were executed by the FDIC with the banks that took over failed institutions. Some had the terms that the author describes. Others did not have the same terms, and were much more restrictive. The author is referring to the Shared Loss Agreements similar to OneWest Bank/IndyMac, which I wrote about.
The SLA for OneWest Bank worked in the following manner:
• It only applied to the Portfolio Loans being purchased. It did not apply to servicing rights. 1st Mortgage Loans were purchased for 70% of the original balance. Second Mortgage Loans were purchased at a much lower rate, at 55% or lower at times. I shall only mention First’s from here on out, but Seconds apply as well.
IndyMac had a large portfolio of Neg Am loans, so the 70% purchase price of individual loans might be “lower” if the loan had accrued a Neg Am balance above the original loan amount. If there were a large number of 30 year fully amortized loans, then there might be a greater than 70% purchase price. There is no way to break down the proportion of each.
• The first 20% of losses on the “Total Portfolio” purchase would be absorbed by OneWest Bank. There would be no reimbursement on those losses.
• The next 10% of losses, up to 30%, are reimbursed at 80%. So to begin to make claims, the 20% level must be reached.
• From 30% on, the reimbursement rate is 95%. But the 30% loss level must be reached before the 95% can be claimed.
• The total purchase of Portfolio loans was approximately $12.5 billion, so a 20% loss would be $2.5 billion before claims could begin.
• If every single loan (first mortgage) had defaulted on the first day of purchase, and after reimbursement, the agreement, every $.70 spent would have resulted in $.745 being returned. Not bad! But that is not all.
Most of the loans were not in default. Therefore, interest would continue to be earned until the loan refinanced, or defaulted, so they were making a profit, and as their filings have shown, they made very good profits on these loans.
As you can see, it is always in the best interests of OneWest Bank to foreclose on defaulted properties. The sooner that the 20% loss is reached, then the quicker that they can make claims for reimbursement.
Has OneWest Bank reached the 20% threshold? That has not been announced. However, it has been 2.75 years since the Shared Loss Agreement went into effect in March 09. One would think that the 20% level has been reached.
In Feb 2010, a person I know claimed to have seen the paperwork on one loan showing that reimbursement had occurred on that loan. I did not see the paperwork, but since this person did the Good Bank/Bad Bank scenario for the FDIC in the early 90’s, I have to accept that he knew what he was looking at.
Who Benefits: George Soros, Michael Dell, John Paulson
Pulatie referred to an article he wrote on December 1, 2009: Anatomy of a Government-Abetted Fraud: Why Indymac/OneWest Always Forecloses
OneWest Bank and its Sweetheart Deal
OneWest Bank was created on Mar 19, 2009 from the assets of Indymac Bank. It was created solely for the purpose of absorbing Indymac Bank. The principle owners of OneWest Bank include Michael Dell and George Soros. (George was a major supporter of Barack Obama and is also notorious for knocking the UK out of the Euro Exchange Rate Mechanism in 1992 by shorting the Pound).
When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try to simplify the terms. Some of the major details are:
- OneWest would purchase all first mortgages at 70% of the current balance
- OneWest would purchase Line of Equity Loans at 58% of the current balance.
- In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.
How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:
- The original loan amount was $500,000. Missed payments and other foreclosure costs bring the amount up to $550,000. At 70%, OneWest bought the loan for $385,000
- The home is located in Stockton, CA, so its current value is likely about $185,000 and OneWest sells the home for that amount. Total loss for OneWest is $200,000. But this is not how FDIC determines the loss.
- ‘FDIC takes the $500,000 and subtracts the $185,000 Purchase Price. Total loss according to the FDIC is $315,000. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $252,000.
- Add the $252,000 to the Purchase Price of $185,000, and you have One West recovering $437,000 for an “investment” of $385,000. Therefore, OneWest makes $52,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.
At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.
Meet IndyMac’s New Owners
Flashback March 20, 2009: IndyMac Bank’s new name: OneWest Bank
The sale of IndyMac Federal Bank was concluded Thursday, and the new owners wasted no time in ditching its tainted name. Starting today, IndyMac is OneWest Bank.
The Pasadena bank’s new owners, organised under OneWest Bank Group, bought the bank’s $20.7 billion in loans and other assets for $16 billion. That includes $9 billion in financing from the Federal Deposit Insurance Corp. and the Federal Home Loan Bank.The ownership group is led by Steven Mnuchin of Dune Capital Management in New York. The bank’s investors include J. Christopher Flowers, who has specialised in distressed bank purchases, and hedge fund operators George Soros and John Paulson.
Check out the last line and primary lie in the above article:
The management team has been working with the FDIC on a loan modification program to attempt to keep people in their homes.
OneWest bank profit: $1.6 billion
On February 20, 2010, the Los Angeles Times reported OneWest bank profit: $1.6 billion
The billionaires’ club of private financiers who took over the remains of IndyMac Bank from the Federal Deposit Insurance Corp. turned a profit of $1.57 billion last year on the failed mortgage lender — more than they invested less than a year ago.
Yet under the sale agreement, the federal deposit insurance fund still could lose nearly $11 billion on bad loans that the Pasadena institution made before it was sold last March and renamed OneWest Bank.
In taking over IndyMac’s assets, the investor group, led by Steven Mnuchin of Dune Capital Management, put up $1.55 billion to revitalize the bank. Other investors included hedge-fund operators George Soros and John Paulson, bank buyout expert J. Christopher Flowers and computer mogul Michael S. Dell.
OneWest’s financial results were filed with regulators Friday. Regulators and the investors declined to comment on the profit.
As much as $11 billion is set to go straight into the hands of the desperately needy: George Soros, John Paulson, Michael Dell, and Christopher Flowers. The regulators and the investors parasites declined to comment.
If you are thinking about buying a new computer, and you are considering Dell, you may wish to reconsider.
Mike “Mish” Shedlock
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