Builders Hope Toxic Asset Plan Will Free Up Mortgage Credit
The Treasury Department — in conjunction with the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve — announced last week a $500 billion plan to buy up toxic assets that are dragging down the balance sheets of the nation’s financial institutions.
The long-awaited Public-Private Partnership Investment Program (PPIP) is designed to address the problem of “legacy assets” — older and distressed mortgage-related assets, some of which are also referred to as “toxic” — that are compromising the ability of banks and other financial institutions to raise capital and lend.
NAHB hopes the plan will help to free up housing credit moving into the spring home-buying season.
Using $75 to $100 billion in Troubled Asset Relief Program (TARP) capital, and capital from private investors, the PPIP will generate $500 billion in purchasing power to buy legacy assets — with the potential to expand to $1 trillion over time. The PPIP will be designed around three basic principles:
- Maximizing the impact of each taxpayer dollar
- Shared risk and profits with private sector participants
- Private sector price discovery
The PPIP has two components, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms.
- The Legacy Loans Program, which combines an FDIC guarantee of debt financing with equity capital from the private sector and the Treasury to support the purchase of troubled loans from insured depository institutions. The FDIC is seeking public comments on the program, which it expects to be operational within three months.
- The Legacy Securities Program, which combines financing from the Federal Reserve and Treasury through the Term Asset-Backed Securities Loan Facility (TALF) with equity capital from the private sector and the Treasury to address the problem of troubled securities. The TALF program, which presently only encompasses new securities, will be expanded to include older securities.
Legacy Loans: The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and has limited their ability to lend. To cleanse balance sheets of these loans and reduce the overhanging uncertainty associated with these assets, the FDIC and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through FDIC debt guarantees and Treasury equity co-investments. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program.
How it works
- As an example, say a bank wants to divest a pool of residential mortgages with a face value of $10 million.
- After review, the FDIC determines that it would be willing to leverage the pool at a six-to-one debt-to-equity ratio.
- The pool would then be auctioned by the FDIC, and the highest bidder would form a PPIF to purchase the mortgages.
- Assuming a winning bid of $8.4 million, the FDIC would provide guarantees for $7.2 million of financing, leaving $1.2 million of equity (FDIC financing at a six-to-one leverage ratio).
- The Treasury would then provide 50% of the equity funding, with the investor providing the remaining 50%. In this example, the Treasury would invest approximately $600,000, with the private investor contributing $600,000.
- The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis — using asset managers approved and subject to oversight by the FDIC.
Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds and mutual funds. The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit.
The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program is designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the TALF and through matching private capital raised for dedicated funds targeting legacy securities.
How it works
- Eligible assets are expected to include non-agency residential motgage-backed scurities (MBS) were originally rated AAA and outstanding commercial MBS and asset-backed securities that are rated AAA.
- A pre-qualified fund manager submits a proposal to raise private capital to participate in a PPIF with the Treasury.
- The government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed PPIF. Assume the fund manager is able to raise $10 million of private capital for the fund. The Treasury will provide a $10 million equity co-investment and will also provide a $10 million loan to the PPIF. The Treasury will also consider requests from the fund manager for an additional loan of up to $10 million to the fund.
- As a result, the fund manager has $30 million (or, in some cases, up to $40 million) in total capital to acquire targeted securities.
- The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The manager could also participate in the expanded TALF program for legacy securities when it is launched.
The NAHB staff will continue to monitor implementation of the PPIP. For more information on the program click here; or e-mail John Dimitri at NAHB, or call him at 800-368-5242 x8529.
Tax Credit Web Site Looks at Opportunity of a Lifetime
Builders and other industry professionals can help spur home sales by referring prospective first-time home buyers to www.federalhousingtaxcredit.com. The NAHB Web site provides detailed information on the $8,000 federal tax credit for first-time home buyers included in the economic stimulus legislation signed into law by President Obama.
Consumers can use the Web site to find information on the tax credit – including a detailed question and answer section. It also includes information about other housing-related and small business measures in the legislation and a number of home-buying resources for consumers.
Spanish Version Also Available Online
A Spanish version of this increasingly popular Web site is also available to provide detailed information on the tax credit to Spanish-speaking first-time home buyers.
Industry professionals are encouraged to highlight either tax credit Web site when marketing to their potential first-time home buyer market.
Plan to Attend Construction Forecast Conference
Plan to attend or watch the 2009 Spring NAHB Construction Forecast Conference & Webcast on Thursday, April 23 in Washington, D.C. to get the latest facts, insights and analysis of the housing industry.
Panels of nationally recognized experts at the day-long conference will discuss economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.
For more information and to register, visit www.nahb.org/cfc.
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