The Official Online Weekly Newspaper of NAHB
By Maggie Marotta, Apogee Partners LLC
With 140 bank failures in 2009, and 2010 expected to see bank closings exceeding that total, home builders and developers face an increasing risk of their loans falling under the control of the Federal Deposit Insurance Corporation (FDIC). If you are faced with this situation, the dynamics of your relationship with your lender have changed primarily because the FDIC and possibly an acquiring bank are not seeking a long-term relationship. Navigating through this process will likely be challenging and time-consuming, but it may also provide you with a window of opportunity to restructure debt that may otherwise prevent you from continuing to develop your project.
What should builders and developers expect and do if their bank is taken over by the FDIC? First, find out who actually owns your loan. If the bank was a payout or if a bridge bank was formed, no acquirer is involved and your loan will stay with the FDIC as receiver for your bank until it is sold. If there was an acquiring bank, your loan was probably acquired, although that won’t always be the case. Entities acquiring banks often do not take 100% of the assets despite FDIC efforts to include as much of the loan portfolio as possible.
Typically, the closing will occur on a Friday evening, leaving the weekend for the FDIC, its contractors, the acquiring bank and bank employees to work feverishly to begin the transition. This isn’t a good time to contact them to find out who owns your loan. However, soon afterwards, this is the first step to determine how the FDIC takeover might affect your project and business.
If the FDIC Retains Your Loan
If the FDIC retains your loan, you may have a window of opportunity to work with them in arriving at a value that will enable you to refinance with a new lender or equity partner who is interested in participating in the continued development of your project. This process can be complicated and will require patience on your part. The FDIC (or more likely its contractors) will begin a period of due diligence to determine which assets the receiver has, their value and the condition of the loan documents. The due diligence process can take weeks or months. Part of this process includes ordering appraisals. They will also scan the loan documents to be placed on the website of the contractor assisting them in the asset sale.
A key point that should shape a builder’s or developer’s plan of action is that the FDIC’s mission is not to be a lender or loan manager. Their goal is to dispose of assets while maximizing recovery to the receiver. Regardless of how you want to proceed, the important thing is to be proactive in finding out what has been decided about ongoing funding and disposition.
After some degree of screening, and the execution of a non-disclosure agreement, potential acquirers will have the ability to view the documents during their own due diligence process. Although they should not be contacting you directly, we have seen it happen. If that happens to you, know that you are under no obligation (nor is it prudent) to pass on confidential information. After the due diligence process, the loans can be sold in various ways.
Although we know that the FDIC used to routinely notify borrowers 30 days prior to the sale of their loan, it appears that this may no longer be the case. One reason for notifying borrowers was to give them an opportunity to settle their debt prior to the sale. If that option is available, it may give you the opportunity to bring your loan-to-value down to a percentage that will enable you to refinance the note elsewhere. Unfortunately, with the decline in real estate values and sales, in many cases this opportunity may be the only thing that keeps a borrower from a foreclosure or a bankruptcy filing.
If you are relying on draws to complete a project, you may have a problem. The FDIC will order an appraisal on your collateral. If it does not meet the loan-to-value ratio required, they will not advance funds. In addition, if the bank issued a letter of credit on your behalf, you have another problem because the institution that issued it no longer exists.
Even if your loan is current while owned by the FDIC, don’t expect an automatic renewal. For example, if the loan is packaged and sold to a third party that is not interested in collateral in a certain geographic area, they may not renew your loan regardless of the loan-to-value ratio or your financial condition.
If your loan is delinquent, the FDIC may decide to foreclose on the property and sell the collateral rather than selling the delinquent loan. In addition, if there are personal guarantees involved, the FDIC will evaluate the guarantors’ ability to pay and may pursue a deficiency judgment. If successful, it will sell the deficiency judgment. However, loan servicing does continue during the due diligence process.
The settlement process typically will take 90 to 180 days. You must be prepared to provide any operating cash required during that time even if sales indicate that you cannot meet loan release prices. Once a proposed offer is agreed upon in principle by the various levels of contract and FDIC employees at the receivership, it will typically, depending on the loan balance, go to a satellite and/or regional office for approval by one or two additional committees. A deposit may be required to keep the loan from being included in a bulk loan sale.
A settlement process, whether it’s through the FDIC or the acquiring bank, will require the borrower to produce recent financial statements, tax returns and additional information. It is important to consider and discuss with your accountant the possibility of reviewing each asset for possible mark to market write-downs as well as the tax implications of forgiveness of debt. The process may be a bit daunting, but before you can tell the lender what you can and will do, you need to feel comfortable that you can meet any new obligations.
Most importantly, you should take every step to avoid the uncertain outcome of having your loan included in a bulk sale.
If the Acquiring Bank Purchased Your Loan
If the acquiring bank owns your loan, it is probably protected against a significant percentage of any loss it may incur. The FDIC has been utilizing a loss-share provision as part of the purchase and assumption agreement that typically provides for the acquiring bank to absorb a maximum of 20% of the losses on specific loans. The FDIC absorbs the remaining loss. This allows the FDIC to sell more assets to an acquiring bank. Reporting and collecting on the provisions of the loss-share agreements require a significant amount of administrative effort and in some cases, require the FDIC’s approval for specific kinds of disposition. Our experience is that this has made the acquiring banks much more hesitant to work with the borrower to reach a settlement out of the concern that specific transactions will not be approved by the FDIC and they will then have to absorb 100% of the loss.
Herein lies the problem. In an ideal world, settlement negotiations would achieve a win-win situation for all involved. The builder/developer gets to stay in business and the FDIC or acquiring bank/investor maximizes its recovery of that asset. Experience has shown that the asset is always more valuable to the original builder/developer than to anyone else, motivating them to do all they can to make it work.
The loss-share provision is often a sensitive subject for the acquiring bank. It is not in your best interest to include it in your negotiations. The most important consideration for the borrower or their agent should be bringing about a best case scenario for all involved. When credit was flowing freely, borrowers were often courted, but times have changed.
Unfortunately, what may appear to be the ideal situation is not always an option available to the borrower. If the acquirer perceives that foreclosure and pursuit of personal guarantees is their surest course of action for preserving their loss share guaranty, the borrower may not be given an opportunity to settle and refinance even if it appears obvious that it will provide a greater recovery to the bank and the FDIC. This clearly was not the FDIC’s intent when crafting the loss-share provision.
In summary, your strategic plan should include the following:
- Anticipate bank problems. If you believe your lender is at risk of an FDIC takeover, develop an alternative plan of action in the event that draws are discontinued and loan negotiations with the FDIC and/or subsequent holders are unsuccessful.
- Be proactive in obtaining information on the status of your loan and decisions on ongoing funding and disposition.
- Assemble all documents that will be required in loan negotiations, such as tax returns, personal financial statements and affidavits.
- Be honest and forthcoming and provide as much accurate information as you can.
- Search for an outside funding source or consider using a consultant to negotiate with the FDIC or your bank and to assist in your search for financing.
- Be open to alternative financing options as a means to avoid pursuit of personal guarantees and other assets.
- Act as quickly as possible to avoid the sale of your note by the FDIC to another investor.
Maggie Marotta, CPA, is a principal with Apogee Partners, LLC based in Plano, Texas, which assists clients with debt restructuring, refinancing and obtaining private capital. She was the RTC Southwest Regional Office Department Head of Claims/Settlement, which handled the administration of the purchase and assumption agreements. For more information, contact Marotta directly at firstname.lastname@example.org, or call her at 972-985-4142.
Following are some frequently asked questions about builder loans involved in FDIC bank takeovers and sales.
How do I know if my bank is in danger of being closed?
The Federal Deposit Insurance Corporation (FDIC) provides a variety of information about federally insured financial institutions on its website at www.fdic.gov. By searching for an institution, you can learn whether the bank’s supervisory agency has placed the bank under orders governing how it conducts business or if the bank has been subject to any examination.
What happens when a bank is closed?
The appropriate supervisory agency goes to court to seek the closure of the bank. The court will appoint the FDIC as “receiver” of the failed bank. The FDIC, in its capacity as receiver of the failed bank, will seek a disposition of the bank’s assets, including notes in its lending portfolio. Generally, the FDIC goes about this disposition in one of two ways. After the FDIC takes over as receiver, it will either sell off assets piecemeal over a period of time or the majority of the bank’s assets and deposits will be sold immediately at closing as part of an FDIC-arranged bank acquisition.
What is a “loss-share” agreement?
Due to the volume of bank failures in recent years, the FDIC has utilized incentives to quickly dispose of assets. A loss-share agreement is one of those incentives. The agreement guarantees that the FDIC will cover a certain percentage of losses related to the assets the assuming bank has acquired from the FDIC as receiver for the failed bank. Since 2009, the majority of banks closed by the FDIC were disposed of using a loss-share agreement.
If the FDIC retains my note in its role as receiver, who do I contact at the FDIC?
Your note will be assigned to an account officer. You should receive a letter providing you with the account officer’s name and contact information. Due to the volume of bank closures, the FDIC has utilized many contractors to assist in the management of bank closures. The account officer may be a contractor rather than an FDIC employee.
If the FDIC sells my note to a new bank, who do I contact at the assuming bank?
You should receive a letter notifying you of the name and contact information of the person overseeing your account. In some cases, your prior account officer will be hired on as an employee or contractor with the acquiring institution.
Will the FDIC continue my draws?
Each credit is analyzed on its merits. In the majority of cases the FDIC will not continue providing funding due to the loan-to-value (LTV) covenants in the loan. If you believe your institution is at risk for closure by the FDIC, you should have an alternate plan of action in the event draws are discontinued.
Will an assuming bank continue my draws?
It’s possible. In some cases, the assuming bank intends to continue the ongoing business of the failed bank. In other cases, the assuming bank acquired the assets for other reasons and it will not continue funding the failed bank’s notes. However, the existing debt covenants will still be a consideration.
Can my attorney help me deal with the FDIC?
You should always seek out qualified legal advice. However, as soon as your attorney communicates with the FDIC on your behalf, the FDIC’s legal counsel will become involved in your case. Therefore, you should consider communicating directly or using a non-attorney agent.
How much time do I have before the FDIC sells my note?
This varies depending on several factors. It’s best to act as quickly as possible to avoid having your note sold to a new investor. Given the FDIC’s current workload, the bulk sale of notes is a high priority.
Can I buy my note from the FDIC?
All note sales are subject to a competitive bidding process. However, you can negotiate a settlement of your note with the FDIC.
Can I have a third-party buyer contact the FDIC?
No. The FDIC will not participate in direct discussions with a third-party buyer, with one exception. If another bank participated in the ownership of your loan, the FDIC may offer its share of your note to the other banks who own a percentage of the credit. There are no sole source sales of assets. The FDIC is required to make the acquisition of assets a public opportunity by placing them on the open market.
What kind of documentation will the FDIC require?
At a minimum, the following will be required:
- Three years of tax returns for the debtor and all guarantors
- FDIC personal financial statements from any individuals liable for the debt
- FDIC financial affidavits from any individuals liable for the debt
What do I do if an appraiser contacts me for the FDIC?
First, you should verify that the individual contacting you has been retained by the FDIC. Be honest and forthcoming. Provide as much accurate information as you can.
Will the FDIC get my collateral appraised? If so, can I get a copy?
Yes, the FDIC will most likely get a new appraisal. You should request a copy and the FDIC may allow you to purchase one.
Will the FDIC consider debt forgiveness as a part of a settlement?
Possibly. The FDIC will perform a comprehensive analysis of the collateral value, value of the debtor and value of the guaranties, and negotiate in order to get the highest return possible for the receivership.
Will an assuming bank give me a discount?
Possibly. With the variety of banks acquiring so many different asset types, it is impossible to predict the goals of your specific acquirer. Some may look to get the highest short-term return possible and make a deal with the debtor. Others with a longer term plan may restructure without providing any debt forgiveness. Still others may be unwilling to negotiate with the debtor at all, and seek foreclosure as soon as possible if the loan is delinquent.
Will the FDIC pursue me for a personal guaranty?
The FDIC considers personal guaranties as part of its financial review process. The agency will request detailed personal financial information from all guarantors. Unless financial records demonstrate that the guarantor is insolvent, the FDIC will expect to receive some value for the guaranty.
Will an assuming bank pursue me for a personal guaranty?
It is likely that it will place some value on a personal guaranty. It may seek to collect on a judgment or sell the deficiency judgment.
How much of a discount can I get from the FDIC?
It depends. The FDIC’s employees and contractors are tasked with maximizing the return to the receivership. Its financial review process will determine in large part how much debt forgiveness it might provide. Any settlement that you propose will have to be approved by multiple levels of authority. Smaller loans may only require review and approval at the local receivership level by the account officer and his or her superiors. Larger loans will require the same approval and additional levels of review by credit review committees at the regional level. At each of these steps the documentation must demonstrate that the FDIC has fulfilled its mandate to maximize the return to the receivership.