A Deal That Didn't Add Up

In the late spring when news broke that non-bank lender Taylor, Bean & Whitaker was heading a syndicate to rescue its chief warehouse lender, Colonial Bancgroup of Alabama, the biggest question I had about the deal was this: where the heck was TBW getting the $300 million from?

Lee Farkas, chairman of TBW, never really answered the question but eventually the company filed a document with the Securities Exchange Commission revealing the identity of some of its syndicate members: Allied Mortgage Group, American Home Equity Corp., Atlantic Bay Mortgage, Envoy Mortgage, Myers Park Mortgage, Provident Funding Associates, WR Starkey Mortgage and others.

Sources told National Mortgage News that most of these lenders - non-depositories one and all - were warehouse clients of the bank. Former Friedman Billings Ramsey executive Henry Fan was also part of the investor group, along with Florida developer Tibor Hollo. The group pledged $200 million while TBW promised to chip in $100 million. Late last week investment bankers and warehouse officials that have been following TBW say most of the $100 million was raised by the Ocala, Fla.-based lender by borrowing against the value of its $78 billion residential servicing portfolio. Repayment of that loan could fall into question if TBW files for bankruptcy protection - and it's not like TBW's servicing is rock solid either. The Government National Mortgage Association - which recently suspended TBW as an FHA lender - has seized $25 billion of its receivables, hiring Bank of America as an interim servicer. Meanwhile there's talk that Freddie Mac might do the same.

As for the Colonial deal - it's obviously kaput but based on the events of the past few weeks it's safe to say TBW's takeover was doomed from the start. With the $300 million pledged by TBW, Colonial had hoped to secure $550 million in TARP funds from Treasury. As the weeks wore on it appeared to some (including me) that the structure of the funding was unclear: Did Colonial actually need to have the $300 million in hand before Treasury approved the TARP money - or was it the other way around: TBW wouldn't hand over the cash until the TARP money was safely in Colonial's vault? And all along Treasury and the FDIC weren't saying boo about the deal. The two agencies made no hints whatsoever that they were learning toward rubberstamping it.

In other words, the deal stunk. Given the credit crisis, how could a midsized non-bank lender like TBW possibly take control of a publicly traded multibillion-dollar depository using $300 million in questionable backing, two-thirds of which was slated to come from the bank's top warehouse clients?

Mr. Farkas must've approached the syndicate of non-banks with this plea: If Colonial goes down you can kiss your warehouse money goodbye. Fear sells. At press time, dozens of Colonial's non-bank warehouse customers were worrying about their future, fearing that an FDIC takeover could mean an end to their warehouse lines. (See related story.)

Meanwhile, the Treasury Department is investigating Colonial's warehouse division, the very same one that was backing TBW. Rumors abound that perhaps some of the warehouse money extended by Colonial was being used to fund TBW's takeover of the bank. It's a scandalous assertion - and unproven. But as one warehouse advisor noted: at the peak of their relationship Colonial had extended $1 billion in lines to TBW. Stay tuned.

Paul Muolo can be e-mailed at Paul.Muolo@SourceMedia.com.