FDIC's 'Legacy' Loan Sale Effort Is Delayed

Washington-An Obama administration initiative to sell troubled bank mortgages to investors with the help of government financing is running into headwinds, according to FDIC chairman Sheila Bair.

The Federal Deposit Insurance Corp. chief noted that congressional skepticism about the public-private investment funds - which would purchase the troubled mortgage assets from the banks - is discouraging participation.

"We are finding both on the buyer and seller side there continues to be discomfort about Congress' review of this program," Ms. Bair told reporters. There are concerns Congress "could potentially change" the rules, she added.

FDIC is developing its Legacy Loan Program that would allow banks to sell troubled residential and commercial mortgages to the PPIFs and clean up their balance sheets. Treasury is working on a Legacy Securities Program that would sell toxic mortgage securities to investors.

The FDIC was working toward sending a sales package to investors in June but the first "test sale" might be delayed. "Obviously there are issues we have to look at and take into consideration," a FDIC spokesman said.

The Legacy programs depend on the participation of private investors who are willing to partner with the federal government. Treasury is putting up the financing and 50% of the capital for the public-private investment funds, which allows the government to share 50% of the upside.

But critics claim it places too much of the risk on the government, which could end up with bad assets if the partnership defaults on the financing. Critics also are concerned that buyers and sellers of bad assets could game the system and make large profits at the expense of taxpayers.

The FDIC chairman noted that Congress has passed a housing bill (S. 896) that directs the Treasury secretary to craft conflict of interest rules for the PPIF program. "Banks will not be able to bid on their own assets," the FDIC chairman said. However, Treasury needs to clarify other aspects of the conflict of interest rules mandated by Congress. Treasury also is working on compensation and bonus guidance that could impact Legacy program participants. "The good news is that the banks have been able to raise a lot of new capital," Ms. Bair said, "so the incentives to sell may be less."

The FDIC originally estimated the Legacy Loan Program could remove $500 billion in high-risk mortgages from the banking system if private investors put up $50 billion in capital to invest in the public-private investment funds.

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