FDIC’s pilot securitization program

2 August, 2010: The Federal Deposit Insurance Corporation is trying securitization to get rid of the assets of the failed banks and in its pursuit “FDIC 2010-R1,” sold securities backed by US$ 471.3 million of performing single family mortgages of 16 failed banks, which included banks like CF Bancorp, IndyMac Bank, Desert Hills Bank, Warren Bank and Republic Federal Bank.

The pilot securitization program is consistent with FDIC’s proposed Securitization Safe Harbor rules (see our news here) and consists of three tranches of securities. The senior certificates represent 85% of the capital structure, guaranteed by FDIC’s and carries a coupon of 2.184% with an average life of 3.66 years. The subordinated certificates consist of mezzanine and over collateralization class representing 15% of the capital structure. The subordinated certificates are retained by the failed banks receivership and may be sold in future. The transaction provides for an independent third party oversight of the overall performance. The senior certificates were not registered with the Securities and Exchange Commission and were offered and sold in reliance on the exemption from registration available under Section 3(a)(2) of the Securities Act of 1933 to securities guaranteed by an instrumentality of the United States.

The burst of the housing bubble in the US had caused series of failures in the banking system. Hence FDIC is trying securitization to maximize the value of the assets of the failed banks. FDIC usually sells failed banks to other lenders as quickly as possible to protect depositors and the loans left with FDIC are sold at regular auctions.

[Reported by: Nidhi Bothra]

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