When the FDIC shut IndyMac down, Mnuchin and his partners swept in to buy what was left, bad loans and all. As was typical at the time, the FDIC agreed to help OneWest cover the cost of the bad assets it inherited, including losses on foreclosed single-family loans.
What is loss sharing?
Loss share is a feature that the Federal Deposit Insurance Corporation (FDIC) first introduced into selected purchase and assumption transactions in 1991. Under loss share, the FDIC absorbs a portion of the loss on a specified pool of assets which maximizes asset recoveries and minimizes FDIC losses. Loss share also reduces the FDIC's immediate cash needs, is operationally simpler and more seamless to failed bank customers and moves assets quickly into the private sector.
Does loss share put the taxpayer on the hook for additional losses down the road?
When the FDIC calculates the estimated cost of a failure, it takes into account all expected losses on the assets covered in shared-loss agreements (SLAs). These current market assumptions are built into the cost of failure at the time of resolution. Thus, the cost of all expected future payments are recognized at the time of bank failure and no losses are deferred. Any loss sharing payments are made from receivership funds from the specific failed bank or thrift or, if those are insufficient, from the FDIC's Deposit Insurance Fund (DIF). The DIF is funded by assessments paid by insured banks and thrifts. It is not taxpayer funded.
How does loss sharing work?
The FDIC uses two forms of loss share. The first form is for commercial assets and the second for residential mortgages.
For commercial assets, the SLAs cover an eight-year period with the first five years for losses and recoveries and the final three years for recoveries only. The FDIC typically will reimburse 80 percent of losses incurred by the acquirer on covered assets up to a stated threshold amount (generally the FDIC's dollar estimate of the total projected losses on loss share assets), with the assuming bank absorbing 20 percent.
Loss coverage may also be provided for loan or note sales, but such sales require prior approval by the FDIC. Recoveries on loans which experience loss events are split, in most instances, with 20% of the recovery going to the assuming bank and 80% to the FDIC.
For single-family mortgages, the SLAs are for ten years and have the same 80/20 split as the commercial assets. The FDIC provides coverage on three basic single-family first lien mortgage loss events: modification, short sale, and when the property is sold after foreclosure. Second liens are permitted to be charged off according to regulatory criteria when the first lien is not held by the assuming bank.
Since the inception of SLAs, the basis for sharing losses with an assuming bank has undergone some change. Until March 26, 2010, the FDIC shared losses with assuming banks on an 80/20 basis until the losses exceeded an established threshold defined in the SLA, after which the basis for sharing losses shifted to a 95/5 basis. Sharing losses on a 95/5 basis was eliminated for all SLAs executed after March 26, 2010.
Does the FDIC receive any benefits if the assuming bank makes money on the covered assets?
Yes. If there are recoveries on assets that have been charged off by the failed bank or the assuming bank, then the FDIC receives the majority of the benefit. The assuming bank will reimburse the FDIC for 80 percent of the recoveries.
What types of losses on the assets are covered and when does the FDIC reimburse the buyer for those losses?
The FDIC covers credit losses as well as certain types of expenses associated with troubled assets (such as advances for taxes and insurance, sales expenses, and foreclosure costs). The FDIC does not cover losses associated with changes in interest rates.
For single-family loans, the assuming bank is paid when the loan is modified or the property is sold. For commercial loans, the assuming bank is paid when the assets are written down according to established regulatory guidelines or when the assets are sold.
How do you know that the FDIC is getting the best deal with loss share?
When the FDIC is preparing the sale of a failing bank or thrift, the FDIC reaches out to numerous potential bidders to bid for the customer deposits and the failing bank's assets. The sale relies on a competitive bidding process. In addition, the FDIC uses financial advisors to estimate asset values.
After the bids are received, the FDIC selects the least costly option. To facilitate that analysis, the FDIC dictates the terms and conditions of a loss sharing arrangement and the assets to be covered when potential assuming banks bid on a failing bank. This allows the FDIC to more quickly analyze and compare each of the bids to determine which is the least costly to the Deposit Insurance Fund. The terms and conditions also enable the FDIC to monitor the SLAs effectively.
Isn't loss share more costly? If not, then how does it save money? Aren't you still selling the assets?
Loss share saves the Deposit Insurance Fund money. In today's markets, asset prices are low, and the prices frequently include steep liquidity and risk discounts. These agreements enable the FDIC to sell the assets today, but without requiring that the FDIC accept today's low prices. Instead, the FDIC sells to assuming banks in a way that aligns their incentives with the FDIC and reduces the liquidity and risk discounts. The assuming banks have the capacity and incentive to service the assets effectively and minimize losses.
How big is the loss share program? How much money has the FDIC saved?
Through June 30, 2015, the FDIC has entered into 304 shared-loss agreements with assuming banks on initial asset balances totaling $216.4 billion. Assets currently covered under loss share total $39.7 billion. The estimated savings exceed $41 billion, compared to an outright cash sale of those assets.
List of Loss Share Agreements
Failed Bank List since October 2000
Why don't you use loss share for all failures?
SLAs are one way the FDIC can resolve the assets of a failed bank, and may not be the best alternative for every troubled bank. For each resolution, the FDIC analyzes all available alternatives and accepts the least costly bid. Sometimes the results indicate that the loss share bids are more costly or the FDIC may not receive a loss share bid.
What type of oversight does the FDIC have over the SLAs?
The FDIC conducts annual on-site reviews and regular off-site monitoring of records of covered losses and overall compliance with the SLAs. It also requires assuming banks to provide quarterly reports to ensure compliance with the program and to monitor the performance of the assets. Lastly, if the assuming bank is not in compliance with the SLA, the FDIC has the right to stop payments until the problem findings are resolved, and, in extreme cases, to sell the assets through a bid process.
For SLAs that cover single-family loans, must the assuming bank honor the FDIC's loan modification program?
The FDIC requires that assuming banks modify loans using the Home Affordable Modification Program (HAMP) if they are approved HAMP servicers. If the assuming bank is not a HAMP approved servicer, it is required, as part of its SLA, to modify loans using the FDIC's standard modification program for failed bank single-family, owner-occupied loans. Both programs adjust the current loan terms to achieve an affordable payment by first reducing the loan interest rate, then extending the loan term, and, where necessary, offering forbearance of principal. The goal is to provide an affordable monthly payment based on a debt to income ratio for housing equivalent to 31 percent of the borrower's gross monthly income (including taxes and insurance payments).
The assuming bank can propose an alternative loan modification program that will achieve the goals of providing affordable payments consistent with cost effectiveness. If the FDIC concurs, then the bank can adopt the alternative program.
What guidance has been provided to assuming banks pertaining to the SLAs?
FDIC issues letters and guidance memorandum to assuming banks to clarify or provide a detailed explanation of specific or general aspects of the SLAs. The following link has a copy of the guidance and letters that have been issued: RSAM Guidance
What can/should a borrower or banker do if they are having a problem with a loss share bank or LLC partner?
When a borrower or banker is experiencing a problem with a loss share bank or LLC partner, they should first try to initiate communications with the institution.
If the borrower or banker is unsuccessful in communicating with the loss share bank or LLC partner, they can exercise one of several options in requesting support from the FDIC:
Contact the Risk Share Asset Management (RSAM) policy group directly via e-mail at email@example.com
Complete a Customer Assistance Online Form at https://www2.fdic.gov/starsmail/index.asp
Contact the FDIC Call Center / Office of the Ombudsman at 1-877-275-3342, via e-mail at Ombudsman@fdic.gov, or through the Ombudsman's web site at www.fdic.gov/regulations/resources/ombudsman/. The Office of the Ombudsman is a confidential, neutral and independent source of information and assistance to anyone affected by the FDIC in its regulatory, resolution, receivership, or asset disposition activities. They will in turn work with other FDIC divisions and subject matter experts to help resolve the issue.
Where can I get additional information about the history and use of loss share?
In 1998, the FDIC published the book "Managing the Crisis" detailing the FDIC and RTC experience from 1980 through 1994. Chapter 7 is devoted to loss sharing and can be accessed at: http://www.fdic.gov/bank/historical/managing/
What are the data reporting requirements for assuming banks?
The Loss Share Data Specifications describe the detailed data reporting requirements for assuming banks participating in loss share.
How does the early termination program work?
Banks periodically approach the FDIC with offers to terminate SLAs prior to their expiration. Subject to eligibility criteria, financial evaluation, and supervisory concurrence, the FDIC has approved the early termination of SLAs.
The FDIC only approves an early termination offer if the terms are less costly to the FDIC than the estimated costs of continuing with the SLAs for the duration of the contract.
Early termination program parameters have changed over time as market conditions have evolved and the shared loss program has matured. The most recent change was effective May 5, 2016, and assuming banks are currently eligible for early termination under the following criteria*:
Maximum of $200 million outstanding unpaid principal balance for each single family and commercial SLA
Maximum total termination payment from the FDIC of $20 million per receivership
No maximum unpaid principal balance limit when the termination offer is a payment to the FDIC from the assuming bank
If the assuming bank has both single family and commercial SLAs, both SLAs are terminated at the same time
*Prior limits were $100 million per SLA and a $10 million maximum payment per receivership.
The process begins with the assuming bank submitting an offer in writing. A third-party Financial Advisor is engaged by the FDIC to value the portfolios and estimate future losses and recoveries, which are modeled to account for the remaining terms of the SLAs. If the total estimated costs of continuing the SLAs are greater than the termination offer and the assuming bank is in compliance with the terms of the SLA, the FDIC can accept the offer subject to approval by the assuming bank’s primary federal regulator as well as the FDIC’s Division of Risk Management Supervision.
Are assuming banks permitted to conduct portfolio sales of shared-loss assets?
Yes, if the FDIC consents and the assuming bank satisfies the applicable provisions of the agreement.