by Carlos Reyes
For some time now, I’ve noted how mainstream banks never really lose – whether through monies they received through TARP funds, or worse, the “shared loss agreements” investor/banks “negotiated” with the Federal government (FDIC).
Basically, the purpose of the TARP funds (as stated in Public Law 110-343, known as the Economic Stabilization Act of 2008) was to “restore liquidity and stability to the financial system of the United States” and to protect “home values, college funds, retirement accounts, and life savings”. Many have argued legitimately, that lenders didn’t do much to “restore liquidity” or protect “home values” – especially the latter as home values continue to drop. Instead many banks went out and bought other banks with bad assets as a way of consolidating the banking industry and further removing competition for the banking public. The last thing they seemed to do was provide “liquidity” to the capital markets.
Of course, that alone is not the problem. Our government went further by cutting “sweetheart” deals under both the Bush and Obama administrations that serve to undermine the legitimacy of the free market. I’m describing the “Shared Loss Agreement” structure. Under these arrangements, banks can acquire mortgages at less than full value (e.g., 30-50% under value). Under these agreements (e.g., with the FDIC), a purchasing lender is “guaranteed” to make a profit no matter how much they sell it for or how they dispose of the asset. To be more specific, in the event of foreclosure on a property, the FDIC typically guarantees the lender will receive no less than 80% of the original loan balance. Let me give you an example to illustrate my point:
Let’s say Bank “X” enters into a “Shared Loss Agreement” with the FDIC. Then Bank “X” goes out and buys a “distressed” property (originally worth $100,000) from another failed lender for $50,000. Bank “X” then promotes, markets and ultimately sells the property for what the “market will bear” – in this example, $40,000. At first glance, it looks like Bank “X” loses $10,000 on their original $50,000 investment—right? Wrong! Remember the “Shared Loss Agreement”? (A clear misnomer, since there is no “shared” loss. I’ll show you why.) The FDIC has guaranteed the bank it will not receive less than 80% of the original $100,000 value, or $80,000. So instead of a $10,000 loss, the bank makes a $30,000 profit! Again, here’s the math and how we arrive at it:
$40,000 Market price at which Bank sells property
+$40,000 Additional amount Bank receives from government to assure
they receive the “guaranteed” 80% of original value.
$80,000 Subtotal – “Guaranteed” 80% of the original $100,000 value
-$50,000 Original cost to Bank “X” when buying the asset from FDIC
$30,000 Total Profit to Bank “X”
Presto! Not only has Bank “X” been “adequately compensated” by the FDIC—they’ve made a profit! And, best of all, we, THE TAXPAYERS, paid for it! So, next time you think a loan modification or short-sale is an unreasonable request—think again! There’s no need to cry “crocodile tears” for the banks. Instead, defend your property and preserve you rights! Hire an experienced mortgage foreclosure defense attorney.
P.S. If you want to see a real life “Shared Loss Agreement” example, check the IndyMac—FDIC agreement – click on the following link: http://www.fdic.gov/about/freedom/IndyMacSharedLossAgrmt.pdf .
Learn more about the Reyes Law Group at www.foreclosurefreeadvice.com