Making the Most of a Failed Bank: FDIC Loss-Sharing and Purchasing Loan Portfolios

Jeffrey R. Schmitt

By Jeffrey R. Schmitt



One potentially lucrative by-product of the recent economic downturn and corresponding bank failures is the opportunity to acquire banks or loan portfolios at a substantial discount and on favorable terms. An FDIC receivership of a failed bank presents other healthy lenders with an opportunity to obtain receivables at a discount, and possibly corresponding deposits as well. Bank failures also offer options to investors with capital who may be considering non-traditional investment options given the current economic climate and real property market.

These opportunities usually present themselves in one of two ways. First, the FDIC may sell all of the assets of a failed bank, including receivables and deposits, to a third party, which generally is another lender. Second, the FDIC can pool individual loans together and essentially auction a pooled loan portfolio to a third party without corresponding deposits. Both scenarios require scrutiny of certain issues for the acquiring lender or investor in order to maximize the investment revenue from the purchase and ensure compliance with the terms of the agreement with the FDIC.

Loss-Sharing with the FDIC

A purchaser of a failed bank will generally enter into a Loss-Share Agreement with the FDIC. Loss-Share Agreements have developed in the past two decades, and give a purchaser the benefit of the FDIC’s agreement to absorb a percentage of a loss realized on the acquired receivables. Under a Loss-Share Agreement, the purchasing lender incurs the remaining portion of a loss on a loan, generally around 20%, while the FDIC incurs the greater share.

Loss-Share Agreements are intended to facilitate the FDIC’s sale of a greater number of assets to a purchasing lender while also burdening the acquiring lender with the obligation to manage and collect non-performing loans sold from a failed bank. In effect, loss-sharing results in the alignment of interests between an acquiring lender and the FDIC, which both now face risk associated with the workout of the bad debt acquired.

It is essential to understand the potential effects of a Loss-Share Agreement when bidding on a failed bank. The obvious benefit to the acquiring lender is the reduced risk associated with the purchase of a bank or loan portfolio. However, the benefit to the FDIC is that the loss-share, and the reduced risk to the purchaser, will likely create greater interest in acquiring a failed bank, and therefore increased bids for the purchase.

Dealing with Collateral

Evaluation of collateral packages for loans subject to sale by the FDIC is essential in evaluating the transaction and should be undertaken at the earliest possible opportunity. It is not only important to evaluate the collateral, but to take steps to further protect the collateral, even if a particular loan is not in default.

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Condominium Assessments and the Recession

Jeffrey R. Schmitt

By Jeffrey R. Schmitt



Why Bankruptcy and Foreclosure Aren’t Always the End of the Line in Missouri

The past decade saw a surge in condominium, loft, town home, and other multi-unit developments, in both urban and suburban areas. Urban revitalization resulted in renovated commercial and industrial buildings for loft developments, and baby boomers and empty-nesters have been drawn to the convenience of maintenance-free living provided by multi-unit developments in cities and suburbs. The recent recession and ensuing economic climate has impacted the real estate market and construction industry particularly hard, and many unfinished developments suffered as a result. However, the down turn in the economy poses problems for existing, fully occupied, and even well-managed buildings too.

Traditionally, the payment of condo fees or assessments by a unit owner was a priority, just like the payment of a mortgage. As increasing numbers of unit owners face job loss, reduction in pay, or other financial hardship, this tradition is falling fast, and payment of condominium fees and assessments has become less of a priority.

Other than headaches for building management and board members, delinquent condo fees and assessments pose a variety of dilemmas for multi-unit developments. Legal and practical ramifications of increasing delinquencies include the inability to obtain loans for capital improvements, a loss of services for the buildings and grounds, and an obstacle to sales of existing units.

Condominium associations and boards have long relied on collection lawsuits to compel delinquent owners to pay, and, ultimately threaten the sale of the unit by foreclosure of the condominium’s assessment lien. Increasingly, this litigation option is becoming less viable. The recent and continuing onslaught of foreclosure sales and personal bankruptcies strip the building management of the power to collect through litigation. However, all is not lost when a unit is subject to foreclosure or an owner files bankruptcy, and it is important that associations and boards are aware of their rights in these situations.

Foreclosure

In Missouri, and in approximately half of the states, lenders have the right to foreclose on a delinquent borrower through a non-judicial “power of sale.” Power of sale gives the lender the right to provide notice of foreclosure proceedings and sell property on the courthouse steps. Foreclosure sales by lenders threaten to extinguish assessment liens against a condominium unit that are imposed by operation of the building’s governing documents and Missouri law. In most cases, the lender will buy the property back and will become the new owner of the unit. In these cases, the sale price at foreclosure will likely be less than the loan value, and there will be no surplus for other lien claimants, including condo associations.

It is important for the board to know whether the foreclosing lender made a purchase money loan, that is, a loan used by the owner to purchase the property from a previous owner, or rather a refinance loan. The Missouri Condominium Act gives different treatment to condominium assessment liens and their priority over purchase money loans as opposed to refinance loans. In some cases, building associations can assert priority over the lender for all or part of the unpaid assessment lien. This means that the lien may survive the foreclosure and can be enforced against the lender or other subsequent owner. In any event, the subsequent owner is responsible for payment for fees accruing post-foreclosure.

It is also imperative that building management and the board are mindful of the building indenture and bylaws, and ensure that the provisions concerning assessment lien priority are consistent with those protections provided by the Missouri Condominium Act.

Bankruptcy

A unit owner’s bankruptcy, while initially causing collection problems, does not always result in the removal of an assessment lien. Most personal bankruptcies in the United States today are Chapter 7 cases, meaning that the owner’s assets are liquidated in order to pay creditors. As soon as a Chapter 7 case is filed a condominium association must cease collection activities against the property owner for the past debt. However, the assessment lien against the unit may remain as an encumbrance against the property. This means that in the event of a subsequent sale or refinance after the bankruptcy, the delinquent assessments may be paid at closing, even though the association cannot pursue the owner for those delinquent assessments directly.

Depending on the equity in the unit after a mortgage, the assessment lien, and any other liens against the property, the Bankruptcy Court may allow an assessment lien or other liens to be reduced or eliminated all together, in order to provide value to creditors. Of course, many lenders will begin foreclosure proceedings after an owner has filed bankruptcy, with permission from the Court.

It is also important to remember that even when an owner files a Chapter 7 bankruptcy case, monthly fees and assessments payable after the date of the bankruptcy filing may be collected from the unit owner, and may result in an assessment lien which can be enforced through litigation.

Some individuals file Chapter 13 bankruptcies, which are reorganizations of their financial affairs. These owners will propose a plan to the Bankruptcy Court to repay their debt over a period of three to five years. In many Chapter 13 cases, the delinquent assessments will be paid to the building over time.

Bankruptcy cases can vary widely, and building managers must keep abreast with the status of the case, the effect on the unit, and whether or not a claim for assessments should be filed.

Conclusion

Bankruptcies and foreclosures can seem ominous to building managers and boards seeking to recover delinquent assessments from owners. However, these circumstances do not necessarily preclude the recovery of unpaid accounts. Multi-unit developments are not always doomed to the fate of helpless victims in these scenarios and the management should respond to bankruptcy and foreclosure notices with an investigation of the circumstances in order to evaluate the options that remain and how the building’s rights can be enforced both in the immediate and long term future.