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| The real estate finance sector got another shot of adrenalin today with the Treasury’s plan to inject $500 billion into the ailing secondary mortgage market.The Treasury laid out details of its investment program involving public and private investments. The government hopes to reverse the negative economic cycle that has asset values dropping because institutions are dumping them at fire-sale prices, while institutions — faced with falling asset values — are forced to dump even more assets.
The new plan targets toxic mortgage-related assets that have clouded the balance sheets of U.S. financial institutions. By removing some of the uncertainty about the value of these assets, banks will have better access to capital. Between $75 billion and $100 billion from the Troubled Asset Relief Program — or TARP — will be combined with private investments to generate $500 billion to purchase these legacy assets. That amount could eventually expand to $1 trillion. The Treasury touted how taxpayers will share in the results with private investors, while a market-based approach will ensure that assets are not overvalued. “This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” the Treasury said. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience.” The Federal Deposit Insurance Corporation will oversee the effort to purchase pools of loans owned directly by banks, while the Treasury will manage the taxpayers’ investments in those pools. The FDIC will also guarantee debt financing issued by the proposed investment funds. Targeted investors include individuals, pension plans and insurance companies. “The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC,” the statement explained. Once banks and their regulators identify which assets to sell, the FDIC will establish a guarantee amount for the asset pools based on a maximum debt-to-equity ratio of six-to-one. The FDIC will then sell the assets through an auction process. The highest bidder will be able to fund 50 percent of its investment by issuing debt guaranteed by the FDIC –which would receive a guarantee fee. Once in place, the servicing of the asset pools would be managed by private investors subject to FDIC oversight. The plan for mortgage-related securities involves expanding the available leverage under the Term Asset-Backed Securities Facility. Eligible securities include non-agency residential mortgage-backed securities that were originally rated AAA and commercial mortgage- and asset-backed securities that are rated AAA. Borrowers on the securities purchases will need to meet eligibility criteria, while eligible assets will need to have been originated prior to 2009. Haircuts will reflect the risk involved, and other loan terms will be determined after market participants provide input for the government to consider. The Treasury will approve up to five asset managers to oversee the investments. An example used under the legacy securities program involved a $100 investment by private investors, a $100 Treasury co-investment and a $100 Treasury loan that can be increased to $200. “As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities,” the example stated. The purchases are expected to boost demand for distressed assets and jump start sales in the troubled-asset market. Investors cheered the Treasury’s new plan, sending the Dow Jones Industrial Average 305 points higher to 7583 in early afternoon trading. |
