In November 2011, I wrote a column about FDIC loss-share agreements and how banks who exploit them were reaping windfalls while prolonging the foreclosure crisis, depressing property values and harming American families.
The FDIC took issue with my column and defended loss-share as an important money-saving tool used to encourage healthy banks to bid on the assets of failing banks. The theory may be fine, but sweetheart deals, subjective guidelines and a lack of oversight has some loss-share lenders engaging in "scorched-earth" collection practices where bankruptcy and foreclosure are aggressively pursued even in cases traditionally and more appropriately suited for short sales or loan modifications.
A bit of background: When a bank fails, the FDIC seeks to sell the loan portfolios of the failing bank by offering discounts of up to 65 percent and loss-protection of up to 95 percent. Losses, however, are not based on the discounted price paid, but on the original value of the loan.
For example, the FDIC sells a $300,000 mortgage to a new lender for $150,000 and promises to pay 90 percent of the new lender's "loss." If the new lender forecloses and sells the home for $100,000, the new lender is deemed to have incurred a "loss" of $200,000 and the FDIC cuts a check for $180,000. The result is a $130,000 profit "earned" without risk.
The absurdity of these numbers illustrates why loss-share lenders have no incentive to negotiate with borrowers and why some lenders may prefer and even pursue default. In 2009, BB&T, with loss-share protection from the FDIC, purchased the loan portfolio of Colonial Bank. Below are a handful of cases highlighting the practices of this regional loss-share lender.
In St. Petersburg, the owner of a gas station was one day late in paying his commercial mortgage. Despite the owner's multiple efforts to pay, BB&T declared a default, demanded payment of the entire loan and commenced a foreclosure action. Circuit Judge Amy Williams declared in Court: "This is why we're in a worldwide financial crisis because there's no business sense any more in the foreclosure industry, none. And it blows my mind.''
In Boca Raton, BB&T sought to foreclose on a fully performing mortgage because a guarantor was allegedly a borrower on an unrelated nonperforming loan, originated by another bank and secured by another property in another county. Circuit Judge Glenn Kelley dismissed the lawsuit stating "[BB&T] shall take nothing in this case… there was never a monetary default… Indeed, to grant the relief requested by [BB&T] would result in an absurd result."
we really don't want to talk to you, Mr. Borrower, because if we did and worked something out with you, we couldn't collect under our shared loss agreement.
In Tampa, BB&T sought to foreclose on a mortgage based on unsubstantiated allegations of a non-monetary default. Circuit Judge William Levens dismissed the case stating "… a bona fide default never occurred… [BB&T] breached its duties of good faith… was motivated to behave in such a manner as a direct result of [FDIC loss-share protection]… stood to profit by declaring a fraudulent defaul."
t… ""The resulting loan acceleration and law suit were initiated by to maximize collection simultaneously from the FDIC... and from the Defendants...
There are many stories, but most are not exposed because small businesses and working families do not have the resources to fight ruthless collection actions by large institutions that prefer immediate payment in full over incremental, monthly payments.
Some experts suggest that this "terminator-like" approach to collection stems from the misinterpretation of a loss-share requirement to use "best efforts to maximize collection" to mean "exhaust all available collection efforts." While banks surely prefer objective requirements over subjective standards, there can be no excuse for the actions taken by certain lenders and this sounds less like honest misinterpretation and more like lawyerly justification.
Whether the fault lies in FDIC agreements or the actions of a lender or both, we are the ones paying for this outrage and the abuse must stop. By the way, the FDIC has a hundred-billion dollar line of credit with the U.S. Treasury.