A ruling by the Eleventh Circuit Court of Appeals is giving the Federal Deposit Insurance Corp. (FDIC) broad-reaching powers to dispose of the assets of failed banks, according to Moody’s Investors Service. In its latest credit outlook report, the rating agency said the ruling is likely to up the risk to bank-sponsored asset-backed securities (ABS), as recourse to compensation will be diminished, leaving involved parties little alternative than to sue the FDIC in instances of alleged grievance over the handling of these assets. The appellate court ruled the broad receivership powers of the FDIC entitle it to marshal trust property of a failed bank. And by doing so, the ruling rejects a lower court’s preliminary injunction that barred the FDIC from selling the assets of Ocala Funding on the basis that the FDIC lacked jurisdiction to sell the assets. The court ruling revolves around the Ocala asset-backed commercial paper (ABCP) program — a conduit providing warehouse funding for originating residential mortgages for the now-failed Taylor, Bean & Whitaker Mortgage Corp. (TBW). According to the latest Moody’s report, TBW’s warehouse lender, Colonial Bank, held the collateral under a series of bailee letters from Bank of America (BAC), which serves as Ocala’s trustee, collateral agent, custodian and depository. The August 2009 failure of Colonial Bank cost the FDIC deposit insurance fund (DIF) $2.8bn and dragged Ocala Funding’s ABCP program into a “vortex” of financial woes, Moody’s analysts wrote in August 2009. But the appellate court ruling does not settle the matter as BofA can still appeal. In the meantime, the Ocala investors are suing BofA for breach of contract in a Second Circuit district court. BofA also filed suit against Colonial, alleging it did not receive funds from Colonial, the proceeds of mortgage sales to Freddie Mac (FRE). The appellate court decision to allow the FDIC broad-reaching powers fuels Moody’s concerns about the FDIC’s proposed safe harbor protection for failed bank assets being transferred for securitization. If the court ruling is ultimately upheld, it would give the FDIC the power to operate under the terms of these new regulations “with no recourse to the courts until completion of those procedures.” As HousingWire previously reported, the FDIC is proposing a 5% reserve fund for residential mortgage-backed securities (RMBS) to cover potential put backs during the first year of the deal, rather than the prior 12-month seasoning requirement. In addition, the FDIC will likely require disclosure of any competing ownership interests in secondary liens secured by the same property and held by the servicer or its affiliates. The proposals include a requirement that deferred compensation be paid only to the rating agencies, rather than all service providers. Write to Austin Kilgore. The author held no relevant investments.
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