FDIC’s pilot securitization program

Nidhi Bothra
nidhi@vinodkothari.com

The Federal Deposit Insurance Corporation is trying securitization to get rid of the assets of the
failed banks and in its pursuit “FDIC 2010-R1,” sold securities backed by US$ 471.3 million of
performing single family mortgages of 16 failed banks, which included banks like CF Bancorp,
IndyMac Bank, Desert Hills Bank, Warren Bank and Republic Federal Bank.

The pilot securitization program is consistent with FDIC’s proposed Securitization Safe Harbor
rules (see our news here***) and consists of three tranches of securities. The senior certificates
represent 85% of the capital structure, guaranteed by FDIC’s and carries a coupon of 2.184%
with an average life of 3.66 years. The subordinated certificates consist of mezzanine and over
collateralization class representing 15% of the capital structure. The subordinated certificates are
retained by the failed banks receivership and may be sold in future. The transaction provides for
an independent third party oversight of the overall performance. The senior certificates were not
registered with the Securities and Exchange Commission and were offered and sold in reliance
on the exemption from registration available under Section 3(a)(2) of the Securities Act of 1933
to securities guaranteed by an instrumentality of the United States.

The burst of the housing bubble in the US had caused series of failures in the banking system.
Hence FDIC is trying securitization to maximize the value of the assets of the failed banks. FDIC
usually sells failed banks to other lenders as quickly as possible to protect depositors and the
loans left with FDIC are sold at regular auctions.

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