How is Subaru Going to Feel?

The Treasury and the Federal Deposit Insurance Corporation (FDIC) have unveiled their mechanisms for creating a market for subprime mortgages and their related securities derivatives (which they've decided to call "legacy assets"). The program is sketched out in this Treasury Department press release (tg-65). Scroll down to the bottom for links to the contracts and FAQs (how can a brand new program have frequently asked questions).

For bad mortgages, the FDIC will match assets and purchasers. Purchase money will be made up of a small equity stake and FDIC guaranteed-debt. The equity contribution will be split between the purchaser and the FDIC and will be leveraged six-to-one.

This helpful explanation is from the press release:


Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.


There will be two programs for purchasing mortgage-backed securties. The first will simply extend TALF to mortgage-backed securities issued before 2009 (and initially rated triple-A). The second would allow approved, seasoned MBS poolers to raise an investment fund which the FDIC would then match dollar-for-dollar.