Should FDIC Continue Loss-Share Agreements at Too Big Too Fail Bank?

UPDATE: According to CRC calculations, the FDIC has already paid out more than $1 billion to OneWest under the shared loss agreements, with another $1.4 billion expected to be paid out before 2019. See CRC’s fact sheet to read more about it: OneWest Loss Share Fact Sheet

OneWest Bank Merger

The California Reinvestment Coalition, as part of its “5 Days of Unanswered Questions about the CIT Group/OneWest Bank Merger” today focused on the loss-share agreement the FDIC extended to the wealthy investors who bought IndyMac Bank.

no info to public

In response to a FOIA request that CRC submitted to the FDIC, the regulator responded that our request for a fee waiver was denied, in part because “the subject matter of your request is not now of interest to the general public.”

Under the loss-share agreement, the investors in OneWest Bank have to absorb the first 20% of loan losses (approximately $2.5 billion) related to foreclosures from bad loans that IndyMac originated. Once that threshold is met, the FDIC pays for 80% of the next 10% of losses, and 95% of losses beyond that.Something doesn't smell rightCRC’s detailed letter to the Federal Reserve Bank of New York includes a preliminary analysis of the merger and a long list of concerns about the proposed merger. Another 30 organizations, CRC members and allied organizations, sent letters to bank regulators, asking for an extension on the comment period and for regulators to hold hearings in Los Angeles.Paulina Gonzalez, executive director of CRC, explains: “We asked Joseph Otting and John Thain about the amount of money OneWest Bank has received from the FDIC under the loss-share agreement, but they refused to answer us. Given the history of these two banks, we could see why they may be embarrassed at disclosing how much of a government subsidy they’ve received, but the public has a right to know this information.”Kevin Stein, associate director at CRC, adds: “We submitted a FOIA request to the FDIC, asking how much money has been paid out under the loss-share agreements. CRC is a nonprofit and we believe this information is important for the general public to know, so we asked for a fee waiver. We were shocked to hear from the FDIC that they denied our fee waiver in part because: ‘The subject matter of your request is not now of interest to the general public.’ Since when is corporate welfare related to the financial crisis not of interest to the general public?”

On Day Two, CRC members are asking regulators the following questions about the loss-share agreement:

  1. How much money has the FDIC paid to OneWest under the shared-loss agreement related to the purchases of IndyMac Bank, La Jolla Bank F.S.B., and First Federal Bank of California, F.S.B.?
  2. What is the basis on which the FDIC will decide whether to allow the transfer of the loss share agreement from OneWest Bank to CIT?
  3. Beyond the 2011 audit that the FDIC won’t share with the public, has an independent audit been conducted of OneWest bank’s adherence to the loan modification requirements included in the loss share agreement? Will an independent audit be completed before the loss-share agreement is transferred to the new bank?
  4. Under the loss-share agreement, the FDIC is authorized to complete quarterly audits of OneWest’s compliance with the loss-share agreement. During the past 22 quarters since the loss-share agreement was created, how many quarterly audits have been conducted by the FDIC?
  5. Will the FDIC make the results of the audit available to the general public?Is the FDIC concerned that OneWest’s foreclosure record may be at odds with the loss-share agreement? According to RealtyTrac Data, OneWest Bank has foreclosed on over 35,000 Californians, including over 2,000 foreclosures based on reverse mortgages serviced by OneWests’s subsidiary, Freedom Financial, a reverse mortgage lender/servicer.

Tomorrow’s questions for regulators will focus on the foreclosure track record of OneWest Bank in California.

Austin Powers

Additional Context:

CRC’s FOIA Request to the FDIC about the loss share agreements is available here.

The FDIC’s initial response denying CRC’s request for a fee waiver is available here.

American Banker noted (OneWest Makes Money, But Making Friends is the Harder Part, Feb 23, 2010) that: “in less than a year, private equity buyers of IndyMac Bank…. have turned a $1.6 billion profit…Yet thriving on a mess that has already cost tens of thousands of IndyMac borrowers their homes is an awkward situation, and not just for the team of billionaire backers including George Soros, John Paulson and Christopher Flowers…But it’s the terms of the FDIC deal that have yielded the bank’s outsize earnings. OneWest paid $13.9 billion for IndyMac’s assets – a 23% discount to their face value that more than covered OneWest’s $2.5 billion “first loss” obligation.”

For a copy of CRC’s letter to the Federal Reserve Bank of New York opposing the merger, click here: CRC letter to FRBNY

FDIC denied FOIA request

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