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TESTIMONY OF

L. WILLIAM SEIDMAN
CHAIRMAN

RESOLUTION TRUST CORPORATION
WASHINGTON, D.C.

ON

STATUS OF THE RESOLUTION TRUST CORPORATION

BEFORE THE

OVERSIGHT SUBCOMMITTEE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES

2:00 P.M.
February 27, 1990
Room B-318
Rayburn House Office Building

Good afternoon, Mr. Chairman and members of the Subcommittee.

I

am pleased to appear before you today to discuss the financial
status and activities of the Resolution Trust Corporation (RTC).

The RTC is only about six months old, but already has
accomplished the following:
-

Developed a strategic plan with the RTC Oversight Board

-

Established 4 regional offices and initiated theestablishment of 14 consolidated offices

-

Hired a staff of over 2,000 people

-

Assumed management and institutional control of 369 thrifts
in 38 states

-

Downsized thrifts in conservatorship by about 20 percent

-

Provided $9.2 billion in advances to over 150
conservatorships for high-cost funds replacement, including
$1.9 billion to institutions which were subsequently
resolved

-

Provided $2.5 billion to almost 90 conservatorships for
emergency liquidity financing, including $0.2 billion to
institutions which have been subsequently resolved

-

Sold or liquidated 49 institutions in 17 states
Initiated sale of an additional 60 institutions

-

Inventoried over 30,000 real estate properties and published
a listing of their key investment characteristics in a 4
volume set

-

Established and published conflict of interest guidelines

-

Established marketing and open bidding process, including:




2

Prepared a guideline booklet, H o w to Purchase an S&L
from the RTC
Scheduled the RTC Seminar Series
Established an 800 Hot Line
Provided Sample Bid Packages
Published a Resolution Schedule
-

Put RTC asset managerial guidelines in place

-

Developed methods for assigning priorities for scheduling
restructure of institutions

-

Established interim guidelines to promote low income housing

-

Assumed litigation responsibility for over 40,000 lawsuits
Filed the largest depository institution fraud suit in
history (the $1.1 billion suit against Charles Keating,
et.al.)

However, the greater part of our work lies ahead.

Successful

completion of that work depends on many factors, one of the
most important of which is the availability of working capital.
Today we will update you on this topic.

We also will discuss

the specific issues raised in your letter of invitation.

I.

OVERALL FINANCIAL STATUS. ACTIVITIES. AND PLANS

Working Capital

We are pleased to report that the RTC Oversight Board has




3
approved an initial plan to provide working capital for the
Resolution Trust Corporation.

As you know, working capital is necessary for resolutions in
order to finance problem assets pending their eventual sale.
RTC's cash outlays take place up-front at the time of
resolution whereas its cash inflows —
the sale of assets —

whether from TU2FC0RP or

will take place over a number of years.

Working capital is also necessary to replace high-cost funds at
the savings associations under RTC conservatorship.

Very high-

cost funds (i.e., costing at least 125 basis points over
market) currently represent roughly 20 percent of the
liabilities of these associations.

High-cost funds replacement

would yield a tangible savings to the thrifts under RTC
conservatorship, thereby reducing the ultimate cost of their
resolution.

Such a program applied on a nationwide scale would

reduce the financing costs of all banks and thrifts, reducing
the RTC's eventual case load and resulting in improved
performance of the entire U.S. financial system.

After analyzing various alternatives, the Oversight Board has
approved a plan to allow the RTC to use the Federal Financing
Bank (FFB) as the primary source of working capital.

These

temporary borrowings will be used by the RTC to finance the




4
acquisition of assets from failed thrifts.

Other potential

sources of working capital will continue to be studied.

As you know, questions have been raised about the RTC's
authority under current law to borrow from the Federal
Financing Bank.

The Department of Justice has concluded that

the RTC is, in fact, eligible to borrow from the FFB.

Under the plan approved, the RTC will be allowed to borrow up
to $11 billion for use during the first quarter of calendar
year 1990.

For each subsequent quarter, the Oversight Board

will approve a maximum amount of working capital funding, based
on the RTC operating plan for that quarter.

Each time it

borrows from the Bank, the RTC will be required to certify to
the Oversight Board that:
*

it has a current need for the amount of the advance;

*

the anticipated use of the advance is consistent with
the quarterly operating plan approved by the
Oversight Board? and

*

the advance will not cause a violation of the
statutory limitation of RTC obligations.

As we have noted, the Board has approved initial borrowings of
up to $11 billion for the period ending March 31, 1990.

Of

this amount, the RTC may use up to $8 billion to finance the
purchase of assets in connection with case resolutions or for




5
emergency liquidity.

Up to $3 billion will be available to

replace high-cost funds in conservatorships to lower borrowing
costs.

We would like to emphasize that amounts borrowed under this
lending arrangement are by no means unlimited.

RTC borrowing

from the FFB is strictly limited by the obligation cap in the
Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA).

This cap generally restricts borrowing to 85

percent of the fair market value of RTC assets, which ensures
that tangible assets are adequate to pay off working capital
obligations.

In the near term, the cap allows the RTC to

borrow against unused REFCORP borrowing authority.

A financing agreement between the RTC and the FFB recently has
been completed.

This will allow the RTC to begin to draw funds

almost immediately.

Questions about the budget treatment of working capital remain
to be resolved.

As indicated in the President's budget, the

Administration will work with the Congress to assure that a
responsible system of budgetary accounting is developed.




6

Current Sources and Uses of Funds

The RTC's actual cash inflows and outflows to date are
illustrated in Attachment JL.

By mid-February the RTC had

received $29.5 billion in capital contributions.

Of this

amount, $20 billion was provided by Treasury appropriations or
Federal Home Loan Bank contributions, and $9.5 billion was
provided from the proceeds of the first two quarterly REFCORP
financings.

The RTC's cash outlays totaled $24.0 billion,

including $14.4 billion to resolve 49 thrift institutions, and
$7.3 billion in'advances for high-cost funds replacement at
conservatorship institutions.

Also included in the $24.0

billion total are advances for emergency liquidity which we
were forced to make to meet depositor demands at
conservatorships.
$2.3 billion.

The cash outlays for this purpose totaled

(Resolution funds include over $2.0 billion

originally advanced for high-cost funds replacement and
emergency liquidity to institutions resolved through midFebruary.

These advances become secured claims on the

receiverships.

The high-cost funds replacement and emergency

liquidity estimates, cumulative through mid-February, exclude
the reclassified amounts.)

The RTC also has the potential availability of an additional $5
billion from the Treasury line of credit granted to the RTC by




7

FIRREA.

This line is intended to be used only to satisfy the

emergency liquidity needs of our conservatorships.

RTC*s own operations are also a potential source of funds, but
the cash available in the immediate future from our
conservatorships and receiverships is quite limited.
Specifically, if we were to force all of the conservatorships
that have received advances from the RTC to repay whatever
advances they could by divesting all of their cash and
marketable securities, we would net less than $1 billion.
Similarly, the maximum dividends expected to be payable from
RTC receiverships this quarter —
their assets —

through the liquidation of

is estimated not to exceed $1 billion.

Until the working capital funds are provided, the RTC has
ceased virtually all advances to replace the high-cost funds of
the conservatorships.

As indicated earlier, this program has

been successful in reducing the funding cost of
conservatorships and, thus, limiting the growth of the loss
that must be borne by the RTC.

Administration

In discussing the RTC's budget, it is important to understand
that only a relatively small part of the RTC's operating costs
are administrative in nature.




By far, most costs will be

8

incurred by and charged to the receiverships of failed thrifts
subject to appropriate court review.

This is because most

operating costs will be related directly to evaluating and
collecting receivership assets and settling with various
claimants, of which the RTC is, by far, the largest.

The RTC plans to use the private sector extensively,
particularly for asset management related services.

FIRREA

required regulations governing the use of private contractors
were adopted within the last few weeks.

The RTC is well under

way in establishing necessary procedures, as well as retaining
personnel, to implement its contracting program.

The RTC*s goal is to contract out over 80 percent of the asset
management workload.

While programs are being developed, the

RTC has arranged, where possible, for acquirers of failed
thrifts to provide interim asset servicing.

Moreover, the

services of outside contractors arranged by the thrifts prior
to failure usually are continued pending review and evaluation
by the RTC staff.

Currently, about 60 percent of all

receivership assets are under private sector management.

Preliminary reports for calendar year 1989 estimate RTC
operating expenses at $34 million.

However, a full allocation

of expenses for common services across the various FDIC and RTC




9
funds has not yet been finalized, which may increase expenses
$10 to $20 million.

It is anticipated that as the pace of operations and
contracting policies and procedures are implemented the overall
expenditure for outside contractors will account for. over twothirds of the RTC's operating expenses.

The RTC currently has slightly over 1,700 personnel, excluding
about 600 managing agents and their staffs in conservatorships.
We expect to have just over 4,800 fully dedicated RTC employees
by December, 1990.

Total personnel expenses, including

salaries and benefits for FDIC employees who charge a portion
of their time to the RTC, are estimated at $205 million for
calendar year 1990.

During calendar year 1991 this amount is

estimated to reach $220 million at peak staffing of about 5,000
RTC employees.

The RTC employs only ten personnel in grades with annual
salaries of $100,000 or greater.

About 600 personnel are in

grades with salaries of between $50,000 and $100,000, and about
1,100 personnel receive salaries of less than $50,000.

RTC Oversight Board personnel costs are running at an annual
rate of $1.2 million for a staff of 23.




10

Case Resolution

With respect to case resolutions, the goal of the Strategic
Plan is to: "Manage and resolve institutions under the RTC's
jurisdiction in a timely and cost effective manner, while
minimizing the negative effects on local financial and real
estate markets."

To meet this case resolution goal, the Plan sets six
objectives.

These are:

(1) manage thrifts under the RTC's

jurisdiction conservatively; (2) prioritize resolutions based
on levels of deterioration; (3) select resolution methods on
the basis of cost; (4) develop procedures to keep all
interested potential purchasers fully informed of the case
resolution process and provide adequate time for the market to
determine the best (i.e., the least costly) method of
resolution; (5) maintain records sufficient to keep all
interested parties informed of the case resolution process; and
(6) use the private sector to manage and resolve institutions
wherever practicable and efficient.

All of these are worthy

objectives given the task the RTC must manage.

The RTC, and

the FDIC before it, has been performing its task consistent
with the Plan's objectives in this section.

Manage thrifts under RTC jurisdiction conservatively.

The

objectives of the RTC when it places an institution into




11

conservatorship are to establish control and oversight while
promoting customer confidence; to evaluate the condition of the
institution to determine the most cost effective method of
resolution? and to operate the institution in a safe and sound
manner pending resolution.

To achieve these goals of conservatorship, we have a Managing
Agent and one or more Credit Specialists overseeing each
conservatorship.

The role of the Managing Agent is to ensure

that management of the institution adheres to RTC policies and
procedures.

The Credit Specialist's function is to assist the

Managing Agent with regard to RTC policies and procedures as
they relate specifically to asset management and disposition.
It is important to note that the asset disposition process
begins immediately upon conservatorship —

appraisals are

brought up to date, conservative underwriting standards are
established for the purpose of marketing and selling real
estate owned, and RTC delegations of authority are made a part
of the operational structure of the institution.

Each Managing Agent is responsible for assessing the condition
and acquiring control of the institution, eliminating any
abusive or speculative practices, and investigating any
evidence of fraudulent practices.

New management is brought in

to ensure conservative operation and preclude insider abuse,
and a business plan for each conservatorship is developed




12

within 60 days of the date the institution is placed into the
program.

To the extent possible, funding costs are reduced by

replacing high-cost funds using RTC advances.

Funding demands

and RTC advances are contained through the process of
downsizing institutions.

Downsizing is accomplished by

curtailing new lending activity and selling assets where
possible.
RTC Conservatorship Case Load

1August
Beginning of month
New conservatorships
Resolutions
End of month

September October November December January To Feb. 16

1 262

262

256

257

275

281

308

^-11

7

10

18

10

32

19

11

13

9

0

4

5

7

262

256

257

275

281

308

320

The conservatorship program began last February under the
auspices of the FDIC.

By the time FIRREA was signed into law

on August 9, and the RTC began its work, there were 262 thrifts
under conservatorship.

Since then 107 have been added, and 49

resolved, leaving 320 conservatorship thrifts as of February
16th.

Attachment 2 provides a list of institutions currently

in conservatorship, along with information on their size and
location.

From the outset, downsizing institutions in the program has
been a high priority, and it continues to be stressed as a
basic objective of conservatorship.




Efforts at downsizing have

13
been successful, especially in institutions that have been
under conservatorship for a number of months.

Of the 243

institutions that were placed into the conservatorship program
during the first three quarters of 1989 and that were still in
the program at the end of the year, aggregate assets declined
by 23.2 percent through November 30, 1989.

At the same time, core funding saw a much smaller decline,
while more expensive or rate-sensitive funding fell sharply.
These less stable and relatively high-cost sources of funding
were replaced to a considerable degree with funds advanced by
the RTC.

High-cost funds replacement is a strategy the RTC

follows to contain operating costs of conservatorship
institutions, thus reducing the institutions* operating losses
and thereby the ultimate cost of resolution.

Essentially, the

RTC has been able to shrink these thrifts and their interest
expenses while preserving franchise values to the extent
possible.




14

Downsizing of Institutions Under RTC Jurisdiction, Distributed by the
Calendar Quarter They Entered the Conservatorship Program
(excludes conservatorships resolved during 1989; dollars in millions)
As of quarter-end before
Number entering conservatorship
of
Qtr. Thrifts Assets
Core* Other**

As of 11/30/89
Assets

Core*

% change since
conservatorship

Other** Assets Core Other

;89:1

148

89:2

47

23,401

16,945

7,088

18,308

17,128

2,141 - 21.8 +1.1 -69.7

89:3

48

11,259

8,384

2,966

9,971

8,027

2,026 - 11.4 -4.3 -31.7

89:4

38

20,150

14,903

4,243

19,279

14,319

1989

281

$ 67,761 $51,805 $21,828 $50,434 $47,038 $11,360 - 25.6 -9.2 -48.0

4,219 -

4.3 -3.9 - 0.6

$122,571 $92,037 $36,125 $97,993 $86,513 $19,747 - 20.1 -6.0 -45.3

* -Core deposits = all deposits with total balances below
$ 100,000
** -Other funds sources = all deposits with total balances over
$100,000 + FHLB advances + reverse repurchase agreements; these
figures do not include RTC advances.
NOTE:

Assets reported net of reserves.

The 281 institutions under RTC conservatorship as of year-end
1989 had gross assets with a book value of $106.7 billion,
based on their financial reports of November 30, 1989.

Losses

already had been taken on some assets, as of November 30, 1989,
resulting in a lower book value than when the assets first came
under RTC jurisdiction.

The estimated fair market value of

these assets, also as of November 30, was $89.2 billion.
following table shows the distribution of assets and the
estimated declines in value based on a mark to market.




The

15
281 Institutions in Conservatorship as of 12/31/89
November, 1989 Financial Data
in millions
Fair value

Loss
(%)

$ 36,740.6

$ 33,513.7

8.8

20,707.8

Î6,631.9

19.7

Total non-real estate loans

6,466.4

5,~405.7

16.4

Mortgage pool securities

9,204.5

8,509.2

7.5

Other investment securities

7,308.4

6,832.8

6.5

Repossessed assets and
other real estate owned

13,429.5

8,821.2

34.3

All other assets

12,798.9

9,497.1

25.6

106,656.0

89,211.8

16.4

Type of asset

Book value

Residential mortgage loans
Other real estate loans

TOTAL ASSETS

The estimated loss on these assets —

the difference between book

and market values —— was $17.4 billion as of November 30, 1989.
Additionally, the book liabilities of these 281 institutions
exceeded book assets by $13.8 billion.

Thus, the estimated total

loss on these thrifts was $31.2 billion as of November 30.

As shown on Attachment 2, 49 cases involving conservatorship
institutions have been resolved through February 16.

These

institutions were handled using a variety of options, which are
discussed in more detail later m

this testimony• Where

possible, the RTC tries to find an acquirer of the failed thrift
who will take over its deposit liabilities and, in effect, buy as
many of its assets as possible.




*

16
In summary, the RTC sells assets in three stages:

First, by

selling assets as part of downsizing programs while the thrift isin conservatorship;

Second, by selling assets as part of the

resolution transaction;

Third, by subsequent sales of assets not

acquired as part of the resolution process.

Preliminary data

indicate that conservatorships sold approximately $14 to $15
billion in assets during 1989 and collected another $6 billion
through loan payments and settlements.

These proceeds were used

primarily to pay down high-cost funding.

Approximately $2.7

billion of thrift assets were sold during 1989 as part of the
resolution process.

This represents about 25 percent of the

total assets held by the resolved thrifts.

Finally, another $300

million was collected by receiverships through 1989.

Prioritize resolutions based on levels of deterioration.

In

accordance with Oversight Board direction, the RTC has to develop
a prioritization schedule for case resolutions.

These guidelines

and prioritization procedures attempt to comply with the
Oversight Board's objective to prioritize based on the rate of
deterioration both in absolute and in relative terms.

The

guidelines leave room to schedule prioritizations on other than
just quantitative factors.

For instance, the RTC plans to

resolve 16 minority-owned institutions now under its jurisdiction
relatively early on so as to preserve what chance there may be




17
for them to be restructured as viable enterprises, preferably
owned by new minority investors.

The guidelines for making the prioritization determination focus
on four factors:

1.

Giving priority to institutions with relatively high
rates of deterioration?

2.

Minimizing the ongoing risk of exposure to the RTC;

3.

Maximizing the recovery of franchise values; and

4.

Ensuring the most efficient use of RTC resources and
staff.

These factors, using eight quantitive measures in all, are
combined to yield a single prioritization schedule.

A

prioritization schedule is developed nationwide as well as for
each of the RTC's four regions to facilitate the resolution of
institutions with less than $500 million in assets in those
regions.

A prioritization schedule is also developed for the

major transaction resolution process headquartered in Washington,
D.C.

Each schedule divides the case load into four levels, or

quartiles, of priority —

the most precise level of

categorization considered practical.




Each schedule is updated 30

18
days before the end of each calendar quarter, to reflect
additions to the RTC's conservatorship program, changes in
investor interest, and new data on institutions already in the
conservatorship program.

This approach was used recently to identify those institutions to
be marketed by the RTC during the first quarter of 1990.

The RTC

will continue to publicize the case resolution schedules in order
to generate maximum interest in the competitive bidding process.

Select resolution methods on the basis of cost.

The RTC has

developed written guidelines for the ”Cost Test” calculation
required by Section 13(c) of the Federal Deposit Insurance Act
and the loss minimization criteria in FIRREA.

Case resolution

options are geared towards maximizing competition and minimizing
costs.

The RTC offers a menu of bid options to open the

competitive bidding process, maximizing the private funds brought
to the table.

This approach is designed to allow the market

maximum flexibility and access in the bidding process, and
minimize the RTC's costs.

It is especially important that bidders can select the amount of
assets they will acquire under current put provisions in that it
minimizes the time required for due diligence.

This should

promote bidder interest and hasten resolutions, thus lowering the
RTC1s cost.




The RTC and the Oversight Board have recently agreed

19
to allow puts for one year, with extended flexibility to go
longer than one year where justified.

The ability to offer cash to fill the asset short-falls reduces
costs, as the market discounts the use of government notes and
guarantees.

Cash should lead to a better price.

It also gives

the RTC more flexibility in the resolution process, again helping
to minimize cost.

The RTC offers five approaches in its current bidding format:

1.

Clean Thrift Option:

Bidder acquires only cash and

investment-grade and mortgage-backed securities, 1-4
family residential mortgage loans, performing consumer
loans, with a put for forged, stolen or fictitious
instruments.

2.

Modified Clean Thrift Option:

Bidder acquires only

cash and securities, performing 1-4 family residential
mortgage loans, and all consumer loans, and other
performing loans (construction, multifamily and
commercial loans) with an expanded put, including for
forged, stolen or fictitious instruments.

3.




Modified Whole Thrift Option:

Bidder acquires all

assets of the institution, except real estate owned and

20

other specific assets, with a put for forged, stolen or
fictitious instruments.

4.

Whole Thrift Option:

Bidder acquires all assets of the

institution with a put for forged, stolen or fictitious
instruments.

5.

Branch-by-Branch Clean Thrift Option:

Bidder acquires

only fixed assets and limited other assets in certain
cases.

This approach provides maximum access for

smaller parties to the bidding process.

Under all of these options, the bidder assumes all deposit
liabilities, and is required to pay the contractual interest rate
on those deposits for 14 days.

Bidders have the option to

purchase all fixed assets (required in whole-thrift and branchby-branch options).

If the RTC fails to receive a bid that meets the "cost test"
during the initial round of bidding, then an insured deposit
transfer option is offered.

This second bidding round might

include a simple insured deposit transfer, an insured deposit
transfer that also includes the purchase of certain assets, and
an insured deposit transfer transaction offered on a branch-bybranch basis.




21

We believe that the broader the marketing, the more open the
process, and the more flexible the product, the better the price
will be.

However, this approach does have some side effects.

The menu of options offered tends to be fairly standardized.
Negotiations with individual bidders for more coioplex or
customized transactions are precluded in the interest of open and
competitive bidding.

While we offer a menu, which certainly will

change as the market dictates, customers cannot get customized
orders.

That may discourage some potential bidders —

particularly in an ever increasing buyer*s market.

Another side effect is that some of the options, particularly the
whole thrift option, take a lot of time for bidders to evaluate.
Depending on the condition of the records of the particular
thrift, even the so-called clean thrift option can take a lot of
time.

Smart buyers shop carefully —— and slowly.

they get, the less they are willing to buy.
slower the sale.

The less time

The more buyers, the

This is the primary reason that sales of 21

institutions started last quarter rolled over into this quarter.
We are happy to report that, of these, sixteen have been sold,
and the rest should be resolved over the next two to four weeks.
This would bring our total resolutions to 54, and we have
announced the process to start selling another 52 this quarter.
Undoubtedly, a number of these will roll over to next quarter.




f

22

Develop procedures to keep all interested potential purchasers
fully informed of the case resolution process and provide
adequate time for the market to determine the best ii.e.. least
costly) method of resolution.

It is the RTC's policy to open the

bidding process for institutions under its conservatorship to all
SAIF or BIF insured depository institutions and corporations,
partnerships or individuals who have the potential for receiving
approval from chartering authorities for an assisted acquisition.
Solicitations for bidders on conservatorship thrifts are made to
the greatest number of potential purchasers possible, without
regard to existing or potential organizational structure (i.e.,
thrift or bank).

In an effort to attract the widest possible

market, the RTC is committed to keep the marketplace of potential
purchasers informed of its plans wherever practical.

The RTC publicizes and communicates its case resolution plans,
procedures and results to potential purchasers through the use of
various techniques including RTC publications, advertising,
conferences, outreach programs, and the RTC reading room.

On November 27, 1989, the RTC published "A Buyer*s Guide:

How to

Purchase a Savings Association from the RTC,” which was announced
in a press release.

The Buyer's Guide is found at Attachment ±.

This pamphlet explains the RTC's marketing process for the
institutions that have come under RTC conservatorship.
available free of charge.




It is

To date, the RTC marketing department

23
has mailed approximately 3,000 copies.

These mailings were in

response to written requests, general interest calls to the RTC,
and calls received on the RTC "hot line."

Included with the

"Guide" is the RTC clearance package, which contains a financial
statement form for all private investors, a bidder fact sheet for
financial institutions, and a list of all institutions currently
under RTC conservatorship, which is updated weekly.

The RTC toll-free "hot line" also was established on November 27,
1989, and announced in a press release explaining its usage.

To

Ijsjpl

date, the RTC has responded to approximately 1,600 calls from
individuals expressing interest in purchasing a savings
institution.

The RTC announces a case resolution schedule for each quarter,
listing each savings institution for which active marketing has
begun or is planned, along with names and telephone numbers of
RTC officials to. contact for more information.

For each

institution listed in the case resolution schedule, a public
information package is available containing general information,
financial statements and branch location and deposit information.

The RTC also publishes the case resolution schedules and contact
names and numbers in the Federal Register and advertises in
appropriate newspapers, such as The Wall Street Journal.

In

addition to these announcements, the RTC schedules marketing




24
conferences to provide potential bidders more information on
upcoming resolutions.

Attachment 5 provides the most recent

"invitation to bid" list for institutions scheduled for
resolution.

Beginning April 1990, the RTC plans to hold a series of one-day
seminars around the country to inform the public on RTC's
operations.

Among the topics will be how to purchase a savings

association from the RTC.

All potential purchasers who have

contacted the RTC about the case resolution process will receive
invitations to these seminars.

In concert with RTC*s Minority and Women*s Affairs Officer, the
Washington and Regional Office case resolution staffs will speak
at various non-RTC programs around the country in an effort to
encourage the active participation in the bidding process of all
potential purchasers, including minorities and women.

The RTC maintains a data base which includes, to date, over 2,800
potential bidders who have expressed direct interest in
purchasing an insolvent savings association and have completed
the clearance package.

This list consists of bank holding

companies, savings associations, commercial banks, and corporate
and private investors.

As outlined in our discussion of case resolution prioritization




25
above, the Strategic Plan calls for a quarterly update and
announcement of resolutions planned for the upcoming quarter.

Keep records sufficient to keep all interested parties informed
of the case resolution process.

In the spring of 1990, the RTC

will open a reading room in Washington, D.C.

It will house in

one central location all documents of interest to potential
purchasers, the media, academicians and the general public, and
will be staffed by public information specialists.

All of the

RTC*s policies, procedures, guidelines and other sources of
public information, including purchase and assumption agreements
entered into since August 9, 1989, will be available for public
inspection.

Copies of all documents will be made available to

any interested part for a nominal charge.

Low Income Housing.

The RTC has developed interim guidelines to

address the eligible residential housing requirements of FIRREA.
These guidelines have been forwarded to the Oversight Board for
review and approval.

The RTC Oversight Board has granted approval for us to begin
sales of a limited number of properties presently being put on
the market.

This demonstration program will allow the RTC to

gain experience and put in place a process to market all lowincome properties consistent with our mandate.

The Oversight

Board has also encouraged this demonstration effort so that they




26
can determine whether subsidies, discounts, or concessionary
financing are needed and how we can structure financing that
meets the needs of qualified buyers consistent with secondary
mortgage market underwriting criteria.

With respect to discount prices during the demonstration program,
the Low Income Housing staff has placed considerable emphasis on
identifying an array of resources that can be marshalled in
support of financing the sale of properties to low- and moderateincome home buyers.

This area will be critical to the ability of

low-income families to be able to purchase a home.

As we begin the pilot demonstration, we want to understand what
resources are available from private lenders, the Department of
Housing and Urban Development, and the low-income housing
programs of Fannie Mae and Freddie Mac.

We will look closely to

determine what gaps in financing still remain for review with the
Oversight Board prior to developing final RTC programs.

Approximately 700 properties will be offered pursuant to the
interim guidelines.

Our regional staff informs us that, as a

result of the dissemination of the affordable housing inventory,
there have been numerous expressions of interest by potentially
qualified buyers.

By far the vast majority of affordable housing, however, is held




27
by conservatorships.

We have identified 10,000 properties (half

of which are in Texas) that appear to meet the affordable housing
criteria.

Surely, as new appraisals come in, the numbers will

increase.

We have heard concerns that we may try to sell all

these properties outside the low-income housing program because
FIRREA specifically excludes conservatorships.
intent.

That is not our

We anticipate that the vast majority of these properties

will pass to the RTC as thrifts are sold.

II.

POLICIES AND PROCEDURES

It is the RTC *s policy that a property should be extensively
marketed for sale immediately after acquiring title.

The primary

reasons for this policy are:

*

a

prompt sale reduces the RTC1s direct and indirect

asset holding costs;
*

An expeditious sale minimizes physical deterioration of
property ?

*

An expeditious sale minimizes the risk exposure from
unforeseen problems that may arise from owning
property, especially operating properties? and

*




An early sale returns the property quickly to private
ownership, which, we believe, is the best way to
achieve efficient use of the property.

28
The RTC does not intend to postpone marketing efforts for the
purpose of improving occupancy of the property before marketing,
or to speculatively hold property in the hope that values will
increase.

However, this policy does not preclude attempts to

improve occupancy while aggressively marketing the property.

Upon acquiring title to a commercial property, at least one
independent appraisal conforming to the RTC*s Uniform Appraisal
Instruction for Appraisals will be obtained to determine the
current market value of the property.

Additionally, a marketing

strategy will be developed, generally relying on one of four
methods of sale:
auction.

1) sealed bid? 2) broker? 3) RTC staff? or 4)

Each method has its relative advantages depending upon

the situation? accordingly, the appropriate budget and marketing
strategy will be developed, approved, and implemented on a caseby-case basis.

The RTC has developed policies to minimize the possibility of
dumping* assets, particularly real estate assets.

The RTC

recognizes FIRREA's mandate of maximizing the net present value
return from the sale of assets and minimizing the impact of these
transactions on local real estate and financial markets.

Dumping

of assets does not further these objectives.

The RTC has implemented thresholds of selling properties at
prices greater than 90 percent of appraised value in




29
non-distressed markets and 95 percent of appraised value in
distressed areas.

The latter threshold was established pursuant

to Section 501 of FIRREA, which directs the RTC normally to not
sell a real property asset located in a distressed area without
obtaining at least the minimum disposition price, defined to be
95 percent of the market value established by the RTC.

On an infrequent, case-by-case basis, a property may be sold
below its appropriate threshold with justification.

In these

situations, a determination must be made that the part of the
disposition price below the appropriate threshold is directly
attributable to the savings of verifiable projected marketing and
holding costs.

This provision is consistent with the objective

of maximizing the return from the sale of assets.

The RTC relies on current independent appraisals to determine the
market value of properties in their "as is” condition.
Appraisals are based upon the following definition of market
value:

"the most probable price which a property should bring in

a competitive and open market under all conditions requisite to a
fair sale, the buyer and seller, each acting prudently,
knowledgeably and assuming the price is not affected by undue
stimulus."

Furthermore, appraisers are specifically instructed

not to provide fire sale or liquidation value appraisals.




30

The RTC believes that these asset disposition and appraisal
policies will prevent "dumping" of real estate assets and the
resulting impact on local real estate markets.

The RTC*s goal will be to sell assets for the highest possible
price and maximize return on the asset.

Our policy is to

thoroughly market assets to the widest group of potential
investors, which may include prior owners.

In some circumstances

the previous owner of the asset could make the highest offer to
purchase.

The decision to sell the asset would be analyzed on a

case-by-case basis.

In making a decision to sell to a prior owner, the RTC would
consider the circumstances involved.

Specifically, we would

review the initial transaction to determine if any conflicts or
ethics violations, such as fraud, exist.

The marketing efforts

would be carefully reviewed to ascertain that all potential
investors were solicited and that a full disclosure of
information on the property was made to all parties.

After this

review and a determination that an offer from prior ownership is
clearly the most beneficial to the RTC, we may proceed and close
the sale.

To date, we know of no examples where this has

occurred.

The RTC will honor all loan agreements with borrowers.
will be allowed to continue to make agreed upon payments




Borrowers

31
throughout the duration of their loan contracts.

In order to

insure that the borrowers are provided professional servicing of
their accounts, the RTC will soon issue a Request for Proposal to
contract with a group of experienced mortgage loan servicing
companies.

This core group of servicing companies will be

available to the RTC Regional Offices to provide ongoing services
to the public on current performing mortgage credits acquired by
the RTC.

In addition, we anticipate expanding this program and contracting
out the servicing of other performing loans acquired by the RTC.
Current performing consumer loans, credit card and mobile home
loans, etc., will be contracted out to the private sector for
servicing.

The final disposition of these types of assets will be
accomplished primarily through bulk sales or a securitization
vehicle.

Currently the Southeast Region is conducting a pilot

program for securitization or sale on a whole loan basis of a $12
billion portfolio of mortgage loans currently held in
conservatorship.

The concepts used in this pilot project will

evolve into a nationwide policy regarding the disposition of many
types of performing loans.

In general, the RTC policy is that foreclosure on residential and
commercial property is the collection method of last resort.




The

32
RTC will work with troubled borrowers to restructure or
compromise existing indebtedness when possible.

However, in

order for the RTC to perform its mandate for maximizing value,
troubled borrowers must cooperate with the RTC by providing
current financial and income statements, and allow^access for an
appraisal on the property.

Upon receipt of this information we

will work with the borrower and attempt to agree on an acceptable
workout.

In general, the net present value of a workout should exceed the
anticipated recovery of the foreclosure alternative.
illiquid and distressed mortgages total $4.9 billion.

Currently,
The normal

collection process will involve a substantial number of
foreclosures for loans in this category.

The exact number is

impossible to determine until the individual capacity of the
borrower is determined.

Obviously we prefer prudent

restructuring of loans over foreclosure.

Pursuant to the intent of Congress, RTC policy is to use the
capacity and expertise of the private sector wherever practicable
and efficient.

The Strategic Plan directs the RTC to develop

targets and mechanisms for measuring what our proper reliance on
the private sector should be.

The development of such mechanisms

demands a base of knowledge from which to make comparisons and
evaluate alternatives.




The RTC*s asset management fee structure varies depending on the
composition of the portfolio.

Where the RTC holds marketable

title, we expect to pay asset managers a minimal management fee
to cover their overhead along with a substantial disposition fee.
This disposition fee, earned upon the close of sale of an asset,
is a function of three variables:

a) the sale price, adjusted

for expenses; b) the length of time a contractor was associated
with the asset; and c) the percentage the price exceeds a target
sale price.

The RTC oversees the activities of contractors chiefly through
its Standard Asset Management Agreement (SAMA) and its Asset and
Management Disposition Manual.

The SAMA outlines the nature and

scope of the contractual relationship between asset managers and
the RTC.

The Asset and Management Disposition Manual guides the

RTC staff and the contractor as to RTC's expectations and
procedures.

As mentioned earlier, the RTC generally arranges for acquirers of
failed thrifts to provide interim management for assets not
acquired while contractor programs are being developed more
fully.

Also, when the RTC assumes control of an asset, those

finns previously associated with the asset continue in most
instances.

Soon after taking on the management of assets, the

RTC evaluates the effectiveness and efficiency of these firms and
only seeks to find alternatives for deficient managers.




34
There are numerous examples of firms whose contracts we assume.
For example, in Colorado we are continuing to use Bry Property
Management, and in California Larken Management, IBM Realty and
Noyes Alexander Realty.

About 60 percent of the approximately

$10 billion of assets held in receivership through January are
under private sector management.

The RTC's policies and procedures governing the qualification of
real estate agents are no different from the qualifications
procedures for any other type of asset-related service.

All

firms wishing to provide asset-related services must register
their interest with the RTC, utilizing the RTC's «Contractor
Registration Request” form.

This form asks the firm to identify

itself and the services it provides, as well as the geographic
area it services.

In addition, the firm is asked to certify that

it is in compliance with the RTC's Qualification of, Ethical
«standards of Conduct for, and Restrictions on the Use of
Confidential Information bv Independent Contractors.
regulation became effective February 5, 1990.

This

The RTC has now

begun the process of verifying and «approving« the many forms we
have already received.

As specific solicitations are issued,

firms will submit their qualifications and experience as part of
a «technical proposal«, which will be rated in accordance with
RTC criteria.




35
We are unaware of any locations where a majority of real estate
agents are disqualified.

To reduce the possibility of such an

event, large amounts of staff time are used to assist interested
persons in understanding the RTC's contracting program and
ethical regulations.

This activity ranges from presentations by

senior RTC staff at large conventions to consolidated site
officials speaking at the local chapter of the realtors
association.

HI.

INTERACTION WITH THE DEPARTMENT OF JUSTICE

The RTC has established an Office of Investigations to identify
the individuals who caused thrift insolvencies through their
reckless mismanagement, fraud, or criminal -conduct, and to re­
cover the assets they misappropriated.

The corps of RTC

investigators, which is expected to reach 300 by year-end, will
help determine whether and what sort of litigation should be
initiated against insiders and others.

The RTC will vigorously

assist the Department of Justice in prosecuting individuals who
benefitted personally at the taxpayers' expense.

In many of the thrifts under RTC control, the conduct of insiders
and affiliated parties did not go beyond negligence or gross
mismanagement.

In these instances, the RTC will limit asset

recovery activities to civil actions; for example, pursuing
professional liability claims against directors, officers and




36
possibly accountants and appraisers.

There are also cases where

the insiders acted deliberately, either alone or in conjunction
with other affiliated parties to harm depositors, or were
personally enriched at the expense of depositors.

In these

cases, the RTC will work closely with the Department of Justice
to gain a criminal conviction and a restitution order restoring
stolen funds to the RTC.

In the more serious cases, both civil

and criminal actions will be pursued.

The information needed by the Department of Justice to begin a
criminal investigation is provided in a criminal referral, a
standard form used by all insured financial institutions and
regulatory agencies.

In the case of an RTC thrift, criminal

referrals may have been prepared and sent: - (1) by the
institution*s management prior to the date of conservatorship?
(2) by the Federal Home Loan Bank Board or the Federal Savings
and Loan Insurance Corporation prior to August 9, 1990? (3) by
FDIC or the management during the S&L Management Program? or (4)
by RTC investigators.

The important issue is not who or what

agency initiated the criminal referral or how many were filed,
but whether adequate resources are being applied to the cases of
serious criminal misconduct that demand attention.

In FIRREA, Congress authorized the Department of Justice to
dedicate additional resources to bank and S&L fraud cases.

These

resources are sorely needed to relieve the backlog of criminal




37
cases in many districts.

The FDIC and other regulatory agencies

provided input into the process that Justice used to allocate
these additional resources.

We believe they have placed proper

emphasis on the districts experiencing the greatest caseload and
those having to deal with complex prosecutions.

Over 1200 criminal referrals have been sent to the Justice
Department naming insiders, borrowers or agents of RTC-controlled
thrifts.

Apparent violations range from embezzlement and petty

theft to complex conspiracies and schemes to defraud the
institutions.

Many of the complex schemes involve over-valued property that was
swapped several times between borrowers or among various S&Ls.
These land flip schemes created false values on which loans were
made and generated excessive fees that were parcelled out to
appraisers, brokers, developers and other participants in the
scheme, including insiders of the S&Ls.

We are pursuing several

instances where assets of doubtful value were exchanged with
assets of even more questionable value to deceive regulators into
believing the capital position of the thrift was not impaired.
We are also looking into several instances of unauthorized
trading in mortgage-backed securities and other financial
instruments where insiders benefitted personally at the expense
of the institution.




38
Our current estimate is that about 60 percent of RTC thrifts have
been victimized by serious criminal activity.

We are conducting

a comprehensive survey of regional and field sites to determine
the exact number and nature of referrals that have been made or
are expected to be made in the near future.

With this

information in hand, we will be better able to project the
expected caseload in each geographic area of the country.

The

results of this survey should be in about March 10, 1990.

We estimate that about 75 percent of the 1200 criminal referrals
pertaining to RTC thrifts are being handled by U.S. Attorneys in
the priority areas.

Over one-half of the referrals involving RTC

thrifts are in the following U.S. Attorney Districts:

Houston,

Dallas, Los Angeles, Chicago, San Antonio and San Francisco.