WASHINGTON -- The Resolution Trust Corp. has declared its first sale of nonperforming housing loans backed by tax-exempt bonds to be successful and is moving ahead with a second auction, scheduled for the end of the year.
But some bond issuers and investment bankers say they continue to be concerned that the RTC is moving too fast to unload the mortgages. As a result, they say, the corporation is failing to do all it can to preserve the bond financing and make sure the projects continue as housing for low-income people.
"They need to be more responsive to the needs of the market," said a housing developer who asked not to be identified. "I don't want to see this killed, I just want to see it improved."
The RTC official managing the sale effort, William Schainker, said he is "extremely pleased" with the first auction of $125 million in loans, concluded at the end of October. Seven successful bidders purchased a total of 15 loan pools, said Schainker, who is the corporation's senior asset marketing specialist. He declined to name the buyers.
Schainker said there was a large. diverse group of bidders, and "the return to the RTC was better than expected." The corporation anticipates "that because of our success there will be more interest" from buyers in participating in future auctions, he added.
The corporation has already begun gearing up for its second loan sale of $500 million. Schainker said. No specific deadline for bids has yet been set, but Schainker said he expects they will be due around the end of the year. The First Boston Corp. is managing the second auction, as it did the first, Schainker he added.
Over all, the RTC plans to sell a total of about $1.8 billion in nonperforming multifamily housing loans originated by failed savings and loans acquired by the agency.
Issued mainly by local authorities, the bonds backing the loans carry investment-grade ratings because they received a letter of credit or some other form of credit enhancement from the savings and loans. When the RTC acquired the failed institutions, it became the credit enhancer for the bonds, and has been making debt service payments to bondholders.
Housing industry officials first raised one concern about the sale process in September when the RTC announced the series of auctions. At the time, the corporation said it planned to sell the bonds along with the loans but also wanted to end its role as credit enhancer. The officials objected, saying the bonds would lose their investment-grade statue.
The industry officials said the corporation might have difficulty in carrying out its plan, because it would involve obtaining the permission of issuers to change bond indentures. The officials predicted that the agency would be unable in most cases to obtain that permission.
But Schainker said that for the bulk of the $125 million in loans, the bond indentures were changed and the bonds were sold along with the corresponding loans.
"It is our objective to maintain the tax-exempt financing where available because we believe it adds value to the assets," Schainker said.
Daniel C. Bird, a lawyer with Chapman and Cutler, said loans were sold without bonds in six of 31 transactions in the auction. Out of the six bond issues that had to be collapsed, only two were the result of the RTC's failure to obtain permission to change the bond indenture, said Bird, whose firms is representing the RTC in the loan sale process.
Several industry officials said they were surprised that issuers willingly changed those bond indentures to allow the credit enhancement on the bonds to be removed. They said it was possible that issuers felt they had no choice but to go along with the RTC, because the only alternative would be collapsing the bonds.
One official said that was the case for a bond issue sold by her authority, the Fairfax County, Va., Department of Housing and Community Development.
The authority would have preferred not to see the credit enhancement removed, but permission was given for the bond indenture to be changed because "we had to weigh the risk of RTC giving up on us" and collapsing the bonds, said Paula Sampson, the director of the authority's real estate finance section. "we don't want our bonds in default and we didn't want our bondholders to suffer."
Another concern about the sale process is that it puts local housing authorities at a disadvantage. These authorities, trying to buy individual loans for projects in their jurisdictions to ensure that the units remain low-income, fear that the bonds may go into default.
The corporation's push to sell the loans in large pools moves the loans out of the portfolio faster, "but in the process it pretty much runs roughshod over the public purpose elements," said James s. Bancroft, chief financial officer for the underwriting firm of Bancroft, Garcia & Lavell Inc.
The bulk sales are not conducive to case-by-case deals for specific projects, Bancroft said, adding, "The systems is not designed for any well-meaning local entity to make a reasoned approach within the scope of their resources."
Fairfax is a case in point. Sampson said her authority wanted to bid on the loans connected to the bonds it issued, but found it could not. The corporation's national sales office is "in a mode of dealing with a large portfolio, so they didn't want to take the time and sit down and negotiate each one individually," Sampson said. "We understood that, but felt if we had been given a little more time and opportunity, we could have presented a deal that was just as attractive" as that offered by the winning bidder.
Sampson expressed hope, however, that the RTC will work out some of the concerns that she and others have.
Officials in the corporation's affordable housing section "were very receptive to hearing about the problems we encountered and seemed to be interested in doing some technical assistance or something else in the future to help other issuers," Sampson said.