Resolution Trust Corporation:

Assessing Portfolio Sales Using Participating Cash Flow Mortgages

GGD-92-33BR: Published: Feb 25, 1992. Publicly Released: Apr 15, 1992.

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Gaston L. Gianni
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Pursuant to a congressional request, GAO reviewed the Resolution Trust Corporation's (RTC) pilot program of portfolio sales using participating cash-flow mortgages.

GAO found that: (1) as of September 30, 1991, $45 billion of the $147 billion in assets that RTC held in inventory from failed thrifts were in such hard-to-sell assets as delinquent loans and commercial real estate; (2) commercial real estate and land accounted for about $15.7 billion of RTC assets; (3) RTC uses portfolio sales to sell its real estate assets; (4) by the end of fiscal year 1991, RTC had sold $6.2 billion in real estate assets, including $4.4 billion of commercial real estate and land; and (5) the RTC portfolio sales policy states that RTC may solicit, evaluate, and negotiate purchase offers for portfolio sales of real estate, delinquent loans, and other liquified assets. GAO believes that: (1) the large inventory of assets and anticipated future additions will require RTC to develop creative and innovative strategies to sell those assets; (2) the use of portfolio sales using participating cash-flow mortgages could be an important disposition strategy for the least marketable real estate assets and reflects RTC willingness to become more innovative and market-responsive; and (3) overall, the strengths of the pilot portfolio using participating cash-flow mortgages outweigh the weaknesses.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: A postclosing assessment of the Congregate Care cash flow mortgage was completed shortly after the buyer satisfied its obligation to RTC. RTC has not completed postclosing assessments of Centrust and Patriot because RTC officials determined that these transactions cannot be accurately assessed until they are completed. RTC does not have an estimate for when this will occur.

    Recommendation: RTC should perform a post-closing assessment of the pilot transactions to determine if all policy and transaction requirements were complied with and if the transactions have the potential to meet RTC financial objectives.

    Agency Affected: Resolution Trust Corporation

  2. Status: Closed - Implemented

    Comments: On May 26, 1992, RTC advised GAO that it was in the process of establishing servicing and oversight policies and procedures including: (1) utilizing existing RTC loan servicers to service the pilot transactions on an interim basis; (2) establishing a loan servicing program for the long-term administration of the portfolio sales; and (3) developing a loan servicer oversight program. RTC has completed the development of its detailed oversight procedures for loan monitoring and administration. On November 10, 1992, RTC established its Multi-Asset Sales Transaction (MAST) National Servicer Task Order Procedures and implemented MAST as its new oversight process. Oversight of MAST is the responsibility of regional RTC offices. GAO has reviewed the new procedures and will comment on them in a follow-up report that will be issued in the near future.

    Recommendation: RTC should develop detailed oversight procedures for loan monitoring and administration, centralize oversight responsibility, and implement an oversight process in a timely manner. The oversight process should be implemented prior to the completion of the pilot transactions. These actions should enable RTC to closely monitor completed portfolio sales using participating cash-flow mortgages in order to protect RTC long-term interests.

    Agency Affected: Resolution Trust Corporation

  3. Status: Closed - Implemented

    Comments: RTC has determined how it will account for the loan assets that it receives as a result of the pilot transaction. Each retained loan asset will be accounted for as an adjustment to the asset-in-liquidation accounts. In May 1992, RTC told GAO that every potential and contingent liability would be considered in the loan loss reserve calculations and will be reflected in RTC corporate reporting. An allowance for losses is estimated for the retained loan asset through the allowance for losses computation done by RTC corporate accounting.

    Recommendation: RTC should determine how it will account for the loan assets that it receives as a result of the pilot transactions and whether any allowance for potential future loss is required.

    Agency Affected: Resolution Trust Corporation


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