Even as it looks as if the fraud-related troubles at First National Bank of Keystone may drag on for years, a new rule proposed by the Federal Deposit Insurance Corp. likely means the bank's securitized assets should remain safely in the hands of their buyers, according to a senior official at the FDIC
Further, the official added that the outstanding high loan-to-value mortgage collateral the bank was known for securitizing either will stay with the FDIC until a buyer for the collateral can be found, or may be securitized by the FDIC itself.
First National, based in Keystone, W.Va., was closed by federal regulators two weeks ago after the Office of the Comptroller of the Currency found evidence of fraud related to apparent improper accounting of a $515 million securitization by the bank.
Both the OCC and the FDIC found that First National had failed to take the $515 million in loans off its books after the debt was securitized and sold.
Less than two weeks ago, the FDIC announced it would not exercise its right in its role as a receiver of a failed bank to reclaim assets that were transferred in a securitization by a company or entity that was insured by them. The regulator proposed the proclamation be put into law in order to satisfy a large number of bankers, legislators and lawyers who felt that only a binding rule would protect asset-backed transactions from being snatched up by the FDIC during a bank failure.
The proposal came right in time for investors in First National's high-LTV transactions, observers noted, as it should protect the bonds from reclamation.
First National entered the market in 1993, and last priced a deal in September 1998 for approximately $565 million. Currently, about $2.6 billion in high-LTV mortgage-related securitizations is outstanding. Plans for both a high-LTV and a home-equity securitization slated to fall sometime in the second half of this year were quashed when the OCC shut the bank down two weeks ago.
The FDIC source said a "postmortem" investigation of the bank's alleged activities would take several years, and that a "closing team" visited the bank's offices for the first time less than two weeks ago.
In addition to the investigation, FDIC officials are looking for a company known for buying high-LTV debt to take over First National's loans.
Buyers of such debt have become fewer after the liquidity crisis of last fall, when foreign market volatility sent spreads soaring, particularly in the home-equity market. GMAC-Residential Funding Corp., a securitization giant in the mortgage-related sector known for doing high-LTV securitizations, was pegged by sources as a possible candidate.
But if the FDIC can't find a buyer, it may securitize the collateral itself, the FDIC official said, because of the volume of loans contained in First National's portfolio.
"We've done two or three issues of securitized loans," the official said. "We haven't done those in a couple of years because we just haven't had the inventory to do that kind of fancy footwork. But we might do it on these.
"They had a lot of consumer loans, but where they had real rapid growth was in their high-LTV loans," he said. "All of those assets are essentially left behind with the FDIC to resolve."
The official would not get specific on numbers, but did say that the FDIC held $1.1 billion of First National's assets. Last week, approximately $72 million in insured local customer deposits from First National was purchased by AmeriBank Inc., a neighboring regional bank based in Welch, W.Va. The source would not name other institutions interested in First National's assets, though reportedly 17 institutions are bidding for pieces of the bank.
Owen Carney, a former federal regulator who is now an ABS consultant, last week expanded on why he left as president of First National.
At the time he quit, Carney blamed his brief stay as president of First National on the big-fish-small-town culture clash he experienced when he arrived. However, he told the American Banker that he "was forced out. Near as I can tell, it was because I asked too many questions."
Carney added that there was some reluctance on the part of bank officials to open the books at First National, and when Carney pressed for "reform," he claims he was shown the door.
Billie J. Cherry has so far remained chairwoman of First National after resigning as president following the scandal. Along with senior vice president and securitization head Terry L. Church, Cherry owns a significant but undisclosed share of the bank. Both women own a large number of properties and commercial holdings in and around Keystone as well. In addition to her banking duties, Cherry is also the mayor of the town where First National is headquartered.