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I'm Eric Lanigan an attorney in Winter Park. We've been in practice about 36 years, do
a great deal of real estate litigation which involves foreclosure defense. And in that
area of foreclosure we're constantly being asked by our clients these days: why can't
I get a loan modification?
Part of the answer is that loan modifications are in and of themselves complete failures.
In fact nationwide less than 5% of people who apply for loan modifications get any kind
of modification at all. And there's several reasons for that. But here's one that often
applies to mortgages in commercial properties and it's called loss share arrangements.
And this is how it works...you often hear about a bank takeover where the FDIC comes
in and takes over a failed bank and another bank immediately comes in and takes over the
old bank. And I've often wondered, how do they do that so fast? And isn't that acquiring
bank taking on a huge risk? What we've come to find out is that they're actually taking
on no risk. In fact they're virtually guaranteeing themselves a profit.
And here's how it works. The FDIC and the acquiring bank enter into what it commonly
called a loss share agreement. And it might better be called a "profit guarantee arangement."
And here's how it works. The FDIC essentially agrees to cover somewhere between 80 and 95
percent of the losses that the acquiring bank incurs. Let me give you an example.
Let's say the acquiring bank acquires a million dollar loan. That's what's on the books, that
it's a million dollar loan. They pay $300,000 for that loan and they later find out that
the property is only worth $100,000 and the loan goes into default. Well, the question
then becomes, how much has that acquiring bank lost?
Well if you were in Sister Theresa's third grade arithmetic class with me you would have
come to a very simple conclusion. You would have said, they paid 300, they got 100 for
the property so they lost $200,000. But that's not what happens because under these so called
loss share agreements what FDIC has done is said we're insuring the difference between
the book value of the loan and what you ultimately recover for the value of the property.
Well, the book value of the loan is one million dollars. What the bank ultimately recovered
on the property was $100,000. Well then they say FDIC says, you've lost $900,000. And we're
going to pay 80 percent of that, that's $720,000. So what the bank ends up with is $100,000
in property and $720,000 from the FDIC. That's not exactly loss sharing. That sounds to me
like profit guaranteeing.
So when the bank's dealing with you in an attempt to renegotiate your loan, the bank
has a choice: go through the bank negotiating process with you or double their money with
the FDIC. Well guess what? You lose.
However, there is a silver lining and that is the exposure of the loss share agreement
and its terms can be a real game changer in the foreclosure process.
So if you have a loan, commercial or in fact residential, and the bank that originally
lent you the money failed and was taken over by another bank, then you need to know whether
or not that arrangement is covered under a loss share agreement.
What are the terms of that loss share agreement and how much money has the acquiring bank
actually recovered or stand to recover on your loan?