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`Now They're Really Down To The Dregs'


Finance

`NOW THEY'RE REALLY DOWN TO THE DREGS'

Given the shattered faith of many in the efficacy of government, the Resolution Trust Corp.'s record in mopping up after the savings and loan fiasco looks nothing short of stunning. In little more than three years, the agency has peddled more than $330 billion in securities, properties, and loans it acquired from failed S&Ls, recouping a surprising 92% of book value.

But look again. The RTC is still sitting on a $100 billion stockpile of, well, junk. About half of the agency's real estate, for example, consists of nearly worthless land investments such as Texas "rock farms" and half-built desert communities. "The RTC has always had hard-to-sell assets, but now they're really down to the dregs," notes Stephen A. Roth, president of Los Angeles real estate firm Secured Capital Corp.

To help these dogs fetch top dollar, the agency has begun moving aggressively beyond its conventional sales tactics (table). It's expanding to troubled loans its successful securitization program, which has used pools of performing loans as collateral for bond-like securities. It's also joining forces with debt-collection agencies and large investors to unload other properties.

EQUITY. To share in any windfalls, the RTC is keeping equity stakes in lots of the properties it is selling. "As we get down to the harder-core stuff, it's important for us to retain some upside potential," says Lamar C. Kelly Jr., the RTC's senior vice-president for asset management and sales.

One of the RTC's most promising tactics is bulk sales of troubled properties. This summer, the agency will choose winning bidders for six large packages of real estate, including 1,000 undeveloped tracts, unfinished apartment and condominium complexes, and abandoned shopping centers. Among the properties: Estrella, an aborted 21,000-acre residential development 15 miles outside of Phoenix that was started by jailed thrift executive Charles H. Keating Jr. The agency recently rejected two offers to buy 100% of Estrella--reportedly for $17 million in cash or $25 million with financing--because it believes it can do better holding on to a large part of the equity. Current plans call for selling a 25% stake. Some real-estate experts think waiting is smart. "The Estrella has extraordinary potential," says David M. Luber, a Los Angeles attorney who leads a bidding group. "The upside is incalculable."

The RTC is also betting that it can get higher prices on the troubled loans it's pooling in its securitization program than it could by selling them separately. The agency is converting pools of nonperforming loans, including some that bidders have snubbed in the past, into tradable short-term securities. Already, agency officials say, securitizing loans has enabled the government to raise $2.9 billion more than it could have if the RTC had auctioned the loans off in smaller lots.

Notwithstanding the optimism of many RTC officials, though, squeezing big bucks from junk won't be easy. "The ultimate success of the cleanup and the final loss numbers are still in the balance," says Peter H. Monroe, president of the Thrift Depositor Protection Oversight Board. In truth, the RTC expects to recover no more than 30 on the dollar for many of its land sales. And even that may be overstated. Kelly concedes that "trades in raw land are so infrequent that the values are harder to estimate." And while the RTC's equity retention will seem brilliant if the real estate market rebounds, it will look like a speculative blunder if market conditions worsen.

MYSTERY LOANS. What's more, the new securities could pose pitfalls for both investors and the RTC. To sell the packages, the RTC had to provide payment guarantees to investors. But some of the thrifts were in such disarray when the RTC took them over that it doesn't know the real condition of some of the loans. Critics say that if many notes default, the RTC may have to make big payments to make good on the bonds.

In the past, the RTC has been criticized for unloading some properties at bargain-basement prices, giving buyers huge profits. Retaining an equity stake and a share in any price increases in many remaining deals is one way the RTC is seeking to quell those critics. But some legislators question whether the agency should act as a real estate speculator. For taxpayers, the strategy "is like having someone else going into the gambling casino and playing the games for you," says Representative Bruce F. Vento, a senior member of the House Banking Committee.

Despite the criticism, RTC officials have begun to boast that the cleanup is "in the eighth inning." But if the RTC's latest ventures falter, it could becloud the agency's early success and force the thrift bailout into extra innings.HOW THE RTC IS

CLEANING HOUSE

JOINT VENTURES Deals are being set up with investors to manage and sell $2

billion worth of vacant land, unfinished apartment complexes, and incomplete

shopping centers

SECURITIZATION Nonperforming loans are being packaged into collateral for

securities sold to institutional investors

COLLECTION AGENCIESPortions of some bad loans are being sold to private

collection agencies

BULK SALES Large packages of nonperforming loans and undesirable real estate

are being sold to investor groups, who can return portions of the assets under

certain conditions

DATA: BW

Dean Foust in Washington


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