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FDIC names first winner in toxic asset program

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MARCY GORDON | September 16, 2009 02:34 PM EST | AP

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WASHINGTON — The Federal Deposit Insurance Corp. on Wednesday named the first winning bidder under a test of the government's program to back private purchases of toxic mortgage assets and get them off banks' balance sheets.

Fort Worth, Texas-based Residential Credit Solutions Inc. is paying $64.2 million for a 50 percent stake in a new company that will have about $1.3 billion in home mortgages from the failed Franklin Bank.

The FDIC took over Houston-based Franklin Bank in November. Under the test sale to RCS, the new company will issue a note for $727.8 million to the FDIC. Twelve groups of companies had bid on the assets, the agency said.

The program is part of the government's public-private partnership to guarantee private investors' purchases of toxic assets to help banks raise new capital, get credit flowing and aid the economic recovery.

The sale is part of the government's so-called Public-Private Investment Program, announced in March by the FDIC, Treasury Department and Federal Reserve as one of the financial recovery measures. The backing for the private investors' purchases is coming from the $700 billion federal bailout fund, with the government matching private investors dollar for dollar and sharing any profits equally.

The FDIC said it will analyze the results of the RCS-Franklin Bank sale to determine whether the same process could be used to get toxic assets off the balance sheets of banks that are still open and functioning, as opposed to failed banks.

Officials have said that the PPIP will aim to relieve banks of up to $40 billion worth of soured investments tied to mortgages.

The FDIC pilot sale involved actual mortgage loans rather than the related securities.

The closing of the RCS sale is expected later this month, the FDIC said, after which the company will manage the portfolio and service the loans under guidelines for modifying distressed mortgages.

RCS is a large mortgage servicing company that deals in modifications for troubled home borrowers. The company had no immediate comment Wednesday afternoon.