A year after its launch, a government program to take troubled real estate assets off bank balance sheets is slowly gaining steam.
The eight investing partnerships taking part in Treasury’s Legacy Securities program have poured $16 billion into troubled residential and commercial real estate loans, Treasury said this week. That’s up from $10 billion at the end of March and just $4 billion at the end of last year.
Some 83% of the money has gone into residential mortgage backed securities, or RMBS, with the rest – just over $2 billion — invested in commercial mortgage backed securities, or CMBS.
Treasury rolled out the plan last year in a bid to boost the health of the banking system. Under the arrangement, private investors put up equity that is matched by Treasury. The government then issues debt to further expand the fund’s purchasing power. In this way $7.4 billion in private equity has turned into $29 billion in funds under management.
The plan was heavily criticized at the time as the latest giveaway to the banks engineered by Treasury Secretary Tim Geithner (right). With the tab for government support of the financial sector still rising, bailout rage remains a formidable political force.
But if the so-called the Public Private Investment Program didn’t unlock markets by itself, it can hardly be considered a disaster. The actual volume of deals supported by the plan has remained small, but there is some talk that its launch helped the market sort out prices in these troubled markets.
The eight funds in the program have deployed more than half the capital they and Treasury raised, but have an additional $13 billion they have yet to put to work. Because the markets have generally improved over the past year, the funds invested have returned between 4% and 25%, though Treasury stresses that it’s early yet to judge the results.
Funds “are in the early stages of their three-year investment periods … and early performance may be disproportionately impacted by structuring and transaction costs and the pace of capital deployment,” the government says in this week’s report. “It would be premature to draw any long-term conclusions about the performance.”
