Magazine article American Banker

Participation Interests Facing Extinction

Magazine article American Banker

Participation Interests Facing Extinction

Article excerpt

Back when eight-track tapes were considered cutting-edge audio technology, lending institutions often sold loans as participation interests. Now that loan mechanism is facing extinction.

From the 1960s to the early 1980s thrifts createH participation inter%sts to raise cash. A loan was usually split in two: 90% was sold and 10% retained along with the servicing rights.

"Most institutions sold to their friends and neighbors," said William C. Buell, chief executive of MBS Financial Corp., San Francisco.

MBS is one of a handful of institutions still actively dealing in participations, but it is having increasing difficulty in findinN product.

By the 1980s, when the Federal National Mortgage Association and Federal Home Loan Mortgage Corp. became dominant buyers of home mortgages, participation interests were becoming passe. The agencies bought all unwanted loans.

RTC Was Major Dealer

But participation interests were still being bought and sold. Lenders often pieced participation interests together into whole loans. The whole loans were sold to the agencies or to private buyers.

The worst of the loans were sold to bottom-fishers at tremendous bargains, Mr. Buell said.

The Resolution Trust Corp. became a large dealer in participation interests from 1990 to 1992. They were a bargain then, Mr. Buell said, but no longer.

During that period the thrift bailout agency sold a large amount of small assets such as participation interests, said Joseph B. …

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