Asset Management: Resolution Trust Corporation Needs to Build a Strong Foundation to Support Its Asset Disposition Efforts

Published by the Government Accountability Office on 1990-05-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office   / +/gT(.+


For Release        Asset Management:
on Delivery        'Resolution   Trust Corporation
Expected at
1O:OO a.m. EST      Needs to Build a Strong
May 4, 1990         Foundation   to Support j!ts
                    Asset Disposition   Efforts

                   Statement  of
                   J. William   Gadsby
                   Director,  Federal  Management       Issues
                   General Government Division
                   Before the
                   RTC Oversight  Task Force
                   Subcommittee  on Financial     Institutions
                   Supervision,  Regulation    and Insurance
                   Committee on Banking,    Finance and
                   Urban Affairs
                   House of Representatives

                                                                  GAO Form 160 (12/87)
                           SUMMARY OF STATEMENT BY
                              J. WILLIAM GADSBY
                       U.S. GENERAL ACCOUNTING OFFICE

The asset disposition          job facing   the RTC is unprecedented         in
both magnitude      and complexity.        To do this job well,       the RTC
needs an appropriate         management structure,       well trained     staff,
and effective      contracting     procedures.     While RTC is making
progress     in these areas it is not yet ready to aggressively
dispose    of assets.       For example,    GAO believes     the following
critical    elements     should be in place before RTC embarks on an
aggressive     asset marketing       and sales effort:

--    contractor     incentive   strategies  and performance   standards;
VW    alternative     methods for estimating     market value;
--    management     information    systems needed to help monitor
      compliance     with laws, regulations,     policies  and procedures.

In addition,     GAO believes       that guidance     and training    is    needed
for RTC staff     who handle      the contracting      and monitoring

RTC is using the flexibility           provided      by the strategic       plan to
develop a variety      of marketing       strategies      for asset disposition.
These include    securitization        of loans,      real estate     auctions,     and
a national   marketing      program.      GAO supports       these efforts      and
believes   such strategies        should be tested        and evaluated      before
they are used nationwide.

As the RTC gets more involved        with the actual      business  of asset
management and disposition,       it will     need to focus its attention
on at least  three other    items:      environmental     issues,  monitoring
contracts,  and keeping the strategic          plan up-to-date.
Mr.     Chairman         and Members of                     the Task          Force

We are       pleased           to be here             today         to discuss               the     progress            being
made by the Resolution                        Trust          Corporation                   (RTC) in disposing                     of
assets       and to suggest                  ,some steps             it     might           take     to      improve        that
process.         My testimony                 will          cover         three          topics:          the    asset
disposition            process,         marketing               and disposal                   strategies            being
tested       by RTC, and certain                           operational              issues          needing         attention.


The asset        disposition                 task          facing         the RTC is               unprecedented                 in
both     magnitude             and complex'ity.                     To do this               job     well,       RTC must
have       an effective              management              structure              in place          to manage the
assets       under       its     control,             a cadre             of well-trained                  staff,          and
sound       contracting              procedures.


The RTC has organized                        its      asset         management               activities             into         three
major       functions--marketing,                           asset         and contract               management,             and
disposition.              A field            structure              has been set                   up to do much of
the     work,    but      it     is not            fully       staffed            yet.        Overall,           RTC has
about       36 percent           of    its         planned          5,400         staff.            As of April             30,        the
staffing        levels          at    the     consolidated                  sites,           where        most      of     the
ass&t       contracting              and monitoring                  work         will       take     place,         varied
greatly           from        about          55 percent           of         full-     capacity                in Kansas City                  to
14 percent               in        Phoenix,          which       was the              last      site       to be set               up.

While       RTC i,s not                yet      ready          to aggressively                      dispose          of assets,                as
of       March     31,        it     has reported                liquidations                   through            sale,          loan
collections,                  and'debt           retirements,                   of     about         $40 billion                  in
assets.            Of this             total,         about       $33 billion,                      or 83 percent,                     had
been       liquidated                by the          thrifts           in     the      conservatorship                       program.
Further,           about            90 percent            of     the        assets           sold        out    of
conservatorships                      have been loans                       and securities.                        However,                there
have been            some fairly                 substantial                  real       estate           sales.             For
example,           the        Hyatt       Grand Champion                      Hotel          in California                   was sold              in
March       for      $66.5           million,           which      was 104 percent                         of      its      appraised
value.            Also,         a garden             apartment              complex           in Houston                  was sold           for
$13.6       million,               or 117.5           percent           of      its      appraised              value.

Asset       dispositions                  have occurred                     primarily               in    conservatorships
because           those         thrifts         usually           had a structure                         in place              to market
assets.            We believe                 that      liquidating                   certain            assets           while        a
thrift       awaits             resolution              is expedient                   and,       because            it     is being
done       sooner,            can     reduce          ultimate              resolution               costs.


RTC recently                  established               a Training                   Task     Force        which           is
reiponsible               for        assessing           the      overall              training            needs           and

identifying            where        training           should         be strengthened.                     We believe
this     is    a necessary             step          in the        contracting          area         because          (1)
RTC's mandate              is     to contract               out      as much work             as possible,                 and
(2) much of RTC's                   staff       is     either         new to the            government              or from
FDIC where           the     normal          practice             was to do its             own asset
management           and disposition                   rather         than        working      through
contractors.               As RTC intensifies                        contracting            efforts,          it     becomes
more     important           that      field         personnel             are     adequately           trained            to
handle        the    contracting               and monitoring                functions              and to develop
information            systems         which         will         permit     them to adequately                      oversee
and monitor            contractor              performance.


The strategic              plan      called          for     the      RTC to        submit          to the      Oversight
Board     most       of    its      procedures              for      implementing             the      policies            in    the'
plan     by March          30.       The target              dates         were met for             many
implementing              procedures.                But     some important                 implementing
procedures           in    the      asset       disposition                area     related          to contractor
incentive           strategies,              contractor             performance             standards,              and'
alternative           methods          for      estimating             market        values          are    still          being
developed.             As mentioned              earlier,             we believe            these       critical
procedures           need to be in place                          before     RTC embarks               on an
aggressive           asset        management               and disposition              program.


O th e r        related        areas         w h e r e R T C -is still                   finalizing                i m p l e m e n tin g
procedures               include:

           --     a n a tio n a l           sales           program           for    financial             assets           held     in

           --     conveyance                o f assets                to    state     a n d local           g o v e r n m e n ts
                  p a r ticipating                     in certain             HUD programs,

           --     d e te r m i n i n g           th e     u s e o f assets            where no reasonable
                  recovery               is a n ticipated,                    and

           --     m a n a g e m e n t inform a tio n                       system s      n e e d e d to h e l p m o n i tor
                  compliance               with           laws,        regulatio n s ,          policies              and


Recognizing                th e m a g n i tu d e              a n d complexity              o f th e asset
disposition                task,          th e         strategic            plan     directs        R T C to          try
alternative               approaches,                     learning            from experience                     w h a t works a n d
w h a t d o e s n o t work.                       It      furth e r         emphasizes          th a t      n o th i n g       in th e
plan       is     intended               to preclude                  such flexibility.

R T C h a s b e e n using                  th e         p l a n 's     flexibility             to   i d e n tify            a n d test
several           m a r k e tin g         strategies.                      T h e s e include        th e          securitization



        Of     loans,            real         esta te      a u c tio n s ,       a n a tio n a l          sales          c e n ter,         and
        alternatives                    for      estim a tin g         market           value.           W e think               th e s e       are
        positive             steps            and we endorse                 th e      concept          o f testin g               and
        evaluatin g               th e m b e fo r e         n a tio n w i d e          i m p l e m e n ta tio n .           S u c h actio n
        will       b e tter         equip         R T C for        th e      asset         disposition                task         th a t       lies

        Securitization                        P rojects

        R T C h a s reta i n e d                 th e    services            o f a n investm e n t                  banking
        specialist                a n d dealers              in asset-backed                     securiti'es,and                    m o r tg a g e s
        to     assist            in developing                 a n asset            securitization                    program.                  This

        p r o g r a m will              cover       th e    sale        o f b o th .p e r fo r m i .n g             a n d n o n p e r fo r m i n g
        m o r tg a g e s ,        a n d commercial                 a n d c o n s u m e r loans.                     R T C e x p e c ts           to
        a n n o u n c e a securitization                           d e m o n s tration             project            in a b o u t          3
        m o n ths.           This        project           will       pool       a n d securitize                   o n e - to       four-fa m ily
        m o r tg a g e s         from thrifts                located            in e a c h o f th e             fo u r      R T C regions.

        In     a d d i tio n ,          R T C 's E a s te r n         Region           is also          testin g           a program               to
        securitize                m o r tg a g e        loans      to m a k e th e m m o r e m a r k e ta b l e .                           The
        region          is currently                    working         th r o u g h       a d u e diligence                     process           with
        a goal          of removing                 m u c h o f th e            uncertainty               over        th e quality                 Of

        th e     loans           to b e sold.

Auction        Project

In March           1990,        the      RTC announced              it     was soliciting               proposals                 to
auction        real        estate          properties.              This     solicitation              has closed                   and
RTC officials               say the             award      should        be announced              shortly.                 RTC
expects        to hold            d real          estate      auction        sometime           this     summer.
About       $250 million                 worth       of    real     estate          from    around       the          country
will       be offered             for      sale.

National        Marketing                Project

RTC is        also     working             on a solicitation                  for      services         to         retain       a
firm       to help       develop            a national            marketing            strategy.              It     expects
to have        this        firm         under      contract         by mid-summer.                  Other           related
planned        actions            include          a national            sales       center,        and a nationwide
advertising             campaign.

Further,         RTC is           exploring           alternatives               to appraisals               for
establishing             the       market          value       of assets.              In our       opinion,            having
such       alternatives                 readily       available            could      be valuable                  to RTC if
either       the      ability            to get       timely        appraisals             or the      appraisal
results,        become a bottleneck                         in     the     asset      disposition              process.

We further            believe            RTC also          needs     to work with              other         government
agencies         such as GSA, VA, and FHA to                                identify           and pursue              asset
disposition            approaches                 or strategies             that      are      in the        best

interest      of      the government                 as a whole.                  Indeed,            a number            of
federal      agencies             have     large       inventories                of similar              assets              for
disposal       in     the        same markets,              and     it      is    important              that       these
agencies      avoid         undue competition                     with       one another.                     It    is        also
important          that     they     work          together         to see if                the     assets         they            are
managing      could         be used         for      public         purposes             that        would         otherwise               .
have      to be met in whole                  or     in part         with         federal            appropriations.


As RTC gets          more involved                  with      the        actual         business          of       asset
management          and disposition,                   we see.three                    important          items          it         will
need      to focus         on:      environmental                 issues,          monitoring                 contracts,
and keeping          the      strategic             plan      and implementing                       procedures                up-to-
date.       We plan         to review              or monitor             each of            these       areas       to
assess      what     RTC is doing.

Environmental              Issues

An emerging           issue        RTC will          face      relates            to what            effect
environmental              substances              such as toxic                 wastes,           asbestos,             and
PCBs may have on its                     ability           to dispose             of     real        estate.
Environmental              Protection          Agency          regulations                may require                RTC, as
receiver,       to        remedy environmental                      problems             before        property                can be
usgd or sold.               RTC will          need to determine                        the      extent          to which


    properties                in    its         inventory           are         contaminated                  and will       require
    corrective               actions.                We were told                  that         RTC has begun               the     process
    of     identifying                   affected           properties.                      Once this          has been done,                RTC
    will       need to develop                       action        plans               for     any contaminated
    properties.                    The removal               or containment                        of contaminating
    substances               could         .be very          expensive                 , greatly.increasing                   the         RTC's
    disposition                costs         for      the        affected               properties.

    Contract           Monitoring

    With       respect             to contracting,                   it         will         not      be good enough               just      to
    have       well      written             contracts.                   RTC will              have     to adequately
    monitor           the      performance                  of    these          contracts              to be sure           the
    interests            of        the     government              are          adequately              protected.            Given          the
    expected           magnitude                of    the        assets          to be liquidated,                    the
    Comptroller                General            has       identified                  RTC as one of              14 high          risk
    areas       vulnerable                 to      fraud,         waste,           and mismanagement.                        We will
    therefore            pay close                attention               to     the         contracting           area.

    Updating           Policies             and Procedures

    Finally,           the         Oversight            Board        has said                  that     the     strategic           plan
    will       be revisited                 and revised                   over          time       as the Board             and RTC
    gain       greater             experience               regarding              the         scope     and nature           of     the
    challenges               they         face.         We endorse                 this         concept.          We would            also
    emp"nasize           that        the        Oversight            Board              and RTC should              periodically


update       the     strategic         plan         to     reflect         current           policies         and
procedures,           especially         during                the    initial        start        up period            when
changes       tend      to occur        more frequently.                          This       updating         is    very
important          because       the    plan             (1)    serves          as a basic           tool     for
managing         RTC and for           informing                the    general           public       and contractors
how RTC operates.(2)                   provides                the    Board       and RTC with              criteria          for
evaluating          progress       and        (3)        enables          the Congress               to exercise           its
responsibility            to monitor            the            progress          of both       the      Oversight
Board     and RTC.

That     concludes        my statement.                        We would         be pleased            to answer          any
questions          you may have.