As per the media reports, a government program aimed at supporting solvent banks purge of bad loans, is being used to aid federal officials cope with a growingly bloated portfolio of assets from seized banks.

It was announced by the Federal Deposit Insurance Corp. (FDIC) that it took help from a "pilot sale" under the Legacy Loans Program. This program is part of the $1 trillion Public-Private Investment Program; however, it has faced problems getting off the ground as a way for solvent banks to offload problem assets.

The FDIC confirmed transferring $1.3 billion of loans, largely residential, to a new limited-liability company, following which Residential Credit Solutions Inc., a mortgage investor and modification firm based in Fort Worth, Texas, will work to alter souring loans by which borrowers could reside in their homes. A sum of $64.2 million was paid by Residential Credit for an equity stake in the new company.

The loan portfolio was taken control over by the FDIC, after it seized Franklin Bank of Houston last November, which was significant since the bank had been led by mortgage-bond pioneer Lewis Ranieri.

"The deal reflects wider efforts by the federal government to reshape financial-intervention strategies to meet changing needs. For example, Residential Credit, founded by New York private-equity firm Equifin Capital Partners and Chief Executive Dennis Stowe in 2006, will modify the loans under the federal Home Affordable Modification Program, essentially bridging toxic loans with a mortgage-modification program," said FDIC.

It has appeared that a government-backed note worth $727.8 million will be issued by the company established as part of the deal to the FDIC, in return for the Franklin portfolio. While the cash flow for the note will come from the loans in the portfolio, the agency will try to sell the note to fixed-income buyers.