Black and White Program

Monday, September 06, 2010 11:53:11 PM

Failed Banks and Thrifts, the FDIC, and the Housing Bill

July 25th, 2008 by Black and White Staff

The United States banking system, already shaken by a string of financial upsets, is bracing for another potential round of bad news: more banks failing. Last week, federal regulators took over IndyMac Bancorp, an institution that was on the verge of collapse due to bad lending practices, depleting reserves, and customer defaults and delinquencies from mortgages. IndyMac was the ninth-largest U.S. mortgage lender in 2007 with an estimated $32 billion in assets. The bank failed after a bank run, when depositors withdrew an estimated $1.3 billion of deposits within a 2-week period.

The Federal Deposit Insurance Corporation (FDIC), one of the chief U.S. bank regulators, is a unit of the federal government responsible for insuring depositors funds. The FDIC’s funds derive from multiple sources, but essentially the funds are supplied by taxpayer money. The FDIC manages an extensive insurance fund that pays out compensation to customers of failed banks, and takes charge of banks seized by the government. It has taken over hundreds of failed banks over the years, with a moderately good track record. The FDIC insures depositors of up to $100,000.

The FDIC Regulators have plans to sell certain assets of IndyMac as early as October of 2008. IndyMac continues to operate, under the name IndyMac Federal Bank FSB. Almost all of the bank officers have abandoned the firm, prior to takeover. The New York Stock Exchange Regulation Inc. (NYSE) de-listed IndyMac (IMB) and related entities. The common stock closed at $0.28 on July 11, 2008, resulting in a common market capitalization of $28.2 million. The news sent shockwaves down Wall Street and throughout the entire world banking community as investors dumped banking stocks and nervously speculated about which bank might be headed for collapse next.

The Federal Deposit Insurance Corp. issued remarks stating that eight banks have collapsed since February 2007 and another 90 are on a watch list as problem institutions. There are over 8,400 banks and thrifts in the U.S.

Within a few days after the IndyMac news, U.S. Treasury Secretary Henry Paulson announced a rescue plan for Fannie Mae and Freddie Mac, two troubled mortgage-lending firms, both government sponsored entities. Fannie Mae, originally created under President Roosevelt’s New Deal plan, and Freddie Mac, originated in 1970, have the backing of the U.S. government. The two institutions obtain access to funds at lower interest rates than most banks. A major surge in foreclosures over the past two quarters sparked nervousness among investors, resulting in a free fall of value and sell-off of the two firms’ stocks. Approximately 85% of their stock value has been lost in the past 12 months, resulting in even more difficulty in raising capital, and creating concern that the institutions may be unable to cover losses on both the loans that they guarantee and own. Hundreds of billions of taxpayer dollars are at risk. The Federal Reserve will provide funds at a discount rate to the banks, and the government will buy billions of dollars of shares in banks over the next 24 months– a move designed to assure bondholders and investors that the firms will have the liquidity to address the problem market. According to the Congressional Budget Office, Fannie Mae and Freddie Mac would cost taxpayers an estimated $25 billion over two years under the Bush administration’s rescue plan. In response to Paulson’s announced rescue plan, Fannie Mae’s stock fell 8 percent, to $12.99 and Freddie Mac’s dropped 51 cents, or 5.8 percent, to $8.24.

In many cases of government bank seizures, the doors to the institutions close and assets are sold off for recovery. However, in some instances, the institutions continue to operate under federal supervision. The FDIC took over Superior Bank FSB, a bank active in the subprime mortgage business, providing in 2001 high risk mortgages to less than credit-worthy customers. The FDIC funded more than 6,700 new subprime loans at a value of $550 million, and then sold significant amounts of those loans to another bank. That pool of loans was indicative of the same type of problems, e.g. inflated appraisals and poor credit verification, and it eventually developed the same set of problems with high default and delinquency rates as Superior Bank did. A recent third party report used in the filing of government documents this week indicated that the loans made by the FDIC management should not have been authorized in the first place. Carrying interest rates at 12% and higher, many of the loans were ill-performing or defaulted upon and eventually led to foreclosure, only adding more problems to an already growing list. These are the same practices that led to the FDIC to take over Superior Bank in the first place. Another pool of loans facing similar problems– the majority originating when the FDIC was running Superior Bank– have been sold to Bank of America and resold to investors.

As the media continues to report on these institutions, the mortgage and credit crisis, the efforts of the FDIC, governmental and congressional efforts, and the growing list of potentially failing banks and thrifts, the likelihood of further bank runs increases– even if the upcoming housing and banking legislation becomes law.

The decline of these institutions riveted the financial world, and sparked fears of what bank or thrift would be next. The Congressional Budget Office in Washington, a nonpartisan agency that provides economic, budget analysis and reports for Congress, has responded to the crisis. In a letter to Congress, Peter Orszag, Director of the U.S. Congressional Budget Office, stated that there is a “probably better than 50 percent [chance]” that taxpayer funds will not be used to save the mortgage and finance providers. He added that “many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets and such continuing problems would increase the probability that this new authority would have to be used.”

Evident in the FDIC’s efforts in financial bailouts is the growing importance of the use of taxpayer funds, the rights of depositors, the role of government, and the role of media. Questions loom on the minds of the U.S. public.

As the media continues to report on these institutions, the mortgage and credit crisis, the efforts of the FDIC, governmental and congressional efforts, and the growing list of potentially failing banks and thrifts, the likelihood of further bank runs increases– even if the upcoming housing and banking legislation becomes law. Depositors worried of an impending collapse of their bank, have rushed to withdraw their funds, despite the FDIC’s $100,000 deposit guarantee. This essentially helps fuel the collapse of the bank itself. The U.S. government has an obvious interest in preventing bank runs, as a series of failures of high profile institutions could cause trillions of dollars in losses, severely fracturing the U.S. banking institutions and credit markets at home and abroad.

Evident in the FDIC’s efforts in financial bailouts is the growing importance of the use of taxpayer funds, the rights of depositors, the role of government, and the role of media. Questions loom on the minds of the U.S. public.

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5 responses so far.

  • Carol - Jul 26, 2008 at 2:29 pm

    The answer to many of the questions you pose will be found when the FDIC increases insurance coverage to at least $150,000 per title on every account. A quick. strong, meaningful boost to investor confidence is what we need most at this time, and simply raising the insurance coverage is the easiest fastest to make it happen . . . in minutes.
    A strong and confident gesture of this kind will most certainly cost taxpayers much less than bailing out failing banks and thrifts.
    We’re all familiar with FDR’s “The only thing we have to fear . . .” And its just as true now as it was 75 years ago. Given the size and scale of our economy compared to then, maybe even more so. And what a Grand Gesture with Greatest Impact such a move would make!

  • grace yee - Jul 28, 2008 at 11:04 pm

    It is a shame that the FDIC only insures depositors’ account to $100k. The depositors are the backbone of any bank. These are real hard dollars people already paid taxes on and put into banks to make little interest income. Financial planners always say interest made from CD doesn’t even keep up with inflation. Nonetheless, the principle is at least safe and not as volatile like other types of investment. Many senior citizens just don’t have the tolerance of risk in anything other than CD. The banks take this money and loaned it out many folds (9 times?) to make money. The depositors should be guaranteed 100% that their money is safe. The FDIC is the one responsible in keeping a keen eye on banks so that they don’t go over the edge. Where are they when banks are making crazy loans to anyone that fogs up a mirror? What happens to the $1 billion that is over the FDIC insurance limit? Do they just fizzle like stock that tanks? What confidence people should have in the US banking system?

  • Murray - Jul 29, 2008 at 9:10 pm

    Nice article, although reading something like this makes you crazy when you see how many peoples’ mistakes and greed end up costing the tax payer money. I guess the FDIC has no choice, but someone should start chasing down the greedy executives so this problem is reduced. Two more shut down last Friday. How many more to go?

  • Michael J. Hurd - Jul 31, 2008 at 9:41 am

    Nobody ever wants to pay for anything, and they always choose the most expensive option for someone else to pay for.

    I’m waiting to see someone say, the hell with the homeowner that put $0.00 down, borrowed closing costs etc… - He lost nothing in foreclosure. The hell with the mortgage bank that lent him 103% at 8% instead of 12%, take your losses. If you had lent at 12%, much lower loan, home within reasonable price range etc.. fewer losses I would hope.

    Confidence would indeed solve most problems, someone has to have it and admit it to the world first or we keep spiraling. Wish I had the capital to spur the confidence. Now the downward spiral is a self-fulfilling prophecy.

  • linda - Sep 26, 2008 at 12:39 pm

    What a shame the banks/lenders chose not to follow advice of remodifying loans early on this year. The opportunity to head off some of the current issues would have been for the banks to re-work their bad loans and that would have required your OTS and other Federal offices to promote and encourage them to do so. It is too late for us. We way back in February requested assistance with our lender for sometime of remodification as our business was now slowing and headed downward. In an effort to help keep business in positive we needed to start cutting back anywhere and everywhere possible. We were told by the bank that they did not offer re-writes or modifications. If home were to enter default the best they would offer would be a forebearance plan. This would require a downpayment of substantial amount of arrearage with balance divide over twelves months and added to current monthly payment. Now tell me does this lower monthly payment? NO! So now we need to search for a possible refinance. Guess what! The bank says they will not forego the prepay penalty as it does not expire for another 8 months. Refinance not an option, market decline not enough money to accomodate refi. Next step propose to bank a plan. The proposal was a 35% reduction in monthly payment for a two year period eith arrearage due within five years. Bank’ response was no we do not have any program to allow this type of offer. (verbally of course they do not want to put anything in wiriting) (however proposal had to be in writing). Okay now where do we go for alternate option? None available. Time for decision do we ask for deed in lieu, do we file chapter, or do we leave keys on counter and abandon. We worked too hard so we have to find a way. Next step file a chapter 13 restructure and struggle on. Guess what! Bank decides to file a “stay of relief” from the chapter 13. They are stating that the bank’s position is in jeopardy due to declining market. No kidding why do you think we are in this situation. Anyway it is useless to continue chapter 13 if trustee approves the “stay of relief” which they will. So voluntary dismissal of chapter 13. This is ding on credit. Now on to another alternative. There are none. Bank using data information decides home is in a negative equity position. Still they have no options for us to use. Now we head for the foreclosure process. Guess what! Bank has postponed foreclosure sale 6 times. We have not made payments for more than 10 months and should have been able to continue paying something. Bank would not accept any partial payments. How sad is this? We have decided to just let foreclosure take its course so as not to have any deficiencies (basically seeking a clean plate) Our home is high end ($1,085,000.00 now valued at 886,000.00) and well maintained. We have now obtained another home and are awaiting to move only after sale can be completed as we do not want to leave this estate abandoned. The bailout will probably not work if the banks are not controlled and given strict guidelines and direction on how to go forth to help homeowners stay in their homes. Get rid of the high cost administration, the over payed executives and cut back on all the ego expenses. Get back to basics and start over. Re-write the loans using proper income verifications and home values. The banks and lenders were very giving. Homeowners were willing to take based on fact that the bank was the “expert” and who would grant a loan if it wasnT possible? Wrong we were manipulated and the finnegling was put to use.
    We do not want to have a bailout we want to move on with a fresh start. We will survive using our own abilities and not with any expectations or trust that the banks/lenders are capable of protecting their assets and ours. Ask the homeowners. There are probably many, many who are going to move on in the same manner we have chosen. Why not we have all lost already its time to get up and move on using what ever resources we have. The FEDS have failed us and we have failed ourselves. It is time to put shame aside and mutually get it together and get our society out of negativity and to get our economy healthy. We all need to work at the basics and not expect high compensations.

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