FDIC and Failed Banks | Black and White

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

July 25th, 2008 by Black and White Staff

Depositor rights

Should depositors be warned of impending bank and thrift collapses to give them ample time to make decisions about how to handle their finances? If so, who is responsible for informing them? Should the FDIC’s watch list be made available to the public? Should depositors be informed even if the warning and disclosure itself could spark a bank run?

Investor rights

Is there an obligation to investors to be warned if an ill-performing bank, thrift, or mortgage lender is on the FDIC’s take over list, so that investor loss through stock declines can be minimized? Does the disclosure of information carry with it the potential to, again, conceivably fuel the demise of the institution as investors sell off stocks?

Governmental responsibility

Is the government’s efforts to save large institutions using taxpayer funds, the correct thing to do? The FDIC does not releases its ratings on the safety and soundness of banks and thrift institutions to the public. It does however, provide a service to consumers via the FDIC Library that lists private firms who perform financial institution rating services.

Media responsibility

What is the media’s responsibility in reporting information? Public reporting can have a dual affect of helping and hurting depositors, investors, and taxpayers in these instances.

Managing of Public disclosure

Generally speaking, the federal government knows well ahead of time when a bank is due for failure. Since public money is at stake, should an independent watchdog agency exist and function as a disseminator and disclosure source of information to affected parties? Can the markets handle information without causing further problems?

Measures to Calm the Storm

On July 22, 2008, the U.S. House of Representatives approved H.R.3221, a housing rescue bill designed to provide substantial assistance to multiple parties affected by the financial and housing crisis. The Senate is expected to take up the bill in the next three to five days. Under the current bill, millions of homeowners could potentially be rescued from foreclosure, measures are in place to assure that Fannie Mae and Freddie Mac will not be allowed to fail, and elements are in place to assure that credit markets in the U.S. are bolstered. The Federal Reserve Board would have “consultative” authority over Fannie Mae and Freddie Mac until the legislation expires in December 2009. Major aspects of the bill were formulated from Secretary Paulson’s original plan, viewed as a emergency stopgap to calm the financial markets. The bill grants Secretary Paulson immediate but temporary authority to extend an unlimited line of credit to Fannie Mae and Freddie Mac and to buy their banking institutions stock if their financial condition deteriorates sharply before December 2009.

Democrats in the House, including Representative Barney Frank, dropped efforts to mandate specific protections for taxpayers, like a requirement that companies suspend dividend payments to shareholders as a precondition of receiving federal aid. The current bill enables Paulson to set the terms of any bailout. A measure designed to manage the compensation of chief executives of banking institutions is also present.

The bill provides assistance to individual mortgage holders in trouble with delinquency or facing foreclosure to trade high-cost loans with accelerating monthly payments for more-affordable mortgages which would be backed in some instances by the Federal Housing Administration (FHA). As the housing market plunges, homeowners are left holding mortgages that exceed the value of their home, with loans that have aggressive monthly payment increases, setting the groundwork for default, foreclosure, and difficulty selling or refinancing their home to get out of the problem. Some efforts on behalf of debt holders has to be made to forgive portions of the loan, for the FHA to act on a guarantee. Other components of the bill include:

• Temporary tax cut incentives of up to $7,500 for first-time home owners and new property deductions of $500.00
• $25 million appropriation to improve technology, general processes, refinance and performance of programs, eliminate fraud and increase staffing
• A new federal regulator for oversight authority appointed by the president, and confirmed by Congress
• A voluntary program for lenders to write down the loan balance in exchange for an FHA guaranteed loan not to exceed 90 percent of the newly appraised value of home
• The basis of development programs of low-income and affordable housing through multi-family FHA mortgage insurance programs and with the low income housing tax credit programs

Addressed sparingly in the current bill are disclosure issues protecting the rights of investors or depositors, and the responsibilities of financial institutions in disclosure of insolvency.

The House bill can be viewed at: http://www.rules.house.gov/110/text/110_hr3221.pdf

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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.