Bank failures hit 106; many troubled banks remain open
Filed under: Company News, Economy
It's a big number that only tells part of the story. The number of banks that have failed so far this year topped 100 on Friday -- hitting 106 by the end of the day -- the most in nearly two decades. But the trouble in the banking system from bad loans and the recession goes even deeper. Dozens, perhaps hundreds, of other banks remain open even though they are as weak as many that have been shuttered.
Regulators are seizing banks slowly and selectively -- partly to avoid inciting panic and partly because buyers for bad banks are hard to find. Plus, going slow buys time. An economic recovery could save some banks that would otherwise go under.
But if the recovery is slow and smaller banks' finances get even worse, it could wind up costing even more. This year's 106 bank failures are the most in any year since 181 collapsed in 1992 at the end of the savings-and-loan crisis.
On Friday, regulators took over three small Florida banks -- Partners Bank and Hillcrest Bank Florida, both of Naples, and Flagship National Bank in Bradenton -- along with four elsewhere: American United Bank of Lawrenceville, Ga., Bank of Elmwood in Racine, Wis., Riverview Community Bank in Otsego, Minn., and First Dupage Bank in Westmont, Ill.
| Recent US Bank Failures |
| Drag the map for more information on recent bank failures. Source: FDIC/DailyFinance |
To replenish the fund, the agency wants banks to pay in advance $45 billion in premiums that would have been due over the next three years. The FDIC won't say how deep a hole its deposit insurance fund is in. It can tap a credit line from the Treasury of up to a half-trillion dollars to cover the gap.
The list of banks in trouble is getting longer. At the end of June, the FDIC had flagged 416 as being at risk of failure, up from 305 at the end of March and 252 at the beginning of the year. Yet the pace of actual bank failures appears to be slowing. The FDIC seized 24 banks in July, 11 in September and 11 in October.
If any bank poses an immediate danger to customers or the broader financial system, regulators close it immediately, bank supervisors said. The issue is murkier for troubled banks that might qualify to close but whose closings might still be postponed or even prevented. The FDIC's first priority, spokesman Andrew Gray said, is to maintain public confidence in the banking system. "As evidenced by the stability of insured deposits throughout last year, this mission has been a success," he said. He said public confidence isn't reason enough to delay a bank closing, because legally the decision to close rests with whoever chartered the bank -- a state or federal agency.
But more than a dozen experts, including current and former regulators, bankers and lawyers, say the FDIC's mission to maintain public confidence in the banking system contributes to the go-slow approach. "The FDIC was set up to create confidence and prevent bank runs," says Mark Williams, a former bank examiner for the Federal Reserve. Being too aggressive about bank closings "can be counter to the mission."
Sarah Bloom Raskin, Maryland's top banking regulator, said: "Technically it's the states who decide, but in reality it's the FDIC calling you to say" when the bank will be closed.
Last fall, the financial turmoil was rooted in bad bets that the nation's biggest banks, like Citigroup Inc. and Bank of America Corp., had made on complicated, high-risk mortgage investments. Smaller banks have been undone by something more conventional -- real estate, construction and industrial loans that have soured as the recession has deepened. Defaults are up as developers abandon failing projects and landlords can't meet their loan payments.
Small- and mid-sized banks hold lots of those loans and have been hurt more than big ones by the sinking commercial real estate market, especially in states like California, Georgia and Illinois. As defaults rise, these banks must set aside more money to cover losses. For the banks, this means mounting losses and shrinking reserves.
In a healthy economy, Williams said, the Fed and the FDIC would be inclined to close such weak banks. But these days, those agencies and other regulators prefer to hold off, hoping an economic recovery will eventually restore the health of some of the banks.
The recovery is expected to be slow. Americans remain hesitant to spend money because of job losses, flat wages, tight credit and high debt. Their cutbacks have triggered tens of thousands of business failures. Abandoned retail space in downtowns and suburban malls means no rental income for property owners. As landlords default on real estate loans, they weaken the banks that hold the loans.
The situation now is especially grave in Southern California, Georgia and Illinois, which have some of the highest home foreclosure rates. Twenty banks have closed in Georgia alone.
Individual bank depositors aren't at risk when a bank fails. Their money is guaranteed up to $250,000 by the government. Ever conscious of maintaining public confidence, agency officials hammer this point in public statements. When weak banks are allowed to stay open, their growing losses potentially can drain the FDIC's deposit insurance fund faster, says Bert Ely, an independent banking consultant.
Federal agencies aren't the only ones with an interest in slowing the pace of bank closings. State regulators with closer ties to local communities want to avoid the ripple effects when a town loses its main source of consumer and business credit, Williams said.
But finding buyers for wobbly banks has been tough. FDIC Chairman Sheila Bair acknowledged as much in testimony this month before a Senate panel. The FDIC has been offering to share buyers' losses on the assets being transferred, she said. "In the past several months investor interest has been low," she said in prepared testimony.
In an effort to find more potential buyers, the FDIC has relaxed the rules for private-equity firms to buy banks. In the past, regulators had feared such a move would allow investors to protect themselves from the cost of bank failures, escaping serious consequences while drawing down the FDIC's fund. An early success of the new strategy was a deal announced this month to sell assets from Corus Bank of Chicago to a group of private investors.
It's hard to know how many more banks could be closed in coming months, said Daniel Alpert, Managing Partner of the New York investment bank Westwood Capital LLC. "Loans are still deteriorating, but there are glimmers of hope in the economy. Ultimately, it's all about employment."
By Daniel Wagner. AP Business Writers Marcy Gordon in Washington and Sara Lepro in New York contributed to this report. Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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Reader Comments (Page 1 of 4)
10-25-2009 @ 8:24AM
teltech543 said...
Wow, 7 banks closed Friday. What were they doing? Saving them up for one day? One recent week none were closed. One or two before that. Only 18 to go to my guess of 118 for the year. No one else wants to play though. Oh well, Maybe we can have another contest next year. Perhaps with a prize.
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10-25-2009 @ 2:16PM
fed up said...
note how they compare "bank closing" numbers to the savings and loan crisis. By 1992 over 1300 savings and loans folded in the US alone. Now there are few to no "savings and loans". Next time, I suppose they will invent a new word for "bank" to compare to this fresh round of failures.
10-25-2009 @ 4:30PM
JIM said...
HMM Banks in trouble and closing for bad loans. How can this bea fact as the banks were selling their loans.
BACKGROUND
Mortgage-backed securities (MBSs) are simply shares of a home loan sold to investors. They work like this: A bank lends a borrower the money to buy a house and collects monthly payments on the loan. This loan and a number of others are sold to a larger bank that packages the loans together into a mortgage-backed security. The larger bank then issues shares of this security, called tranches ( slices), to investors who buy them and ultimately collect the dividends in the form of the monthly mortgage payments. These tranches can be further repackaged and sold again as other securities, called collateralized debt obligations (CDOs). Home loans were so divided and spread across the financial spectrum, it was possible a given homeowner could unwittingly own shares in their own mortgage.
Eventually, the most desirable, qualified customers dried up; they all had homes. So banks turned to less desirable customers that they had traditionally shunned -- subprime borrowers. These are borrowers with low credit ratings who pose a higher risk of defaulting on their loan. But all types of lenders bent over backwards in the early 2000s to get this type of borrower into homes. The no-document loan was created, a type of loan for which the lender did not ask for any documentation and the borrower did not offer any information. People who may have been unemployed may have received loans for hundreds of thousands of dollars.
One answer is that, with the introduction of MBSs, lenders no longer assumed the risk of a loan default. They simply issued the loan and promptly sold it to others who ultimately took the risk if payments stopped. And since early MBSs performed well based on mortgages granted to the more dependable prime borrowers, investors clamored for more. In response, lenders loosened their restrictions for mortgage applicants and borrowed heavily to create cash flow for loans in order to create more mortgages. After all, without mortgages, there are no mortgage-backed securities.
http://www.pbs.org/wgbh/pages/frontline/warning/view/
MERS FORECLOSURES http://www.mersinc.org/Foreclosures/index.aspx
Mortgage Electronic Registration Systems, Inc. (“MERS”) is a proper party that can lawfully foreclose as the mortgagee and note-holder of a mortgage loan. MERS Membership Rule 8 provides required guidelines that must be followed when MERS is the foreclosing entity. Please click here to access the Rules of Membership, and reference the Rule 8 requirements.
In mortgage foreclosure cases, the plaintiff has standing as the holder of the note and the mortgage. When MERS forecloses, MERS is the mortgagee and it is the holder of the note because a MERS officer will be in possession of the original note endorsed in blank, which makes MERS a holder of the bearer paper. MERS will not foreclose unless the note is endorsed in blank and held by MERS.
The MERS Legal Primer provides a sampling of cases that address the standing of MERS to foreclose its mortgages. These cases are not meant to be an exhaustive list involving MERS but are merely to serve as a primer for the legal arguments. These statements are from the MERS website.
THE QUESTIONS
As mortgages were packaged/bundled into mortgage back securities (MBS) and sold to investors and since these MBSs were bought by investors, with some mortgages being split and owned by several institutions or people (tranches), how can the homeowner/borrower know who actually owns their mortgage? If the homeowner /borrower does not know who actually owns their mortgage, then how does the foreclosure court know who actually owns the mortgage and CAN actually proceed with the foreclosure?
The real estate attorneys representing these possible foreclosed homeowners should request that the foreclosing institution show that they ACTUALLY own the mortgage and can bring foreclosure action to court and are not just the mortgage servicer.
Also, since these mortgages were sold without registering the mortgage in the county, the county has lost doc stamps (tax monies) and who /whom really owns the mortgage. I would say if it is not the company listed at the county and they were paid off when they sold the mortgage, and then a release of lien should be requested for the homeowner.
10-24-2009 @ 9:20AM
john said...
The Gov't did a relatively smart thing in doing stress tests on the Top 19 Banks.. their mistake was to stop there. They should have continued straight down, moving from biggest to smallest, to identify the problem banks, to resolve issues about capitalization as they go, to identify upcoming issues facing the Banking sector at various levels(Big banks have different issues than Small banks), and identify the stronger banks they could rely on to buy assets of weaker banks in a MUCH more timely manner(maybe even pre-closure) to save the FDIC money and mgmt time. I am NOT a big believer in the stress tests as done, but I would rather have something managed and attempted, then be at risk by the winds of chance.
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10-25-2009 @ 8:53AM
refuse2lose said...
The "stress tests"you talk about were a freaking joke and everyone knows it.Our government has it's head so far up it's anus it doesn't know whether it's coming or going.They do know one thing though,they only want the "elite"banks running things,that's why they allowed trillions of dollars to be pissed away in the wind.
10-25-2009 @ 1:06PM
BigPicture said...
This is about power and, it's coming from men who could not spend their fortunes in 20 lifetimes.
The goal is to shrink first world economies (middle class wages and access to credit) to facilitate a global economy. In a global economy, elections and national boundaries are superfluous.
Not much different than monarchs who married their first cousins to "consolidate power". The inbred off-spring went a bit mad but; they became joint heirs to the thrones of several countries.
10-24-2009 @ 10:16AM
Bob said...
1992, that was George H. W. Bush's recession.
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10-24-2009 @ 10:21AM
Bob said...
1992, that was George H. W. Bush's recession.
Two Bush's three recessions.
Two Bush's millions unemployed.
Two Bush's millions of homes reposessed.
Two Bush's misery for Americans.
Two Bush.s three wars.
Ah, the Bush legacy.
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10-24-2009 @ 2:10PM
jerry schablein said...
You must be an ignorant Nazicrat. The whole collapse of our economy is based on three things. Greed by the realestate companies and banks , most of whom supported the Nazicrats and 2 laws that allowed them to do. One by carter which opened the door to unsecured mortgages and one by clinton then blew the lid off the mortgage market by forcing the rise in prime rate mortgages to pe4ople who really didn't deserve these loans. The first bush recession started 2 years before the end of the clinton era. you need to learn how to read.
10-24-2009 @ 3:53PM
huh? said...
ahhhhh... moron.... who's your prez??? barry's your prez.... good boy.... sit.... sit..... roll over......
10-25-2009 @ 11:29AM
vaughnvdg said...
GREAT POST BOB!!!! As Jack Nicholson once said THEY CAN'T HANDLE THE TRUTH!!!!!!!!
10-25-2009 @ 4:24PM
JIM said...
Jerry,
The Clinton bill you are referring to was signed in 1998. The part of the law that you are referring to was added in compromise by R-Phil Gramm (advisor to McCain in this last election).
10-24-2009 @ 10:48AM
The Oracle said...
Mr. Bonehead has been president for ten months. Things have deteroriated, significantly, i.e., the take over of banks
and auto industry. Destroying the healthcare system as we know it; rationing and prevention of access is ahead of us.
The proposed Cap & Trade Bill will increase the price of gas and oil to just north of $7.-gallon. All products and services will increase. More people will be fired since we will have less discretionary income at our disposal. The U.S. has become a PLANTATION, owned and operated by Mr. Knucklehead; Barney Obama. The same being the laughing stock of the world. Putz !
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10-24-2009 @ 11:00AM
Hunner said...
Talk about a MAJOR Putz- that is YOU, Oracle. President Obama INHERITED a nation with NUMEROUS problems, MOST of them CREATED by President Bush and his cronies (some problems were thrust on "W"). The RESCUE of the banks and other financial institutions occured during BUSH's administration (do you have memory problems or a memory of convenience?). Obama did NOT take over the AUTO industry- did we see govt funds go to FORD? Our nation's healthcare system is in trouble and unsustainable- and currently care IS rationed by the insurance companies. For goodness sake- if you have a pre-existing condition, the insurance companies leave you to DIE ! ! ! You must LOVE that ! YOU are one very SICK SICK individual.
10-26-2009 @ 1:51PM
Sandy said...
How ignorant are you. It may have gone clean over your head, but the country was already in the toilet when the president took over. Now you want to blame him for trying to clean up a toilet that was already overflowing, when he wasn't the one that clogged it up to begin with. I think you need to look at the last president that was full of s***. Keep up with things before pointing the finger
10-25-2009 @ 12:15PM
Yawn said...
A bunch of peons fighing over the scraps as if it makes any difference to the masses which party is elected.
Private interest money bank rolls the election and controls the candidates.
This is like watching medieval serfs arguing over who should be pope.
10-24-2009 @ 11:25AM
nick said...
Look's line Obama and his baseball bat and his thugs Rahm and Axelrod aren't doing to good. Look like the moderates and independents are seeing through the cheap suit.
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10-24-2009 @ 2:44PM
gina said...
Judgeing by the way you speak you are a thug yourself.and if the president is a thug (which he is not) It takes one to know one.
10-25-2009 @ 6:32AM
David S. said...
Maybe you should have questioned GW and the other GOP who support total deregulation. Oh, never mind, you were too busy genuflecting the last 8 years......
10-24-2009 @ 11:54AM
pete said...
BOB - you are an ignorant, racist, hate monger. Read history for yourself, quit depending on somebody else's opinion of a reporters opinion of what somebody else wrote for him to say of what was actually said in a different context. You will be shocked at how much you will learn on your own and how you will change your own opinions and views.
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