If we summarize the present banking problems (including Fannie and Freddie), it is pretty obvious that the Federal Reserve and Treasury have bought all of the bad housing. No depositor has lost a dime. The last 16 bank closings have had absurd balance sheets. Oddly enough U. S. Bank Corp took over the last nine closings. In my opinion, this isn’t really the time to expand your market share in the banking industry. The absorbed banks just might make U.S. Bank Corp too big to fail and I imagine any losses from the assumed loans are insured by the FDIC or put on the books at a marked to market value (some sort of "can't lose" deal).
If you simplify all of this, the FDIC is cashing out the failed housing loans written by the closed banks. Then they avoid further losses by folding the rest of the failed bank’s loans into the buyer bank.
In the normal market of the 60’s and 70’s, a home mortgage included a 20% down payment. So if there was a problem with the market, the bank was not out of pocket until the home values decreased 20%. With the 100% loan, the bank is the real owner of the property the minute the note is signed. With the drop in property values of 40%, the banks are left holding the bag. The words “Road Kill” come to mind.
The picture below displays the info on the last failed nine banks, assets to deposits should match in value. Some of the values are so out of whack, it questions whether or not you really need a book keeper to tell you that your broke!
Now we have a new FDIC ruling that commercial loans can be carried on the books at original price for bookkeeping purposes. They don’t have to be marked to market. I would call this “Creative Financing.” Common sense suggests that this is wrong, and I am just pointing it out.
If you thought housing loans were bad, commercial loans are toxic. If a 10 million dollar shopping mall goes into bankruptcy and is sold for 5 million, the buyer might only have to come up with a 5% down payment (250K--- insurance companies do this all the time). So to the person with an expiring lease can probably get a real rent reduction by switching malls. What happens next? Retailers vote with their feet. The irritating thing here is that more commercial property falls into bankruptcy. It’s not a fast process; it will take about 5 years (In our area, this was evident 2 years ago). So I guess we have a head start. I just don’t know if winning a bankruptcy race is the sort of race we really need to win.
So far there have been 116 banks that have failed this year, 10 times more could fail over the coming year. Transferring the assets from small banks to larger banks, doesn’t make the problem loans any more secure, it just passes the problems into the future.
It is very comforting to know that the FDIC has everything under control--We get to watch them paint themselves into a corner.