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It’s been a big week for the FDIC.
On Wednesday, the latest CFO report to the FDIC board [pdf] was released, covering the first six months of 2009. Overall, the FDIC seems to be doing a good job of shepherding their resources to manage the massive tasks they face. In their general budget, receivership expenditures for the first six months were 27% under budget (see the figures on p. 16), because:
. . . bank closings have been less costly to administer than anticipated due to the prevalence of structured and whole bank transactions for the first six months of 2009; and budgeted positions have not been filled as quickly as projected in the original Board approved budget. These factors led to lower-than-budgeted costs for asset management and liquidation, outside counsel, travel, and other expenses. [p. 10]
Good news, right? Yes, and no. It’s good news now, not because things are slowing down, but because they expect them to pick up steam and they want to be ready for it. The explanation goes on:
With the expected increase in bank failures and resolution activities during the second half of the year, Receivership Funding expenditures should increase each quarter as the number of bank closings increases and the cumulative inventory of assets under management grows. Based on that assumption, we project that all or most of the surplus budget authority in the Receivership Funding budget component will be utilized by year-end.
But go back to that first quote for a minute. The use of “structured and whole bank transactions” to deal with seized banks saved the FDIC a lot of money, because piecemeal transactions require more staff time, more lawyers, more travel, and thus more money. The FDIC knows they’ve got a huge job to do, and they seem to be figuring out how to make the most of their operating budget.
That’s the operating budget. The other, more ominous situation, is in the separate Deposit Insurance Fund. The DIF takes in fees from FDIC member banks, and invests them to use to back up deposits in the case of bank failures. The CFO report description of the DIF investment strategy for Q3 is to put just about every DIF income source “into overnight investment and/or short-term T-Bills in anticipation of using such funds for resolution activities.” (p. 15), which is the same strategy as they were employing in Q2. IOW, the DIF is keeping its head above water, but the money coming in is going right back out again.
Which leads to Friday’s activities. As was widely anticipated, Corus Bank (Chicago IL) got seized, along with Brickwell Community Bank (Woodbury MN), and Venture Bank (Lacy WA). In the press releases, however, a new wrinkle appeared. Up until now, most of the closure announcements contained a standard paragraph like this one from the Venture Bank announcement linked above:
As of July 28, 2009, Venture Bank had total assets of $970 million and total deposits of approximately $903 million. In addition to assuming all of the deposits of the failed bank, First-Citizens Bank & Trust Company agreed to purchase approximately $874 million of the assets. The FDIC will retain the remaining assets for later disposition.
In the Corus and Brickwell announcements, however, the statements read like this, with emphasis added to highlight the new wrinkle:
[Corus] As of June 30, 2009, Corus Bank had total assets of $7 billion and total deposits of approximately $7 billion. MB Financial Bank will pay the FDIC a premium of 0.2 percent to assume all of the deposits of Corus Bank. In addition to assuming all of the deposits of the failed bank, MB Financial Bank agreed to purchase approximately $3 billion of the assets, comprised mainly of cash and marketable securities. The FDIC will retain the remaining assets for later disposition. The FDIC plans to sell substantially all of the remaining assets of Corus Bank in the next 30 days in a private placement transaction. [note: the FDIC appears to have found a buyer already, but they have to wait for the ink to dry on some paperwork before that deal can go through.]
[Brickwell] As of July, 24, 2009, Brickwell Community Bank had total assets of $72 million and total deposits of approximately $63 million. CorTrust Bank will pay the FDIC a premium of 0.10 percent to assume all of the deposits of Brickwell Community Bank. In addition to assuming all of the deposits of the failed bank, CorTrust Bank agreed to purchase essentially all of the assets.
There’s no explanation given for these “premiums,” but it would appear that the FDIC is pushing to get more immediate income out of those banks that purchase failed institutions. When they assume the deposits, they also are assuming a customer base — sometimes in very desirable locations. My guess is that the banks also probably paid this premium in exchange for better terms on the loss-share agreement. That is, the purchasing banks agreed to put more money into the deal up front, but the FDIC agreed to cover more of the losses down the road. This helps the FDIC in terms of cash flow now — a very critical concern — with more of a gamble as the problem assets get unwound later.
No idea if this is a good idea or not — but it is clear that the FDIC is being creative in structuring these deals. They’re keeping one eye on the problems they have today while keeping the other eye on the problems coming next week, next month, and next year. So far this year, the FDIC has taken over 92 banks, with $99.6B in assets, $83.0B in deposits, and an estimated cost to DIF of $24.4B.
So far, so good.
But one phrase from the CFO report kept cropping up: “the expected increase in bank failures and resolution activities during the second half of the year.” As bad as the first six months were, the last six will be worse.
There was one more press release from the FDIC on Friday morning, though, that might be the most telling of all:
As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.
“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”
The FDIC can’t handle this alone, says Bair. But if banks and borrowers can work together better, it’s cheaper for both lenders and the banking system in the long run. What Bair didn’t say — and maybe didn’t have to — is that if the FDIC ends up spending more money to cover foreclosures covered in the loss-share agreements, they’re probably going to have to increase the assessments they charge banks for their deposit insurance. Banks could save themselves a lot of headaches and money by dealing with borrowers to rework the loans, rather than going through foreclosures.
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The lending institutions have forged on under the assumption that they can avoid taking losses when toxic ‘assets’ are subjected to valuation. That means that they take foreclosure rather than downgrade loans they made. The FDIC is making an end of that avoidance of responsibility and acted in the interests of borrowers – who have been treated as if their homes are still worth the full value of the loan, and who have been required to pay as if they were receiving full value. Renegotiating mortgages acknowledges the reality, that loans were made that have diminished in value, and the lenders share in the loss.
‘Bout time.
Excellent post. I don’t follow the FDIC stuff that closely but the rate of bank failures has been accelerating. I have heard estimates of 150 more by the end of the year. The FDIC also keeps a list of “troubled” banks most of which probably will go under at some point. That list has something like 430 banks on it at the moment.
I am glad you touched on the loss-share provisions. This is how the FDIC has been sweetening the pot to get other banks to purchase the failed ones. The FDIC is taking on a lot of down the road risk. In other words, they are leveraging to get these sales done, and of course it was leveraging that got a lot of these banks in trouble in the first place. So in a lot of ways the problems associated with leveraging are not being dealt with by these sales rather they are being transferred on to the American taxpayer.
This in no way solves the problem. It only kicks it down the road. What still isn’t on the table here are cramdowns, reducing the principal. It doesn’t even change the terms of the mortgage permanently into say more affordable long term fixed rate mortgages.
Another way they might keep head above water? Confiscate bank accounts. I just received a letter from Chase bank, who took over Washington Mutual. I had two IRAs with MaMu. The letter told me I must contact Chase to claim these accounts or they would be turned over to the FDIC. This letter from Chase came in an unremarkable envelope, like the kind I get all the time selling life insurance or a credit card application, and usually just throw away.
I called and claimed the accounts, so I’m fine, but I could have easily missed this. Chase hasn’t made much of an effort here, and some people will find their sitting accounts without much activity confiscated.
My advice is: if you were with WaMu, call or go to a Chase branch near you and make sure your account is “claimed.”
Calculated Risk does a periodic update of a The Unofficial List of Troubled Banks, drawing not just on the FDIC but also other banking regulators. It’s got 424 banks on it right now, all of which have had some kind of preliminary warning action filed against them. The warnings are official actions, but since each regulator has its own list, there’s no overall “official” list — just this Unofficial one. (And it has some errors on it, including at least one bank that was seized quite a while ago that should be removed (Bank of WY, Thermopolis).
Some banks will clean up their acts, and others will be seized when they don’t. And a year end total of 150 seems like it is entirely within the realm of possibility.
That sounds to me not like the FDIC is trying to confiscate accounts, but that Chase doesn’t want to hassle with them and is trying to dump them off on someone else.
You might contact the FDIC and see what they think of the letter you got. If Chase is screwing around with the accounts they assumed, the FDIC will NOT be pleased.
It doesn’t solve the problem of the financial institution, but of the borrower. By freeing the borrower, a.k.a. consumer, from the full burden of a bad loan, it gives more solvency and disposable income to that individual. So this is far better for the economy as a whole. Cramming down would be better still, but solvency of the individual is served.
I’ve heard estimates of anywhere from 300-1,000 more failed banks by the time this is over.
One thing FDIC is doing differently this time. They aren’t starting a new entity like they did with RTC, which had 12,000 employees at its peak. Instead, everything will be out-sourced to consultants. Which is probably cheaper and more efficient in the long run. (No medical, no taxes, no retirement funds.)
The biggest problem for banks now is the collapsing commercial real estate market.
Bair is clear that this only helps one class of borrowers in trouble: those who lost their jobs and who will get new ones in a couple of months. This won’t address the mess for people with Interest-Only loans, option ARMS, and all the other crazy mortgage instruments that banks were pushing while the bubble inflated.
But for folks who were current on their traditional mortgage, lost their job, and have a reasonable likelihood of getting a new one in six months, getting some breathing space now from the lender could indeed keep a bunch of otherwise normal loans from adding to the problem.
Very helpful analysis – thanks peterr
In a sense, that’s what the CFO meant when he wrote “bank closings have been less costly to administer than anticipated due to the prevalence of structured and whole bank transactions.”
By immediately turning over as much of the troubled bank as possible to a healthy bank, the FDIC is outsourcing the task of unwinding as much of that one mess as they can to the healthy bank. They pay that bank for doing so, both in terms of the price the FDIC gets for the assets they sell outright and also through the specific arrangements in the loss-share agreement.
It may be that this will be cheaper than setting up a new RTC, but given the climate in DC politically, I think Bair views trying to set up a new agency for failed banks as a political non-starter. Between the various Wall Street bailouts, the AIG mess, the deals with Detroit, arguments about government’s role in health care and health insurance, etc., Bair does not want to caught up in arguments about a giant growth of government.
I can’t help thinking that this is a drop of water in the ocean kind of deal. A Deutsche Bank report estimates that 48% of real estate mortgages will be underwater by 2011.
And Ruth Calvo, the mortgagee still has the full burden of the loan under the FDIC program. The burden is briefly delayed is all.
If we could see the banks’ books and evaluated their assets at mark to market prices, the whole financial sector would, almost without exception, be exposed as bankrupt. This is what has struck me as surreal about the whole process. All the banks are insolvent but one class of bankrupt banks is being allowed or forced to take over another.
Maybe so, but if Bair can get banks to toss their resistance to ANY kind of mortgage modifications out the window, it might encourage them to support addressing the larger problems of the crazy loans in their portfolios.
Putting off an insupportable burden until the borrower can potentially come up with a financial arrangement is relief for the borrower. In this economy, it may be just putting off failure, but at least better in the face of bankruptcy – that is a burden to both borrower and lender. And as I said, yes, cramdown would be better.
It strikes me that the loss-share agreements are a step toward sanity in that regard, as they recognize the gap between the market prices and the book prices. “Let’s unwind this piece of the mess together, and share the cost of cleaning up the books.”
Yes, it’s a small step — but it IS a step.
The only solution that I can see is for inflation that is thru an increase in wages for the working class.
Peterr, except we don’t know how the crap is being apportioned. I suspect that the FDIC will end up with most of it.
Wouldn’t this then be a call on the guarantees that the FDIC has out there and result in the FDIC’s insolvency?
Very true. Roubini was making an observation earlier to this effect on WSJReport, that we have to continue deficit spending and stimulus efforts, letting up now would precipitate a rapid descent into that double dip recession so many are dreading.
And as Peterr points out, loss sharing would be a great step in the direction of reviving our consumer economy.
Well yes, the FDIC is leveraging these buyouts this way and could be caught up short in the future just as we have seen other leveraged schemes do so.
The banks are keeping a large number of their foreclosed homes off the market; it’s being called the “shadow market”. Banks are hoping that keeping a large number of homes off the market will keep the price of known for-sale homes high – at least this is happening in California a lot. Option ARMs and interest-only loans are now resetting and will continue for the next 3-4 years. How long banks will claim these properties as assets at full value I don’t know.
People are not being evicted at foreclosure, sometimes spending a year or two in the homes, leaving them responsible for upkeep and taxes, so it pays for the bank to do this. Also, it might be the reason that bank vice president moved into the fancy palace in Malibu – free digs courtesy of the lender who just wants the place kept up.
“and have a reasonable likelihood of getting a new one in six months,”——this is really hope without any basis in reality. the probabilities are VERY high that if such persons do get a job it won’t be at the compensation levels they used to have.
Appreciate the post and encourage you to keep posting but this “if Bair can get banks to toss their resistance to ANY kind of mortgage modifications out the window” is truly not cognizant of the greed that runs these institutions.
Hugh is ABSOLUTELY correct in stating “If we could see the banks’ books and evaluated their assets at mark to market prices, the whole financial sector would, almost without exception, be exposed as bankrupt.” AND meanwhile the perpetuators of the fraud that has occurred are escaping justice.
BTW Peterr, thanks for the unofficial list of troubled banks.
They don’t need a job that compensates them at their former level, only one that compensates them at a level high enough to sustain their mortgage. If they were in a traditional mortgage, they’ve got a better chance of that happening than if they were in a “let’s play the numbers to get more house than we can reasonably afford” mortgage.
As for greed, I’m well aware of how the system works — I’ve got a degree in economics to go with my theology degrees. I went to school with some of these folks, and know precisely what motivates them.
And so does Sheila Bair.
That press release doesn’t say “Gosh, let’s all help out the poor suffering homeowners.” It says “You’re in this for the money? Fine — but let’s review the facts: foreclosures are more costly to you in the long run than revising mortgages would be.” She appeals to their greed (or as they would prefer to say, “their trust in the market forces”), and dares them to run the numbers.
If they try this, and come to see that she’s right — they do make more money by reworking the loans rather than paying the lawyers, the court costs, the sheriffs, the county clerks, the real estate listing agents, and everyone else who gets a slice of the foreclosure pie — they might be more amenable to trying the same thing with people who have “exotic” mortgage instruments.
Foreclosures aren’t cheap, and she’s trying to remind them of that — for everyone’s sake.
I know people who refinanced to keep their heads above water, because they had good jobs that went away – the first time in Bush41’s recession, then again in Bush43’s. They were doing okay until the market went poof; now, like a lot of people, their house is worth about 2/3 of what the mortgage is for. (The house next door to them is for sale/rent. The price on that started at 569k, last I checked it was 529k, and the previous sale was at 488k. It’s not a repo; they’re getting out because of other problems.)
There aren’t the good jobs out there, if you’re middle-aged and already highly skilled. Companies will hire some people as managers, but mostly they don’t want people who have much experience. especially if you’re in a technical field, like computers, they want young and cheap.
This might also be of interest:
An interview with Phil Angelides.
Thanks for the comprehensive wrap-up, Peterr. Maybe the FDIC will have more success than anyone else so far has had in convincing the banks, at least, that since they’re going to have to take some losses it might as well be sooner, and shared, rather than later.
On related fronts, I see that Rep. Waters’ HFS Subcommittee on Housing and Community Opportunity had a hearing this past week to find out what the hold-up on mods under the Making Home Affordable Program has been. Seems that six months into the program, only 15% of the 2.7MM eligible have been assisted.
At that hearing* HFS chairman Barney Frank expressed an interest in reviving attempts to restore the mortgage cramdown option to bankruptcy law.
It is paralyzingly obvious that the cramdown is the only way to give the borrower a little leverage in the process, albeit costly leverage in that they’d have to declare bankruptcy. Therefore, of course, banks or other holders of the loan asset would then be forced to recognize a loss immediately, which is all you need to know about what the obstacle has been, against all common sense.
[rummage, rummage] Ah yes: Here’s a recent post from CR on the subject, which is evidently one of the places where I saw mention of the possible return of cramdowns. There is also a link to an excellent article on the subject from CR’s late blogging partner Tanta, who was a mortgage industry pro.
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* I thought it was a different story, just found out in checking it that Frank’s remark was made at the hearing.
Who is buying all these banks? I worry that in the bigger picture we may wind up with a massive consolidation of bank ownership into a very small number of hands — Chase, BofA, Wells?