FDIC gearing up for bank closures

Washington Business Journal

Contributing Writer – Janet Leiser

The Federal Deposit Insurance Corp. is gearing up to handle a large number of bank failures expected as a result of bad mortgages, both in residential and commercial real estate, an economist said Tuesday.

“They know they’re going to take down a large number of banks and they can’t do it until they’re staffed up,” said Mark Dotzour, chief economist and director of research for the Real Estate Center at Texas A&M University.

 Dotzour expects federal regulators to establish an agency, similar to the Resolution Trust Corp. that disposed of assets belonging to insolvent S&Ls in the late 1980s and early 1990s.

 “Once they start to sell [foreclosed real estate], we’ll find out what the market really is,” Dotzour told attendees at an economic summit hosted by a handful of real estate groups in Tampa, Fla.

Dotzour blamed federal intervention for the lack of commercial real estate investment activity in recent months, as well as the failure of businesses to make major decisions.

 “Nobody knows what to do so they’re doing nothing,” Dotzour said at the luncheon meeting at the Intercontinental Tampa.

 Government, in its quest to help the economy, is causing harm by propping up failing companies and regularly changing rules, he said.

 “No one can predict what the government will do,” Dotzour said.

 “People are frozen. It’s not that they don’t want to invest in the future, the rules are unclear,” he said.

 He jokingly called the Federal Reserve “inksters” for routinely printing money to bail out big business, including banks that are still not making many loans.

 The government’s role in a capitalistic society, he said, “is to make the rules and get off the dance floor.”

 Businesses and individuals that can’t pay their bills should resolve their problems in bankruptcy court, not with money from the government, he said. It’s a process that has worked for decades, for generations.

 “Everyone has a lesson to learn here, including you and me,” he said. “We have to live within our means.”

 Dotzour expects foreclosure rates to continue to climb, real estate prices to fall more and cap rates to rise to at least 9 percent before leveling off.

 In 2010 and 2011, interest rates will begin to rise, as will inflation. Once investors realize the market is at bottom, deals will begin to flow again, he said.

In the meantime, he compared the bad loans that remain on banks’ books to a smelly cat litter box and the feds keep throwing more litter on top to mask the smell. But they’ll eventually have to remove the organic material to fix the problem.

Original story

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One thought on “FDIC gearing up for bank closures

  1. Well a new version of the RTC is a frightening thought. I was not in the US the last time this happened but I have heard investors talk about it. It was likened to putting the mortgage and real estate business into the hands of result driven bureaucrats who didn’t have a clue about either. The sad thing is the results were how many homes can we foreclose on and how many properties can we sell and how fast. This meant foreclosing on as many homes and commercial deals as possible without regard of the basis of the loans.

    From what I understand, if you were an investor with cash you had the picking of thousands of homes for cents on the dollar. Many famous real estate investors made a fortune at this time. If you were a home owner or an investor with a loan, then you provided those properties because you were foreclosed on. I have real estate investor friends who are very bitter about the RTC. Their large project properties were current and positively cash flowing, but they still had their loan called due.

    The sad thing is that the loan market was in the same disarray as it is now and so when the RTC called your loan due, there was no one able to finance you to save your home. Being results driven, like good investors, the RTC created a market; by agreeing to sell to foreign investors with government secured loans. So you had to watch as your life’s work and savings was sold to a foreigner for 10% of what you owed with the government loaning them the money to do so.

    So it fixed the problem, but it ended up with many having lost everything and many foreign investors. As the economy recovered the foreign investors sold their properties for dollars on the cents they paid.

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