Friday, September 10, 2010

This Week in Bank Failures

The buyers of the FDIC’s mortgage portfolios — loan portfolios assembled from failed banks — tend to be real estate investors rather than financial investors. This is a sign that observers expect the failure rate of the mortgage loans to increase in the next few years. Real estate investors have an advantage over financial investors in that scenario, with more skill and experience in selling off or managing the foreclosed real estate. Of course, if more foreclosures are on the way in loans that come from failed banks, the same is likely also true for loans owned by banks that are still operating.

In the debate over how much the government can do to support the housing market, no one seems to agree on what a normal state for the housing market would look like. Some economists expect a rapid return to the conditions of the 1990s, for example, while others worry about a decade-long deleveraging process akin to Japan’s recent experience. The truth is probably not somewhere in between, but a new pattern for which there is no such handy historical reference point.

This brings up questions about what new risks banks are getting themselves into by making new home mortgages. Banks routinely make 30-year loans to support a real estate market that has been turned on its head twice in the last 20 years — crossing their fingers and hoping they’re not painting themselves into a corner with the two or three upheavals that may come along before the loans mature. This creates such uncertainty for the banking system that I believe there ought to be rules limiting any one bank’s long-term exposure to the real estate market. Currently, there are still banks that brag about having a loan portfolio that consists of more than 90 percent real estate loans, but that’s a practice that ought to be banned, not just to protect the future of the economy, but to protect the future of those specific banks.

One small bank in Florida failed tonight. State banking officials closed Horizon Bank of Bradenton, Florida, which had four branches and $165 million in deposits. The deposits and assets are being transferred to Arkansas-based Bank of the Ozarks.