Peter Pays Paul

The problems with commercial real estate do not appear to be over. See TARP Panel Says Smaller Banks May Need Fresh Capital Update1 – Bloomberg.com

Smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans still on their books, the Congressional Oversight Panel said today in a monthly report.

The weakness of smaller banks is evident in the number of banks that have been closed by the FDIC. That’s not to say that only small banks are being affected. Corus Bank seems posed for an eminent FDIC takeover.

Mish details the woes of some of Georgia’s banks in Zombie Subdivisions and “Pig In The Python” Shadow Inventory.

The Atlanta Journal Constitution is reporting fire-sale prices on some lots have dipped to 20 to 30 cents on the dollar as the Volume of ’subdivision’ vacant lots overwhelms banks.

You think it’s hard selling a house these days? Try unloading a subdivision. And not just any subdivision, but one with few if any completed homes and a weedy patch where the swim-and-tennis center was planned.

That’s the reality many Georgia banks find themselves in amid a foreclosure crisis that has claimed not only individual homes but also entire failed developments.

Real estate investors are seeing their equity erode. This is causing some of them to threaten/warn of imminent default. And we may continue to see more of these defaults as time goes on.

Phoenix From the Ashes?

The Dirt Lawyer may have identified the silver lining in all of this where he writes:

While I agree we are waiting for some properties to “die,” in a sense, I take a more phoenix-like perspective to the whole thing. After all, the property is reborn by its transfer to a new owner. So I like to think of this as the bottom of an evolutionary cycle, after which a lender dumps the property to a new buyer on the cheap or holds it for a while. As I keep saying, however, the problem, at least for many prospective buyers, will be finding money, because traditional lenders are not lending much and the CMBS market — well, we’ll see when or if that phoenix arises.

WASHINGTON Reuters – The number of problem U.S. banks and thrifts jumped in the third quarter to 171, from 117 at the end of the prior quarter, marking the highest level since the end of 1995 and adding to expectations that more banks will fail, regulators said on Tuesday.

It looks like we are not out of the rough yet.

U.S. problem banks rise to 171 at end of third quarter: FDIC: Financial News – Yahoo Finance.

The FDIC has leased 200,000 square feet of space in Irvine. I wonder if this is a sign of things to come or just a coincidence?

FDIC to open temporary office in Irvine – Los Angeles Times.

(HT: Calculated Risk)

The Wall Street Journal has another article on an East Bay town this week.

Antioch, California is the focus of an article by the Journal regarding IndyMac Federal Bank’s (formerly IndyMac Bancorp) efforts to stem the tide of foreclosures.

FDIC Plan Tests Limits of Leniency – WSJ.com.

The FDIC is taking steps to modify as many delinquent loans as possible. There are some complications with the process, including loans that IndyMac Federal Bank only provides the servicing for.

IndyMac sold many of the loans it made to various investors. IndyMac still services the loan by collecting payments, keeping track of interest owed, and filing the necessary tax forms. IndyMac is limited in its ability to negotiate with the borrower because it is no longer the lender, the investor that bought the loan is now owed.

I also liked the WSJ’s efforts to give an accurate description of those that had borrowed money from IndyMac. Some used loan proceeds to buy other houses. Others have stopped paying and have “socked away money he saved by not paying IndyMac” and stored it in a safe.

Not all delinquent borrowers are “down on their luck”.