The Cause of Bank Failures
Several weeks ago I ran into an acquaintance of mine at the local coffee shop were he told me the bank he worked for had just announced that the FDIC had taken over and the mortgage division he worked in was completely shut down because Fannie Mae and Freddie Mac cut off their funding. This placed an additional one hundred and fifty five people on the unemployment line. To clarify, this bank was seventy six years old and had been a strong regional lender for mortgages fro decades. So I asked what did them in.
I was surprised by the answer: builders defaulting on their loans. Come to find out that one of the things that has hurt so many regional and small banks were lending to local builders in and around their communities. The economic downturn has been very hard on these guys and even though your retail residential mortgage is making ten million dollars a year, the bank can potentially take a hit of ten million form one builder! Multiply that a couple of times and you have a big problem. Why the government has not helped some of these smaller banks that lend directly into their communities is beyond me but it would stand to reason that this is just the types of banks they should be helping.