The Current Situation

The FDIC announced last Tuesday that the number of troubled banks has risen from 552 in the third quarter of 2009 to 702 for the fourth quarter and that the fund may have to cover up to $20 billion in additional losses by 2013. If the economy worsens, this number could rise. The New York Times reports that Sheila Blair, FDIC chairwoman, said Tuesday that it was unlikely the FDIC would need to tap its emergency credit line with the Treasury Department, but she would not rule the possibility out.

The number of failing banks has been rising sharply since the onset of the crisis and shows little sign of slowing down. A comparison of January and February of 2009 and 2010, shows that bank failures seem to be gaining speed, rather than subsiding. At the end of the third quarter of 2009, the FDIC was $8.2 billion in the red and has since reported another $20.9 billion in losses. The number of troubled institutions rising does not bode well for the prospects of improvement.

Trouble Looms Ahead

At the root of the bank failures since the crisis began has been the troubled residential mortgage market, starting with sub-prime mortgages and spreading to the rest of the market. According to the Washington Post, The FDIC is currently testing a program that would reduce principal for distressed borrowers who owe significantly more than their homes are worth. The article portrays the program as one to help borrowers stay in their homes, but the benefit of not adding the foreclosed property to the FDIC balance sheet cannot be overlooked.

Even so, an even bigger problem lies ahead. Commercial mortgages, unlike residential mortgages which typically run 30 years, generally come due in five years. At the end of the term the balance due is usually refinanced by the mortgage holders. Over the next three years, those commercial mortgages which were purchased at the height of the boom will be due for refinancing. Currently, residential mortgages with negative equity represent around 24% of the market. Commercial mortgages with negative equity represent around 50% of the market. This can only mean more trouble for the banks that hold those mortgages.

Insolvent

In the third quarter of 2009, the FDIC officially ran out of funds and posted a negative balance of $8.2 billion dollars. In order to keep operating funds since then they have been collecting advance fees from banks. The big question is, what will happen when these advance fees run out? Since they can’t very well collect fees from institutions that have already paid them, they will have nothing left to do but go to the Treasury to keep operating.

Carlton Smith is a Project Manager and Programmer living in Southeast Michigan. He is also the founder and Executive Editor of the web literary magazine Troubadour21.com. His blog can be found at UncleSol.net. Email Carlton at carlton@unclesol.net