Hazardous Lending and Lax Collection Practices

One of Minnesota's largest and oldest community banks, Forest Lake's Mainstreet Bank gets FDIC order to change.

Mainstreet Bank of Forest Lake, one of Minnesota's largest and oldest community banks, has received a cease-and-desist order from the Federal Deposit Insurance Corp., alleging "hazardous lending and lax collection practices."

My Comment: If hazardous lending and lax collection practices are grounds for cease and desist orders, then about 1000 notices ought to be flying out of FDIC headquarters right now, starting with Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), and even some newly created bank holding companies like GMAC.

Like many community banks, Mainstreet is getting stung by loans it made to developers and builders during the real estate boom, when property prices were going nowhere but up. Now, those loans are souring at an alarming rate, and banks that hold the loans are being ordered by state and federal regulators to clean up their lending practices.

The FDIC claims Mainstreet operated with policies and practices that "jeopardize the safety of its deposits." The 105-year-old bank, which has nine branches in the Twin Cities area, operated with an excessive level of delinquent loans and did not keep an adequate allowance for loan and lease losses, according to a 23-page order, issued Dec. 12 and made public Friday.

My Comment: The whole freaking system is insolvent. There is nothing special about Mainstreet. What is special is the perhaps 10-20% of the banks that did nothing stupid but are being punished for it. FDIC insurance has CD money flowing to the crappiest of crappy banks.

One way to tell if a bank is crappy is to look at the CD rate. If it is way above normal, then assume it is involved in way above normal risk.

Out of commercial real estate

A Mainstreet spokeswoman said Friday that the bank is moving quickly to address the FDIC's concerns. It has temporarily stopped making loans to real estate developers, and will focus instead on consumer and business loans.

"It's back to our core, which is community banking," said Karen Greisinger, chief marketing officer. "All of our products are still in place. We're still making loans. But we're just moving away from that segment -- commercial real estate."

My Comment: Now there's a fantastic plan. Mainstreet made hazardous loans on commercial real estate and now wants to return to its core business of making hazardous loans to consumers smack in the face of a soaring unemployment rate.

In Minnesota, the delinquency rate on commercial mortgages and construction loans made by state banks rose 84 percent in the third quarter of 2008 from the same quarter a year earlier, according to Foresight Analytics, a California real estate research firm.

"It was the residential housing market that burst first," said Jennifer Thompson, a financial analyst with Portales Partners. "But all these home builders borrowed from someone, and those loans are starting to crack, too."

As of Sept. 30, an alarming 37 percent of the bank's construction and land loans were more than 30 days past due -- nearly four times the national average, according to Foresight.

About 100 Minnesota banks have more than four times their total capital in commercial real estate -- a level at which heightened scrutiny from examiners may be warranted, according to the FDIC.

Let's translate that last sentence so that it reads properly: "As many as 100 Minnesota banks may be doomed to fail having engaged in hazardous lending and lax collection practices centered around commercial real estate".

A tsunami of commercial real estate failures is coming. And when it comes to "lax collection practices", you either have the money or you don't. All the debt collectors in the universe cannot squeeze blood out a bankrupt turnip.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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