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10-06-06, 09:23 AM
Regulator Warns Of Lending Risk In Property Sector (Registration Required) (http://online.wsj.com/article/SB116009427692284427.html)
October 6, 2006 (DAMIAN PALETTA - Wall Street Journal)

A federal banking regulator sounded warnings about potential problems ahead with commercial real-estate loans and subprime adjustable-rate mortgages.

The Federal Deposit Insurance Corp., in its quarterly state-profile analysis, said the concentration of commercial real-estate loans has reached "historic highs." Regulators, including the FDIC and Federal Reserve, have struggled to warn small lenders in particular against becoming overexposed in this sector, requesting higher capital protections and stricter internal controls for banks with large commercial real-estate portfolios.

Also, the FDIC said analysts in its San Francisco and New York regions have reported "deterioration in the performance" of subprime ARMs compared with fixed-rate mortgages. This trend "may reflect 'payment shock' for some adjustable-rate borrowers," the FDIC said.

Subprime mortgages carry greater risk to the borrower because they usually are given to those with lower credit scores and less means to pay off the debt. Adjustable-rate mortgages generally start out with a relatively low interest rate, but that rate can increase after a few years, while the interest rate remains the same for the life of a fixed-rate mortgage.

Regulators have grappled with ways to deal with the expansion of both commercial real-estate loans and subprime ARMs for at least a year.

In January, regulators proposed guidelines warning small lenders against bulking up on commercial real-estate loans. These types of loans are popular with community banks, which have found success competing in this sector against their larger rivals.

According to the proposal, if a bank's commercial real-estate loans equaled 300% or more of its capital, it would be considered highly concentrated. Regulators said banks with high concentrations of these loans might have to increase their capital protections and add risk-monitoring systems.

The new FDIC data showed concentrations of these loans increased in every sector of the country from June 30, 2005, to June 30, 2006. In 11 states, the average concentration was more than 300%. In Arizona, the average concentration was 511%.

More of these loans were considered more than 30 days past due. In June 2005, 0.43% of these loans were past due. By June 30, 2006, that number had increased to 0.48%. In Alaska, 2.03% of the commercial real-estate loans were at least 30 days past due.

Despite warnings from regulators, the guidelines triggered almost unanimous objections from the lending industry. More than 1,000 banks publicly objected to the proposal, and Congress also has said the guidelines are too strict.

Because the proposals have become controversial, they are being reworked among several banking agencies. Industry experts expect some version of the guidelines will eventually become permanent.

AntiSpin: Who needs bank regulation when banks have US tax payers to bail them out? Hundreds of real estate appraisers (http://www.appraiserspetition.com/)–soldiers on the front lines of the housing bubble–see another S&L crisis on the horizon, except involving more and larger banking institutions.

Of course Congress says the guidelines are too strict. These loans, while risky, are very profitable, until the day borrowers stop paying them off.

According to Wikipedia, "The ultimate cost of the S&L crisis is estimated to have totaled around USD$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government, which contributed to the large budget deficits (http://en.wikipedia.org/wiki/Budget_deficit) of the early 1990s (http://en.wikipedia.org/wiki/1990s). The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990 (http://en.wikipedia.org/wiki/1990)-1991 economic recession."

The government formed the Reconstruction Finance Corporation (http://en.wikipedia.org/wiki/Reconstruction_Finance_Corporation) in 1932 after the US banking system collapsed following the bursting of the bank-leveraged stock market bubble and the Resolution Trust Corporation (http://en.wikipedia.org/wiki/Resolution_Trust_Corporation), formed in 1989 after the S&L collapse. We propose that the Bush administration get ahead of the inevitable failure of many US banks, large and small, as this massive and idiotic housing bubble ends, and charter the Greenspan Bubbles Reconstruction Trust Corporation (http://www.itulip.com/bankrupt.htm).