FDIC Ramping Up Loan Sales as More Banks Fail

The Federal Deposit Insurance Corporation (FDIC) has stepped up its sales of loans as it closes more failed banks and prepares for further failures.

The agency closed four more banks last weekend, bringing this year’s total to 69, a pace well ahead of the 140 total bank failures in 2009.

According to FDIC statistics, the agency sold $5.7 billion in loans in 2009, the highest level since 1993, and more than three times the $1.6 billion sold in 2008. The 2007 total was a relatively paltry $449 million. Of the $5.7 billion in loan sales in 2009, $2.2 billion were non-performing loans (44,132 total accounts). And this year’s total is expected to surpass that of 2009.

The FDIC sold more than $51 million in loans in March, according to the latest government statistics. Loans closed in April are not yet available. Nearly $9.4 million of that was sold to U.S. Acquisition LLC of Aurora, Colo.

The loans were a mixture of performing, non-performing, commercial, installment and other debt, had a book value of more than $114.7 million. By comparison, in February, the FDIC sold nearly $50.4 million in loans that had an original book value of just over $120 million. Beal Bank, Dallas, a subsidiary of Beal Bank Nevada, purchased more than $14.4 million, all of it performing commercial loans.

Even most of the performing loans for both months sold for prices below book value. Non-performing loans sold for much less, one sale going for as little as 6 cents on the dollar, and several between 20 and 33 cents on the dollar.

The FDIC is serving much the same capacity in the resolution of non-performing consumer loans as the Resolution Trust Corporation (RTC) did with the disposition of the assets of failed thrifts in the early 1990s.

However, the RTC was established once most of the thrifts had failed and was there to resolve the remains. This is what initially established the modern debt purchasing business because the amount of debt that RTC sold dwarfed the other outstanding debt at the time.

By contrast, the FDIC’s recent actions come with the debt purchasing industry already well established and methods in place to attempt to handle much of the additional debt. For that reason, the vast majority of debt sold by the FDIC in 2009 was commercial debt, since non-performing consumer debt has an established and mature market.

But, unlike the establishment of the RTC, the FDIC’s debt sales are coming at a time when many are forecasting that the brunt of bank failures is still in the future. Some forecasters have predicted that several hundred more banks could fail before the end of the current onslaught of trouble.