Bank Failures Surge to 77

By
Real Estate Broker/Owner

Colonial Bank became the biggest bank failure this year, the 6th biggest of all time, and the largest since Washington Mutual, as the FDIC took over the company on Friday, according to an article written by Alison Vekshin, David Mildenberg and Dakin Campbell in Bloomberg.com

Additionally, four more banks were taken over this weekend, bringing the total this year to 77.

This is more than triple the number of bank failures that we saw in 2008 when there were only 25, and we still have over four months left to the year.

The reason why the number of bank failures are escalating is because of the number of non-performing assets on their balance sheets are exploding.  With all of the talk about a housing bottom, what continues to be overlooked is that the number of loan defaults are rising, and they are rising at a greater pace than the demand for real estate is.

And these losses are not just isolated to smaller community banks, both Bank of America and Wells Fargo have been hit by massive surges in the amount of non-performing loans during their recent quarterly earnings reports.  Wells Fargo showed a 45% increase in non-performing assets when compared to the first quarter.  Bank of America's non-performing assets jumped 21% from the first quarter.   

Additionally, according to RealtyTrac, foreclosure filings set a new record in July as they rose 32% from the previous year.

The banking crisis is ongoing to do falling values in both residential and commercial real estate.  In the absence of strong demand for these assets, values will continue to fall for the next two to three years putting even more pressure on the banking system and broader economy. 

Comments (4)

Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

I would expect if this trend continues that the regulators will change the "leverage" requirements of the banks.  The percentage of cash to debt is already at an all time low. 

That seems to me to be the only to avoid continued bank failures.

Aug 16, 2009 01:38 AM
Mark MacKenzie
Phoenix, AZ

Lenn:  Good point.  I am not opposed to that, but I would think if they do that it will remove liquidity from the market place, further complicating an economic recovery.  A very fine line that needs to be walked with the banks.  I still contend that we need to rebuild the banks balance sheets from the ground up with more demand from qualified buyers with in excess of 20% down-payments.  Reforming or repealing the TRA of 1986 as it pertains to investment real estate passive loss and income limitations would be one way to approach this.

Aug 16, 2009 01:54 AM
Jim Crawford
Maximum One Executive REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

I think liquidity and credit are going to take a vacation for a while.  The only credit will be at the hands of the government.

Aug 16, 2009 02:32 AM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Mark - Most community banks are struggling to remain afloat.  The number of banks that have already been issued "cease and desist" orders is astounding; and many of them will fail.

Aug 16, 2009 02:37 AM