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Mortgage & Housing Market News from HSH.com
August 4th, 2011

Small banks still struggling with TARP bailout

by Peter Miller


Buying justice macroIt was back in 2008 that the Bush Administration decided to hand out as much as $700 billion to save the financial industry and the auto companies.

The Troubled Asset Relief Program (TARP) is not really in the news too much anymore, but a large chunk of cash remains outstanding, and loans to the small banking system remain a particular problem, one that could potentially impact mortgage rates and the availability of real estate financing.

The latest report from the Office of the Special Inspector General for the Troubled Asset Relief Program–SIGTARP–offers some amazing information:

First: The Treasury has been largely repaid by the biggest financial institutions. In fact, this should come as no surprise because most of them had the assets and management to avoid problems. Forcing government money on them was done merely to give cover to the lenders who were really in trouble.

Second: The community banking system is really in trouble. SIGTARP says smaller banks are not “exiting” TARP with the same speed as their larger financial cousins. At this point, almost 500 of the 700 that received TARP funds still owe money to the Treasury. To understand the importance of this figure, consider that there are nearly 7,600 lenders insured by the Federal Deposit Insurance Corporation.

Third: 188 community banks are not paying the dividends required under TARP for the money they still have outstanding.

What’s really foul about this report is that the community banks which are now in so much trouble, got there with help from the very government that created TARP.

Remember that Fannie Mae and Freddie Mac were nationalized in 2008. That means the stock in those institutions fell to just about nada.

Small banks lost big

Among the shareholders who lost money were these community banks.

That was because the government had long told them that preferred stock in Fannie Mae and Freddie Mac could be used to meet capital requirements. When Fannie Mae and Freddie Mac were taken over, the community banks lost a capital equivalent at the very time when the economy was most in trouble.

According to the Independent Community Bankers of America, small banks lost $16 billion because of the take-over. Those losses reduce the ability of small banks to make loans, to generate revenues or to pay back their TARP money.

Given the massive profits of the largest lending organizations, why should we care if a bunch of small banks go the way of the telegraph?

Small banks are important

Small banks are actually good places to do business because they’re simply local. They’re not sending $500 million to fund a building project 6,000 miles from the local high school.

They also tend to deal fairly with the public because they don’t want a home down the street to be foreclosed.

Lastly, it’s good to have choices and diversity in the marketplace and small commercial banks can often offer programs that you can’t get through a standardized financial giant with a home office on the other coast.

Their struggles=your struggles

It’s fairly plain that a lot of community banks will be unable to repay their debts to Uncle Sam. Then what? Will the government foreclose? Will it take over lots of little banks with one or two offices?

The repayment of TARP debts is going to cripple many small banks for years to come. That means less money will be available for local loans, a reality that will not lower mortgage rates or increase homeownership.

Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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