FDIC limits the banks?

Question

I recently had a real estate agent inform me that FDIC had required a bank to set the asking price for the property at the loan value and not the actual property value.

Basically the 1 acre lot andmobile home is worth right at $8,000 but they were unable to accept any offer below $17,000.

Is the FDIC getting involved in the property value floating? or is this a special case where a bank is distressed and the FDIC is exerting its influence?

Joel Owens · Answer

Jared the FDIC does play into approving a sales price in certain situations.

If the bank went under the FDIC can sell the loans to another bank in a loss share agreement or they can also sell off the distressed assets themselves.

A bank simply in trouble under regulators watch can do what they want which is different from the FDIC actually coming and taking control.

The FDIC goes by an appraisal value to set what they can take.In the loss share agreement generally they give the new bank a certain time (number of years) to work through the assets.

Each situation is different.

Jared Orme · Answer

Interesting points from both of you.

I believe Georgia is a leading state with banks going under. The reason for this is the sheer number of lone standing banks. The 80's-90's saw many investors starting banks then selling them and moving to start a whole new bank. Georgia banking laws made this a fertile ground for such.

Most of those were bought out by a couple of large banks (Bank of America and Regions).

As stated above if the FDIC did step in on this bank as it is going under then they would have the ability to regulate the asking price.  Given this happens alot in GA it is not out of the realm of plausible.

Though on the flipside I also nod my head to the fact they are unlikely to concern themselves with a mobile home and acre.

I may never know the details in the background but I thank you guys for the insight!

Dion DePaoli · Answer

Yea, I enjoy the humor that comes up around this topic.  The FDIC as a receiver of a failed bank would have authority over the assets.  If the bank has not failed and placed into the care of the FDIC then the bank has authority over the assets still.  That is not to say the FDIC is not involved with scrutinizing the banks assets and liabilities to judge the health of the bank which is the banks capacity to pay its creditors and depositors.   Without the authority of receivership, the FDIC can not direct the bank.

Now the bank may have marked the asset to a certain market price and that troubled asset report has been reviewed by FDIC examiners, but that does not give the FDIC any power to direct.  The bank might be trying to hold out for that price they marked to, which as Bill stated, might be from market feed back from the agent, but the power rests in the hands of the bank.

I have seen plenty of bank balance sheets where the mark levels are pretty unrealistic.  That is an internal function of the bank.  They mark the asset to a value they anticipate recovering.  The bank has to hold reserves against the asset and may need to raise additional capital to offset the loss.

In this case, again as Bill said, an asset worth less than $20k is not changing the world of the bank.  There are likely other assets which the bank has such as million dollar loans that the recovery at 50% to 65% that have a far greater impact on the bank's health.  Not saying they they have lost sight of the value of $1.00 but the scale of concerning economies doesn't seem to flow with this asset example.

Bill Gulley · Answer

I doubt FDIC has any real thing to do with it. The assessment of management is an overall assessment, classified loans will be a mention, not set policy. This loan is insignificant, this loan alone is nothing really, but if the bank is in trouble or classified loans are piling up, the bank will plant their feet and try harder.

I'd say that when any agent or bank loan officer says FDIC is requiring us to blah, blah, they either don't know what they are talking about or passing the buck, the relationship between a bank and FDIC is confidential and if they were to actually give out negative information they would be putting their job on the line, that's for bank employees! FDIC does not dictate loan policy, guidance yes, policy no, not until the bank is taken.  :)

Jared Orme · Answer

Exactly what I was thinking. I figured the agent did the BPO at some point and was very wrong and is covering now to the potential buyers that push back.

The other option is as you say, the FDIC created some generic policy to mitigate a distressed banks losses, and the bank is now trying to comply. I am largely unaware of this policy and cannot find reference to it.

Bill Gulley · Answer

Sounds like BS to me, that the agent probably told the bank they could get that and has to save face? FDIC does not set prices. However, there is another aspect, that links to the management of the bank as assessed by FDIC, where the bank loaned too much in the first place, but FDIC will want the losses limited. At this amount it's like a bad car loan, not even significant for a bank, so I suspect it's the agent saving face for the listing....  :)