FDIC Seizes Three Banks, Expanding Its Mortgage Modification Program

By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, November 22, 2008

Federal regulators seized three banks last night, including Downey Savings and Loan Association, a large California mortgage lender, expanding what is by far the most expensive crop of bank failures in modern American history and indicating that the pace of failures is increasing.

The Federal Deposit Insurance Corp., which took control of the banks, said holders of about $1.9 billion in Downey mortgage loans who have fallen behind on their payments would now be eligible for reduced monthly payments to help them avoid foreclosure. The unprecedented move in connection with a bank failure expands the agency's controversial loan-modification program, which is opposed by other parts of the Bush administration.

Downey, with $12.8 billion in assets, is the third-largest bank to fail this year, after Washington Mutual and IndyMac Bancorp. All three institutions were large mortgage lenders focused on the California market and regulated by the Office of Thrift Supervision.

The failure was not a surprise. The company said in a securities filing last week that it expected to be seized by regulators, a highly unusual confession that underscored its desperate straits. Downey was a leading originator of alternative loans called option adjustable-rate mortgages, which work like credit cards, allowing borrowers to pay less than the full amount due each month. As with credit cards, many people borrowed more than they could afford, and default rates on the loans have soared.

Another bank seized last night, PFF Bank and Trust, is also a California thrift, with $3.7 billion in assets. Its bad loans were made mostly to residential developers.

The FDIC sold both companies to U.S. Bancorp of Minnesota. The company agreed to absorb up to $1.6 billion in loan losses. The FDIC will absorb any additional losses. In exchange, U.S. Bancorp gets about 200 branches in prime California markets, expanding its presence in the state by about 60 percent.

U.S. Bancorp also agreed as a condition of the deal to offer loan modifications to Downey and PFF customers under an FDIC formula.

The deal marks the latest creative expansion by FDIC Chairman Sheila C. Bair of a program she has championed to offer loan modifications on standardized terms to as many borrowers as possible. Bair introduced the program for borrowers at IndyMac, which the FDIC still controls after seizing it in July.

The Bush administration has turned aside her requests to fund the program nationally, but Bair has found a new way to extend her program's reach. The FDIC could not immediately say how many borrowers might be eligible for modifications.

The third failed bank, Community Bank of Loganville, Ga., was immediately sold to the Bank of Essex in Tappahannock, Va.

The pace of bank failures is accelerating. Regulators have closed 22 banks this year, including 12 in the past three months and five in November.

The FDIC guarantees the first $250,000 in each bank account. To make good on that pledge it collects insurance premiums from every U.S. bank. The agency projects that it will spend $2.3 billion on the three failures yesterday and almost $15 billion on the failures so far this year, more than twice the total in any previous year.

The agency said last month that it would raise the premiums banks must pay, increasing costs for an industry that is eager to hold on to its money.

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