Main Street Banks Victims of Bad Mortgages, Loans and Investments

Main Street banks are gasping being victims of bad mortgages, loans and investments. Till now 52 have closed down this year and there are fears that more will collapse. One of the primary causes for this debacle has been loan advances to risky parties and dangerous funding methods. Using “hot money” to make loans has turned out to be a curse.

This hot money otherwise known as brokered money came from entities that wanted to park their funds and get above normal returns. Banks became hungry for this money to advance more loans but depending on it became risky and expensive as well as volatile. Brokers rapidly shifted funds from one bank to another, hunting for the best returns. It all laid to chaos and catastrophe in the financial sector.

The regulators seized Franklin Bank of Houston in November 2008. According to reports coming in from the FDIC’s office of the Inspector General, the financial body largely relied on brokered deposits in the months just prior to its fall.

The regulators are more and more concerned about the dependence of banks upon the same type of methods by which the banks take loans from Federal Home Loan Bank system. The latter comprises of a 12 banks (government sponsored). This group was created during the time of the Great Depression to arrange for loans being given to small communities.

This practice has been gaining momentum during the last few years. Ultimately it led to the housing crash followed by bank failures. $788 billion was advanced in 2008 to all the banks and thrifts in the country. It was an increase of 45% from the levels of 2004. During the first quarter of 2009 banks have got as advances $697 billion.

It is not unusual for banks to rely on such funds but what is of concern to the regulators is that some of the lenders have become too reliant on them to operate their day to day business. An analysis on several of the failed lenders by the Office of Inspector General show that the advances have been telling negatively on the earnings of the banks.

Small bank organizations however say that the majority of the community lenders that make up 90% of 8,200 banks as well as thrifts of the country are safe and secure. They continue to be the main source of credit to the people. Some got snarled up in the web of dangerous and complicated financial tools that pulled down their bigger counterparts on Walls Street.

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