Is it safe?
As financial woes grow, local and state officials say area fiscal facilities are secure
By Johna Strickland
Argus Observer
Tuesday, July 22, 2008 10:08 AM PDT
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| Joe Bennett, a teller at Malheur Federal Credit Union, calls a tube in for drive thru banking Wednesday at the Ontario branch, 1695 S.E. Fifth Ave., Ontario. The credit union also has branches in Vale and Payette. The National Credit Union Administration and the Federal Deposit Insurance Corp. insure each depositor up to $100,000 aggregate should a financial institution fail. |
Ontario — Is it safe?
That’s a fundamental question regarding bank accounts punctuated by the actions during the past few weeks where several monetary institutions — including giant IndyMac Bankcorp Inc., — were seized by the Federal Deposit Insurance Corp.
So is our money safe?
At least locally, the answer appears to be: yes.
The FDIC and the National Credit Union Administration insure all deposited monies should a financial institution close, President and Chief Executive Officer of Malheur Federal Credit Union Howard Benson said.
But most banks and credit unions in Idaho and Oregon avoided the high risk subprime loan market — which collapsed last year — and escaped serious damage. Other institutions across the nation, though, were not so fortunate.
“Our Idaho base banks did not make subprime loans. They did not make the non-traditional loans that you read about. ... (Our banks are) very well managed, conservative lenders,” Gavin Gee, director of the Idaho Department of Finance, which examines and regulates banks and credit unions in Idaho, said. “You can control the risk by what kind of loan you make.”
Most Oregon banks and credit unions also did not delve deeply into the subprime loan market, Richard Rinken, program manager for banks and trusts for the state of Oregon in the Division of Finance and Corporate Securities, said.
“That is true for Oregon, too, a few exceptions, generally not the rule (though),” Rinken said, citing construction loans as one possible area where banks stepped out on the loan limb. If a builder cannot sell a house built in speculation, he may not be able to make payments on his construction loan.
Despite downturns in the economy and failing mortgage firms, Idaho and Oregon financial institutions have a stable history.
It has been 22 years since an Idaho state-chartered bank — the First Bank & Trust of Malad — failed, Gee said.
“The bank before that was 1955,” Gee said of Idaho’s history in closing banks.
Oregon shows similar numbers, Rinken said. In 1987, a Portland-area bank failed, ending a number of Oregon bank closures in the early ’80s.
Only five U.S. banks or thrifts have failed this year, the FDIC reports on its Web site. Three failed in 2007. The Web site shows similar numbers from earlier years, except 2002, when 12 banks failed. However, 2,808 financial institutions failed in the years between 1982 to 1992, The Associated Press reported July 14.
Where trouble starts
Often loans are what pushes banks into financial trouble, forcing intervention by the FDIC or the state, Rinken said. A financial institution needs to maintain a balance between its capital monies and money expended in loans. Should a borrower default, the institution loses money.
“Typically, it’s bad loans. You know the risk business banks are making is loans,” Gee said, adding a bank can have problems when it suffers losses that exceed the capital. Idaho banks have higher capital and fewer loan losses, though, Gee said.
In the subprime loan market, institutions assumed more risk in hopes of a greater reward, Gee said.
“The upside is they can make more money,” he said. “The downside is they take more risk.”
The risk lies with the borrower. A loan applicant who has a good credit rating and a good job poses less risk than someone with bad credit or a past bankruptcy, Gee said. For many people who have these credit blemishes a high interest subprime loan with high fees may have been the only mortgage loan available.
“The people who take out subprime loans can’t qualify for another loan,” Gee said. “It’s usually because they don’t have any other choice.”
Benson said he read a story, “Confessions of a subprime lender: 3 bad loans,” posted online at CNNMoney.com July 15 about a couple who took out a subprime loan because they had poor credit and employment histories. Their combined net income was only $2,200 a month, and the mortgage payment demanded $1,500 including taxes and insurance, the story reported.
The couple never made a payment.
“How can you do that and not expect somebody to fail? You can’t keep making loans to people who don’t qualify for them,” Benson said.
Adjustable rate mortgages hurt too, Benson said, noting the loan could start at 3 percent interest then jump to 5 percent, nearly doubling the payment.
Colleen Johnson, an economics professor at Eastern Oregon University and the mayor of La Grande, said the “unscrupulous behavior of mortgage firms who put people in houses they couldn’t afford” proved to be the downfall of the market this time.
“That’s putting their balance sheet in jeopardy,” she said of financial institutions writing off loans.
While bad investments by savings and loan companies caused the downturn in the 1980s, the diminished housing market contributed this time, Johnson said.
“You had builders who thought if they continued to build, people would continue to buy,” Johnson said, adding when the housing market crashed, people who had bought too big couldn’t sell as their interest rates increased.
As foreclosures stack up across the nation, Idaho and Oregon financial institutions report lower than national percentages of defaults.
The national rate for foreclosures and mortgage delinquencies is slightly less than 6 percent. Idaho is below 4 percent, the Idaho Department of Finance shows. Oregon financial institutions have less than 2 percent of loans in “serious” delinquency, 90 days without payment, Rinken said.
Still, Benson said MFCU is seeing higher than usual delinquency percentages. Measured as no payment for 60 days, the delinquency rate of total loans is at 0.8 percent.
“That’s historically higher than usual because of what’s happening out there in the economy ... Some are making payments, but they’ve just gotten behind,” Benson said. “For us it’s usually down in the half percent area ... peerwise in the industry, it’s usually 1 to 2 percent.”
While dealing in all types of consumer lending — mortgage and automobile loans, for example — MFCU avoided subprime lending.
“Auto loans are our bread and butter. One of the differences we’ve prided ourselves on is that we haven’t gotten into the subprime lending,” Benson said of the 51-year-old credit union.
Wells Fargo banks and lending institutions in Idaho and northwest to Baker City and Spokane, Wash., also chose to miss the subprime market, Amy McDevitt, vice president and spokesperson for Wells Fargo Bank Idaho, said.
“We’ve always been committed to responsible lending,” McDevitt said, adding Wells Fargo attempts to place each customer into the most appropriate product for them. “I would say our discipline has paid off for us. We’re in a fairly good position of strength ... We’re the only U.S. bank that has the highest possible credit rating from both Moody’s Investors Service and Standard & Poor’s rating service. We also have a business model that works. We have a diverse book of business and it works ... It’s a model that’s sort of proven over time to hold up ... We’re well-situated to weather economic storms.”
Is our money safe?
It’s something like renters insurance for your money. Just as renters insurance protects your assets stored in a building, the FDIC and the National Credit Union Administration protect your money when deposited in a bank or credit union. Should the financial institution fail or federal regulators seize it, the FDIC or NCUA will write you a check. The NCUA, which has never lost insured money since its inception in 1970, usually makes payments within three days of the credit union’s closure, an NCUA brochure shows.
Since its formation in 1933, the FDIC has never lost a penny deposited into an FDIC-insured account, either, Gee and Rinken said.
“The safest place for your money is in an insured financial institution,” Gee added.
The FDIC and NCUA insure each depositor up to an aggregate amount of $100,000 and $250,000 deposited into individual retirement account, Keough and certain other retirement accounts. This lessens risk, Benson said.
“Even in putting your money in your mattress, there’s some risk, but for the most part you’re safe up to the $100,000,” Benson said.
The $100,000 limit applies to all accounts held in one name. A depositor who places $25,000 in an individual checking account, $25,000 in a joint account and $50,000 in a savings account has an insured total of $100,000. Accounts can be structured to protect more money, though, Gee said.
“We see that all the time in our bank,” Gee said, adding some people will open multiple joint accounts because each depositor is insured up to $100,000. For example, a depositor can have $100,000 in her account, $100,000 in a joint account with a spouse and $100,000 in the spouse’s account all in one bank or credit union and still be fully insured, Benson said.
“Don’t put all your eggs in one basket, ’cause if you drop your basket ...” Benson said. “Spread the risk.” Amounts into the millions can also be fully insured by spreading it between several financial institutions, Gee said.
MFCU, serving about 8,500 customers through Malheur and Payette counties, has an average savings account of $6,300, Benson said.
McDevitt was not able to supply the average account size at Wells Fargo but said the bank serves 213,000 households in Idaho, Eastern Oregon and the Spokane area.
Should a bank or credit union fall into a shaky financial status, not everyone can withdraw their money at one time, Benson said.
“They’ve got the money out there working,” Benson said. “The worst thing you can do for the institution is to go in and withdraw all your money because that just weakens it more.” To cover financial institutions in the United States the FDIC has an insurance fund of nearly $53 billion, The Associated Press reported last week, and each bank has a certain amount of capital. Idaho banks are well capitalized with fewer loan losses, Gee said, and new banks have opened in the last year. In Oregon, two new state-chartered banks have raised $10 million in capital and opened since September 2007, Rinken said.
“We have good hopes for them,” he said. “They do not have much in the way of loans on the books causing them trouble.”
If a bank does have a number of bad loans, it may have to write the cost off in what Gee calls a “charge off” at a “huge loss.”
“If they get rid of the bad loan, they have a more real picture of their true condition,” he said, noting banking is one of the heaviest regulated industries in the country. Each state-chartered bank in Idaho is examined every 18 months, and each submits a quarterly report to the department. If department examiners and regulators see a problem, they check the bank sooner and more often.
What will it take
Where does the economy go from here? Will the slow housing market and subprime loans continue to hurt financial institutions? Johnson said she doesn’t know how long or deep this period of “stagnation” will last in the American economy, but she tends to be pessimistic, thinking fundamental problems with housing and credit must be changed. Still, the downturn is rather natural.
“You have sort of a natural tendency for sort of booms and busts,” Johnson said, noting the reasons for these fluctuations vary by business cycle.
“You look at the history of any market economy, but particularly the United States, you see booms and busts.”
Sorting out these problems in the economy will take a while, Johnson said, noting write downs on loans are likely to continue, but another Great Depression is unlikely to happen.
“I don’t think that’s in the cards at all. I think we know a lot more about the economy,” Johnson said, adding more safety measures are in place to combat hard economic times than in the 1930s.
Raising commodity prices have also hurt the economy, Johnson said. When consumers need to spend more money on gas and other items, they have less to spend freely. When housing balances and consumers feel safe again, the economy will begin to recover, Johnson said.
“We’re gonna have to see the housing market stabilize. I think consumers are gonna have to feel comfortable enough with their credit position that they start to spend. We’ve got commodity prices at their highest level, I think, in over 20 years. Inflation’s a concern,” she said.
Rinken offered similar ideas. He said the “glut of unsold vacant lots” for development and speculative houses in the Northwest need to sell before construction can pick up again. Rising commodity prices could impact loan repayment as consumers have to decide between gas and food, for example, and paying the mortgage.
Nonetheless, the FDIC and NCUA will ensure deposited money remains safe.
“We’re confident that the system will work,” Rinken said.
