Subprime Fallout: 11th Bank Closed, Feds Take Over Fannie Mae and Freddie Mac

Industry Experts Urge Continued Focus on Risk Management, Security Practices It was a busy weekend for bank regulators, with the FDIC closing a bank in Nevada on Friday evening and the Treasury's takeover of mortgage giants Fannie Mae and Freddie Mac on Sunday morning. Both events are symptomatic of the country's troubled economy, as well as signal flares to other financial services entities to stay focused on sound risk management and compliance programs.

On Friday evening, the FDIC announced it had closed Silver State Bank in Henderson, Nevada. Silver State Bank was acquired by Nevada State Bank, Las Vegas, Nevada. Silver State Bank had $2.0 billion and total deposits of $1.7 billion. It is the 11th FDIC-insured institution to close this year. Silver State Bank also had approximately $700 million in brokered deposits that are not part of the purchase by Nevada State Bank. The FDIC will pay the brokers directly for the amount of their insured funds.

Then on Sunday morning the Treasury announced it was taking over mortgage giants Fannie Mae and Freddie Mac. This event was precipitated by last summer's subprime mortgage meltdown and massive losses by mortgage banks, as a record 1.2 million homes foreclosed. Earlier this summer, the federal government created a new regulatory agency to oversee the two - the Federal Housing Finance Agency (FHFA). After a month of overseeing the two mortgage giants, the federal regulators moved to take over the two, as described by Federal Reserve Board Chairman Ben Bernanke. "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Bernanke says. "I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty." (See Full Statement by Henry Paulson)

On Sunday, the federal banking agencies (FRB, FDIC, OCC and OTS) announced they have been assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. Saying they believe that many institutions hold common or preferred shares of these two government sponsored enterprises (GSEs), only a limited number of smaller institutions have holdings that are significant compared to their capital. The agencies say they will be working with those institutions to develop capital-restoration plans along the lines of capital regulations and to quickly take corrective action.

Tower Group mortgage industry experts Craig Focardi and David Hamermesh see the takeover as a positive and expect the conservatorship status will help "shore up" many concerns around the liquidity of GSE-backed lending.

While policy decision on the future form and shape these two GSEs take will most probably be made by the next President and Congress, Focardi and Hamermesh see the starting point laid out in the feds' plan leaves open the possibility of a break-up of each GSE into a handful of distinct entities.

The Tower Group experts believe that the GSEs must quickly work to develop risk management systems and controls in order to resume operating their business independently in the future.

Fannie Mae and Freddie Mac's return to stability is dependent on improvement of their credit, market and operational risk management systems. With the U.S. lagging behind Europe in adoption of the Basel II international banking standard, Focardi and Hamermesh believe recent issues may have been avoided had these systems been in place.

"While all the focus has been on the investment banking activities of Fannie and Freddie, they have historically had a huge impact on the mortgage industry through their investments in underwriting and portfolio management technology and their strong influence on technical standards," say Focardi and Hamermesh. "If it is determined that IT and IT standards development is not a core GSE function, there will be an opportunity for existing technology providers to expand the scope of their offerings by acquiring the technology assets of the GSEs."

See Also: Bank, Credit Union Failures: The Most Since 2002

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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