Monday, November 10, 2008

Small-town banks that shunned Fannie, Freddie do well; writer asks why Fed wants them gobbled up

"While many of the nation’s large and midsize banks are staggering under the weight of bad mortgages piled up during the housing boom ... most of the country’s smallest banks are doing well," Katie Zezima of The New York Times reports from Orwell, Vt., using the First National Bank of Orwell, above, as her object example. (Times photo by Paul O. Boisvert)

Deposits at the bank have risen 7 percent in the last year, and its lending has risen by 22.6 percent -- but with stricter rules than many larger lenders, such as a 20 percent down payment on home loans. Vice President Bryan Young told Zezima, “We’re very particular on what and who we take, and there’s no need to take anything less than solid credit.”

Jack Schultz, in his BoomtownUSA blog, takes note of the story: "The Federal Reserve wants small banks like this to go away, hoping that their [Troubled Assets Relief] Program will help to eliminate over 1,000 small banks. Bad decision! ... Returns are highest and charge-offs lowest for small banks! Why would you want to eliminate them? What are the Feds thinking? (Read more)

Zezima notes, "Of course, not all small banks have sailed through the financial crisis. Some invested heavily in Fannie Mae and Freddie Mac, the mortgage finance companies that were effectively nationalized in September, and must now write off that debt. Others, especially in places like Florida and Nevada, are having problems after making loans to contractors who cannot sell or finish homes." There is concern in some circles that the Federal Deposit Insurance Corporation’s decision to raise bank insurance to $250,000 from $100,000 could prop up problem banks that might otherwise fail or merge with other institutions." (Read more)

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