Mortgage News: One Less Lender, One More Headache

It’s hard to imagine that a bank with 346 branches would go belly up, but that’s what happened Friday when the Colonial Bank of Montgomery, Alabama, was closed by the State Banking Department.

With the speed of light, or at least the speed of an online transfer, Colonial was then taken over by the Federal Deposit Insurance Corporation (FDIC) which in turn sold much of Colonial to Branch Banking and Trust (BB&T) of Winston-Salem, North Carolina.

Colonial Bank had branches in Alabama, Florida, Georgia, Nevada and Texas and therein lies the problem: Lots of foreclosures in the troubled states of Florida and Nevada mean that lots of loans in those states are in trouble, especially loans to developers and builders — the very folks in a lot of trouble.

Here’s the question of the day: Did it not occur to anyone that the building and pricing growth seen during the few years until 2007 could not continue?

The FDIC expects to lose at least $2.8 billion on this deal. That money comes from premiums paid by national banks, a cost which is now likely to rise. The unfairness here is that most community banks didn’t make option ARMs, did not accept loans without fully documented applications and did not diddle around with derivatives. These small banks are getting screwed because a number of large banks acted imprudently, banks that might not exist today were they not bailed out by Uncle Sam. And your tax dollars.

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