Bailout money for local banks; Defaulting on modified loans

KPCC's business analyst Mark Lacter takes a look at whether local banks really need the federal bailout money. Mark also discusses a study showing a majority of people who had their loans modified ended up re-defaulting within six months.

Steve Julian: On Tuesdays we talk with business analyst Mark Lacter about some of the top business stories in the Southland.

Mark, after this year's debacle with IndyMac, Downey Savings, Pomona First Federal, and Washington Mutual, so many banks are left standing I'm wondering, do local banks really need the federal bailout money?

Mark Lacter: It's a very good question, Steve, but we're not getting very good answers. Frankly, we're getting practically no answers. You know, much of the money and attention on this bailout has focused on the huge banks – Bank of America, Wells Fargo, and so forth – but there also are also a half dozen or so financial institutions in the L.A. area receiving funds from the Treasury Department as part of that big bailout.

So you have City National Bank getting almost 400 million, East West Bank in Pasadena's received 316 million – and then there's a number of smaller banks: Nara Bank, Broadway Financial, and Center Financial. Little indication of how the money's gonna be spent.

Julian: What are bank officials saying?

Lacter: Well, the CEO of East West Bank said the money will be used "to better serve the communities we are located in and our customers." So how's that for clarity? You might recall that one of the main objectives of the money was to encourage more residential lending, but several of the institutions on the list are really focused more on business loans.

One big reason banks have been asking for the money – even if they don't really need it – is that it provides them with a kind of vote of confidence by the government. Otherwise, depositors might get nervous if the government hasn't written a check and take their business elsewhere. So that alone could cause a bank failure.

Julian: But what are banks going to do with the bailout money? Aren't they supposed to turn around and loan it?

Lacter: (laughs) Well, yeah, but for now, they're mostly socking it away. They want to make sure that if the economy gets worse, they'll be in a better position to ride out the storm.

The presumption is that once banks feel comfortable about their balance sheets, then they're start lending again. But that's not going to happen for many more months. And by the way, Steve, there are very few strings attached as to how this money is to be spent, and virtually no oversight.

Julian: For weeks now, Mark, we've been hearing about the need to help homeowners who were slammed by the mortgage meltdown. Are all of them capable of being helped?

Lacter: Short answer – no. What we're starting to learn is that many of these mortgages are really beyond saving. There's a new study out this morning, shows that 53 percent of the folks who had their loans modified to make the payments more affordable wound up re-defaulting within six months.

And that's pretty much what I found in an article I wrote in Los Angeles magazine. When assigning blame, you can mention the banks, the mortgage brokers, the regulators, but let's also not forget some of the borrowers themselves. I found that some of them were unaware or unwilling to consider their financial situation.

Julian: Ignorance or naivete?

Lacter: A bit of both. It was common for mortgage applicants to say they made way more money than they did – of course, the more money you say you make, the more house you're able to cover in a mortgage.

But a loan officer I interviewed said that seven out of 10 homeowners he sees cannot be helped – that is, they wouldn't be able to afford a loan even if it's adjusted downward. So the reality is that some people, you know, just should not own a house.

Julian: And for lenders to try modifying these shaky loans?

Lacter: Well, it's like doubling down on a bad bet. If you're not careful, all the loan modification will do is really delay the inevitable by extending the foreclosure process through the next few years. It leads to more empty houses, which lowers the worth of nearby real estate, and results in additional foreclosures, so I'm not sure that's the answer either.

Julian: We'll explore it further this afternoon with "Patt Morrison" at 1 o'clock here on 89.3 KPCC. Mark, thanks so much.

Lacter: Thanks, Steve.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes a business blog at LAObserved.com.