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FDIC spurs banks to shore up collateral

By Nick Budnick

The Portland Tribune, Oct 2, 2008, Updated Oct 30, 2009 (1 Reader comment)

L.E. BASKOW / TRIBUNE PHOTO

Since losing his job last month, Ashley Offensend is cooking more at home using produce harvested from his garden. “I definitely feel like I’m living the reality of the bigger picture,” the landscape architect says.

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Not until the day before payroll, on Aug. 19, did Ashley Offensend of Northeast Portland learn that there would be no payroll.

Instead, Offensend and about 30 co-workers learned that their Portland-area development and consulting company, Alpha Community Development, was closing its doors, leaving them with no paycheck and their health insurance expiring at the end of September.

Now collecting unemployment, Offensend has gained a new appreciation for banking rules – as well as an up-close-and-personal view of the credit crisis that continues to envelop the nation.

In the case of Alpha, an engineering and land development firm based in Beaverton, Offensend says the firm’s local bank “got in between our company’s coffers and the employees.” And more recently, his personal bank, Washington Mutual, was seized and resold by the Federal Deposit Insurance Corp.

“I never thought we would need the FDIC,” Offensend says. “It was just like this big office up in the sky.”

Indeed, the fate of Offensend and people like him has Democratic U.S. Sen. Ron Wyden and others looking to the FDIC and asking the agency to cut banks a little slack.

The goal is not to help larger institutions like Washington Mutual, but the small community and regional banks like the one that handled payroll for Alpha. Those banks’ lending supports a large portion of the housing industry as well as other smaller industries.

Wyden sends letter to FDIC

Citing the danger to small banks, Wyden sent FDIC Chairman Sheila Bair a letter last month urging the agency to be more flexible in its new requirements on increased collateral to back loans. Those requirements, Wyden believes, are needlessly hurting banks, thus “contributing to a further downward spiral in credit and housing markets.”

The concept may sound abstract, but it no longer does for Offensend. It boils down to whether companies that have borrowed money suddenly have to cough up more collateral to back their loans – meaning they have less money for paychecks.

Wyden’s letter says that in response to the economic downturn, the FDIC has directed banks to reevaluate their loans to businesses. That often means using newly updated real estate appraisals for the property as collateral – appraisals that come in much lower, thanks to the real estate downturn.

As a result, to meet FDIC rules, the banks often have to demand a large lump sum of money or property from the debtor. “The regulators are forcing banks into positions they don’t really need or want to be in,” says Jon Chandler, a lobbyist with the Oregon Home Builders Association.