What is the FDIC?

FDIC stands for the Federal Deposit Insurance Corporation (FDIC). The FDIC was created by the U.S. government as part of the Glass-Steagall Act of 1933 and its primary function is to provide deposit insurance for banks. Currently, all deposits with FDIC member banks are insured up to $250,000. This protects individuals and corporations from losing money if the bank that holds their money fails. Another important part of the FDIC’s duties is managing failed banks that are in receiverships. This is pertinent in this day and age because of the recent mortgage crisis that left 140 banks insolvent and up to 552 banks “in trouble.” As you know, this recent financial crisis was spurred on heavily by unsound mortgage lending practices, particularly with regard to subprime mortgages and other high risk lending instruments, such as “no income no asset loans,” and “state income stated asset” mortgages. As such, many failed and troubled banks have a vast amount of “toxic” or nonperforming (i.e. mortgages where the borrower isn’t making payments) on their books. The FDIC is currently playing an integral role in helping banks cope with these toxic mortgage assets.

The FDIC Legacy Loans Program

In 2009, the FDIC launched the Legacy Loans program in order to help banks divest themselves of toxic assets and raise new capital so they can begin lending again. According to a Bloomberg report from August 2009, about 150 publicly traded U.S. lending institutions had portfolios that consisted of more than 5 percent non-performing loans. Much of this has been attained when smaller banks failed and were absorbed - along with their toxic assets - by other banks. The FDIC is helping surviving banks handle these toxic assets by sharing in the losses. In one case, the FDIC created a separate LLC to hold toxic assets and offered accredited investors equity positions in the LLC.

Consumer Impact

The FDIC’s success or failure in helping struggling banks and managing insolvent banks has a direct impact on home-buyers and home sellers. For one, by keeping credit flowing freely and ensuring that banks have enough capital to issue loans, the FDIC helps decrease the cost of home mortgages and the availability of home loans. And, of course, the FDIC has a strong impact on your finances by protecting you from losses if a bank fails. But at the end of the day, keeping track of what the FDIC is up to is important because it will impact how banks lend and if they can lend at all. By making banking less risky for lenders, the FDIC makes getting a mortgage more affordable and more possible for consumers.