Ignored Regulatory Guidelines Becoming Headline News

Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com. ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine covers over 5,000 stocks every day. A variety of newsletters and portfolios containing Suttmeier's detailed research, stock picks, and commentary can be found HERE. Suttmeier's Four in Four video can be watched on the web HERE.

October 21, 2009 – Ignored regulatory guidelines becoming Headline News Ignored regulatory guidelines are becoming Headline News. The cost of letting C&D and CRE exposures ride is now haunting the banking system. The FDIC sees more bank failures coming. The Housing Slump returns as the $8,000 first time home buyer tax credit fades into the sunset. If our banking regulators reined in C&D and CRE lending, bad loans and bank failures could have been prevented. It was April 2006 in RealMoney columns when I first made the case that community and regional banks would be vulnerable to overexposures to C&D and CRE loans. It was in the 4th quarter of 2005 when the US Treasury, Federal Reserve and FDIC first floated the idea to have regulatory guidelines to limit such exposures. In December 2006 regulatory guidelines were formalized, and have been ignored ever since. Now, commercial real estate losses are headline news. The FDIC has a huge mop-up operation in place that will close 500 to 800 banks by the time the Great Credit Crunch ends in 2011 / 2012 at the earliest. When you look at all FDICinsured banks 37.5% have overexposures to C&D and CRE loans. That’s more than 3,000 banks. I have been producing quarterly reports covering FDIC data since mid-2006, and the most recent is available at www.ValuEngine.com. Our banking regulators had the join guidelines, but did not enforce them and ignored them. The cost of waiting has depleted the FDIC Deposit Insurance Fund, and the FDIC will eventually have to tap its $500 billion temporary line of credit with the US Treasury. I now see estimates that the Deposit Insurance Fund will need up to $400 billion through 2013 to cover up to 1,000 bank failures or closures through merger. Most of the 99 bank failures year to date and 124 since the end of 2007 had overexposures to C&D and / or CRE Loans. Now the FDIC will need guidelines to modify commercial real estate loans, which will cost additional tax payer dollars. FDIC Chair Sheila Bair Projects more Bank Failures

Commercial real estate, which is the bread and butter of community banks, is deteriorating because of the weak economy. The 100th bank failure will likely come on this week’s Bank Failure Friday. The FDIC expects the pace of failures to continue through 2010. My prediction stands that 500 to 800 banks will fail. Housing Starts remain weak Housing Starts are at an annual rate of 590,000 in September, and builders are paring back in anticipation of the end of the $8,000 first time home buyer tax credit set to expire at the end of November. Housing completions declined 10.2% to a record low of 693,000 unit rate. Singlefamily starts are holding up at a 501,000 rate. The National Association of Home Builders are asking Congress to extend the $8,000 first time home owner tax credit. Several congressional leaders want to extend the tax credit despite complaints of fraud and Obama administration concerns about the costs. A cost study could be too slow to get the credits flowing again. First time home buyers, like my son who bought his home in 2009 are eligible for up to $8,000, and there was no requirement to repay the money. In buying in 2009 the credit can be applied to 2008 tax returns. After waiting three months, my son received a letter from the IRS to provide proof of purchase. The letter, dated October 2nd was received on October 16th and the IRS requires the documentation within thirty days of the date of the letter. Anyone else having IRS issues with this eight grand program? Send me your comments and questions to [email protected]. For more information on our products and services visit www.ValuEngine.com That’s today’s Four in Four. Have a great day.

Richard Suttmeier Chief Market Strategist ValuEngine.com (800) 381-5576 As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the ValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample issues of my research.

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