April 24, 2009: Workers of the Federal Deposit Insurance Corp. arrived in the Wood River Valley and shut down the First Bank of Idaho, taking control of its deposit accounts and loans, and—most importantly for many businesses—freezing all lines of credit. Within three days, the bank reopened under new management, US Bank, which had bought only the deposit accounts.
But the dust didn't settle for business owners with loans or outstanding debt, including Karen Day, co-owner of the Salmon River Lodge near Stanley, 60 miles north of Ketchum, who had a $980,000 mortgage on the property.
She was stuck in limbo between the First Bank of Idaho and a new bank, waiting for another bank to buy her loan. And even though the FDIC cut her $2,800 line of credit, it demanded that she pay the full loan rate of $5,600 per month. She relied on that credit to cover half of her payments during the off-season.
Day said she never missed a mortgage payment with First Bank of Idaho, but without her line of credit she was now in default month after month. She applied to three other banks for financing, but to no avail.
Day paid her usual $2,800 for a few months after the bank closure in April, but stopped writing the checks in July when the FDIC refused to renegotiate more reasonable terms than $5,600 a month, according to e-mails provided by Day.
"I was just pouring money down a hole," she said.
Bryan Furlong, former bank president of First Bank of Idaho's Wood River division, said the bank understood this dynamic of the valley's season-based economy, and "tailored" payment plans to fit the tourist area's peaks and valleys.
"We made it so you weren't stuck trying to make payments in the lull of the season," he said.
He said the bank served about half the valley's businesses.
Nearly a year has passed since the bank's failure, but the dust has yet to settle for Day and many others whose loans are still under control of the FDIC, and their lines of credit frozen. As the months have rolled on, Day has fallen more and more behind. And now the debt has caked onto Day too thick for her to shake loose.
Foreclosure could be imminent.
The FDIC told Day in an e-mail early this month that with late fees, she needs to hand over $64,000 to bring the loan current, with that increasing by $208 each day. It's an insurmountable debt for Day, she said.
What's worse, the credit cut came in the spring, when area businesses were still trudging through a seasonal rut muckier than usual because of the mild, slow winter.
Furlong and three other former employees of First Bank of Idaho moved to Zions Bank in Ketchum shortly after the FDIC arrived, bringing some customers with them who weren't in as deep as Day.
Chris Klick, owner of Sheetmetal Fabrication in Ketchum, had a line of credit with First Bank of Idaho similar to Day's, using between $10,000 and $15,000 from February to May to pay his bills when work traditionally slowed.
Klick went into the bank the day it reopened as US Bank and asked the FDIC about the situation.
"What about my line of credit?" Klick said he asked. He said he was told, "'Oh, that's over.'"
Klick said he had to immediately lay off his three employees. Luckily, he didn't have any loans with First Bank of Idaho and managed to pay off his credit by using savings and a loan from Zions Bank. He's no longer stuck under the FDIC umbrella, has a line of credit with Zions and has since rehired his employees.
Gavin Gee, director of the Idaho Department of Finance, said he's received "a number of complaints" about the FDIC's handling of the First Bank of Idaho closure, mainly because of its "timing." However, he said, the FDIC is "not a lender." It's just supposed to transition the assets of a failed bank to another bank. And that's why it doesn't extend lines of credit to customers or perform loans.
Furlong argues that the timing was the only reason the FDIC had justification for shutting down the bank.
The FDIC's rationale for getting involved was that the bank had a shortage of liquid assets, or cash on hand. This issue was raised on April 14, 2009, when the bank's immediately overseeing agency, the Office of Thrift Supervision, ordered the bank to bring its liquid-asset value up to 12 percent of its loans. At the time, the bank reported having 10 percent cash on hand and needed $10 million to reach its target. The Office of Thrift Supervision gave the bank until June 30, or 77 days, to raise the money but was taken over by the FDIC just 10 days later.
Regardless of whether the takeover was justified, it happened. And debating whether it should have happened or not won't help Day, whose loan is being auctioned on April 9.
A new receiver of the loan won't necessarily improve her position, because the only change would be which institution receives her monthly mortgage checks, which she can't afford without credit. Plus, she's now months behind on her payments.
A simple solution would be for Day to set up another loan with a different bank and use that money to buy the loan in the FDIC's auction. The reason this could save her is that failed-bank loans sold by the FDIC sell—on average according to FDIC sales from 1990 to now—for 55 percent of their value, or about $475,000 in her case. Her debt would be cut in half and the monthly payments negotiated for a lesser amount.
FDIC loan sale prices in 2009 were at 43 percent of value because of the flood of bank failures. About 61 percent of the banks taken over by the FDIC during the past 10 years occurred in 2009. The FDIC closed 140 banks last year. Excluding that year, the decade's annual average was about six failed banks.
And the pace hasn't slowed down this year.
On March 19, the FDIC closed seven more banks. That's more closures in one day than in 2004, 2005, 2006 and 2007 combined. So far for 2010, bank failures total 37, the second highest for any year dating back to 2000. And it's only late March.
However, Day couldn't buy her loan even if another bank loaned her the money to do so. The FDIC doesn't allow borrowers to buy their own loans, even if they have the capital in hand.
Even if the FDIC did, FDIC spokesman Greg Hernandez said loans are sold in bundles of non-performing and performing loans. Hernandez said that if loans were sold individually, only the performing loans would sell, and they'd be stuck holding non-performing loans like Day's. Plus, the FDIC would be burdened with organizing millions of individual sales.
However, Hernandez acknowledged that an institution could buy a loan bundle at, say, 50 percent value, and sell individual loans back to borrowers for, say, 60 percent value, earning an immediate profit of 10 percent.
A group called Boston Community Capital is doing something similar with residential foreclosures. Jessica Brooks, the nonprofit organization's director of development, said it buys foreclosed houses from mortgage companies at less than 50 percent value in cases, and then sells the homes back to the evicted owners at a slight profit. The group makes money to keep going, and the evicted homeowners are back in their houses with mortgages of sometimes half the previous level.
"It just makes financial sense," Brooks said, and works because of the recession's crashing real estate values.
She said the group has done this with 50 homes so far, and there's no reason it couldn't be done with FDIC loan sales. The process would be essentially the same.
But why doesn't the FDIC just change its policy and sell loans to their borrowers at the same price bidders are willing to pay, asks Day? The FDIC would make the same amount of money and would manage to help borrowers in trouble.
Furlong brought up the same point, questioning the FDIC's current loan-sale policy.
"There's not a lot of logic to how they do it," he said.
Trevon Milliard: tmilliard@mtexpress.com
The Salmon River Lodge, co-owned by Karen Day, sits on 4.9 acres of land bordering the Salmon River, providing panoramic views of the Sawtooth Mountains. Photo by
