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Taylor Bean, TARP, the FDIC and You

August 5, 2009

Strange doings over the last few days in Central Florida have put about 10,000 Maryland homeowners in doubt about where to send their mortgage checks. But the real trouble is much bigger than that. Here’s a rundown on who, what, where, how, and maybe why:

1. Because of bad mortgage lending, mostly in Florida, Colonial Bank of Montgomery, Ala., is insolvent in all but name.

2. Colonial is a $25 billion bank, specializing in “warehouse lines” for mortgage brokers and other non-bank mortgage originators. That means they supply the money.

3. Ocala, Fla.-based mortgage originator Taylor Bean & Whitaker led an effort to buy control of Colonial for $300 million this spring. The effort failed, the bank announced last Thursday, because regulators were taking too long. (CP readers may remember Taylor Bean as the funder of such ridiculous loans as George Agelakis’ mortgage on 214 S. Chapel Street.)

4. The $300 million from Taylor Bean and its 30 partners would have enabled Colonial to get at least that much from the Troubled Asset Relief Program, or TARP. That cash infusion could maybe keep the bank going. Without it, the bank is looking for a $500 million investment from others. CitiGroup is coordinating that effort.

5. Taylor Bean told the Ocala Star Banner that Colonial was its biggest funder.

6. On Monday, federal agents, led by the Special Inspector General for the TARP, raided the Orlando, Fla. offices of Colonial Bank, and the Ocala headquarters of Taylor Bean, but will not say if these efforts are related. Colonial says the Orlando office houses its Mortgage Warehouse Lending Division

7. HUD and Ginnie Mae (the government’s mortgage securitization company) announced yesterday that they have shut down Taylor Bean’s ability to
a. originate FHA loans
b. securitize loans for Ginnie Mae. Ginnie Mae has taken charge of Taylor Bean’s $25 billion servicing portfolio.

8. HUD is also trying to debar Taylor Bean’s top two bosses-meaning Taylor Bean would not be able to do any business with the federal government for 18 months

9. Part of the reason for the federal action is that Taylor Bean declined to inform HUD that its auditor, Deloitte Touche Tohmatsu International, quit in June after finding indications of fraud.

10. Another part of the reason is that Taylor Bean did not mention to HUD that 14 states had investigated the company, resulting in a June settlement. One of those states was Maryland.

11. Maryland’s Department of Financial Regulation announced on June 22 that it had discovered underwriting irregularities in Taylor Bean’s loan processes, and extracted $9 million from the company (to be divided among the 14 states).

12. The department also got Taylor Bean to refund about $50,000 to other borrowers (lots of borrowers got a little money) because of other irregularities in Taylor Bean’s business practices.

13. In light of the federal action, Maryland is trying to figure out a response. “There’s 10,000 people who need to make a mortgage payment tomorrow,” says Mark Kaufman, the Deputy Commissioner of Financial Regulation. “So if I tell them they’re out of business, I have to have a solution as to where those mortgage payments go.” (in a press release, Taylor Bean says it’s cooperating with the feds and that it expects to keep servicing the loans it now handles).

14. The question of where to send one’s mortgage payment may soon be secondary to the problem of bailing out Colonial Bank. As the Montgomery Press-Register noted on Friday,

If the FDIC were to seize Colonial, it would be the sixth-largest seizure, by assets, in American history. Such a large failure could strain the bank safety net. Colonial has $20 billion in deposits, while the FDIC insurance fund has dropped below $15 billion. The FDIC wouldn’t have to cover every dime, but when Florida’s BankUnited, with $12.8 billion in assets, failed earlier this year, it cost regulators nearly $5 billion.

15. Colonial is one of at least three big regional banks that are either insolvent or on the brink of being so. Some think the FDIC’s failure to seize these banks is part of a cynical game of “extend and pretend,” which will ultimately lead to more losses.

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