Toxic Circus: Are Bank Books All Cooked?

by Gayle Plato
On September 4, 2009, Governor Jan Brewer saw the light thanks to many conservative legislators in the state and repealed the lousy legislation SB 1271. The previous legislation would have tied the hands of home investors now upside down on investment properties. Bank liability regarding any short sale in particular would have been revamped, and home owners would eat the loss and risk future litigation for owed debt even after a sale of the property.
Yet, while real estate blogs offer a virtual sigh of relief locally, there is still the reality of short sale or foreclosure debt and collateral release.  Banks determine if the homeowner is released from the debt owed and the actual collateral- the physical property.  It is the owner’s responsibility to get a release of liability statement from the lender.  But ask any realtor out there how easy that form is to get from Bank of America/Countrywide,  Citibank, or Chase?  Realtors vary greatly in experience and relationships with lenders; one cannot assume the realtor knows what he/she is doing.  Seller beware today: what is supposed to happen and what actually takes place are in question. Banks have no need to hurry up and process debt. The real question is, are they being encouraged to NOT rectify all accounts?
The macrocosm of this real estate reality is the true state of affairs in the nation.  If the majority of short sales and foreclosures are not updated in bank systems, the books of lenders are wrong.  Debt numbers and glowing reports of sales are way off. This is Cash for Clunkers again. Look at the recent bank failures across the country.  The Federal Deposit Insurance Corporation ( FDIC)  is seizing banks with upwards of half of the debt qualifying as toxic.  FDIC regulators are seeing accounting  numbers so out of whack that it begs the question:  Is the reality of mortgage failures overwhelming the FDIC? 
This Labor Day weekend saw five closures with the FDIC estimates.  Enter the latest failed bank in AZ with one of the worst banks by the numbers-First State Bank in Flagstaff.
If I do my math, First State Bank is 50% toxic. This is an estimated number too; the FDIC does not know if this is completely accurate yet. Do you think they estimate over or under the real costs?  They have to use the books they are given by the bank.

From the FDIC: Sunwest Bank, Tustin, California, Assumes All of the Deposits of First State Bank, Flagstaff, Arizona

First State Bank, Flagstaff, Arizona, was closed today by the Arizona Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Sunwest Bank, Tustin, California, to assume all of the deposits of First State Bank.

As of July 24, 2009, First State Bank had total assets of $105 million and total deposits of approximately $95 million. …

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $47 million. …. First State Bank is the 89th FDIC-insured institution to fail in the nation this year, and the third in Arizona. The last FDIC-insured institution closed in the state was Union Bank, National Association, Gilbert, on August 14, 2009.” (


  1. This site jumps the shark!!! says

    Gee, Gayle, as a regular on CR, thanks for the hat tip.

    But you missed the boat- First Azzz failed due to developer loans- not house loans.

    Look at the developer crowd and see who is walking away scot free- after all- they are all LLC or incorporated.

    A lot of big republican contributors on that list- so be very carefull- including a bunch of Rich and Rich/Rose associates- do I hear an Ellman?

  2. Shark, It’s all kinds of shaky debt and we are all paying for it.

  3. Great blog there and yes I knew that chummy scent 🙂 I don’t care who borrowed as all parties got cheap loans and all get to solve. I am concerned that modifications are not being accounted for the sellers nor by the banks.

  4. I had an interesting conversation this weekend with a realtor. She is concerned that most people considering doing a short sale on their home do not know that they will get a tax form from the bank for the amount of the loss the bank took and the homeowner is responsible for that tax.

    The banking system is in real trouble and much of the problem is due to a seriuos lack of knowledge.

    It reminds me of the tax issue with Cash for Clunkers when car buyers eventually find out that they have to pay the tax on the money the government “gave” them for the car. The government will also see an increase as the taxes and fees on the new cars are collected.


  5. Travis,

    The Mortgage Forgiveness Debt Relief Act generally excludes income realized as a result of modification of the terms of the mortgage, or foreclosure on a principal residence in years 2007 through 2012. Even though the forgiven debt is excluded from income, it still must be reported on a Form 982.,,id=179414,00.html

    There are other times when cancellation of debt is not taxable:

    · Bankruptcy

    Insolvency: If total debts are more than the fair market value of total assets.
    Non-recourse loans: The lender cannot pursue a deficiency. However, it may result in other tax consequences.
    These exceptions are discussed in detail in Publication 4681.

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