It’s not quite the S&L crisis, but thrifts continue to feel the pain of the mortgage mess

by Ryan Caione, August 28th, 2008, 7:00 am

The Office of Thrift Supervision (OTS) announced on Wednesday that thrifts — consisting of some 830 savings and loan associations (S&Ls), savings banks, and cooperative banks — lost approximately $5.4 billion in the second quarter. It was one of the largest losses ever, second only to the $8.8 billion that thrifts lost in the fourth quarter of last year. The institutions lost a comparatively paltry $627 million in Q1.

On Tuesday, the FDIC released a report, entailing all banks and thrifts, revealing that Q2 deposits and earnings are down, and charged-off and noncurrent (more than 90 days past due) loans are at their highest levels in some 15 years. A total of 117 institutions are on its “Problem List.” The OTS said in its report that 17 of those are thrifts. (The main difference between thrifts and banks is that thrifts are mandated by law to have at least 65% of their loan portfolios invested in mortgages and consumer loans, making them more vulnerable to the vicissitudes of the housing and consumer markets.)

Of course, not all those banks and thrifts are ready to implode, and it’s still a far cry from the S&L crisis of the late eighties and early nineties, when more than 700 institutions failed. But last week, small Kansas-based Columbian Bank and Trust became the ninth bank this year to be closed by federal regulators. Of course, the most spectacular collapse so far in 2008 was that of one of the largest thrifts, IndyMac Bancorp, which was also one of the largest bank failures in US history.

Like the S&L Crisis, the current mess faced by thrifts has been fueled by risky real estate loans. In addition to the bottom-line losses they have endured, thrifts set aside $14 billion in the second quarter (more than 3.7% of average assets) to cover anticipated losses from bad mortgages and other loan-related investments.