Guaranty fails after big losses on loans

Regulators on Friday shut down Guaranty Financial Group Inc., a big lender felled by losses on loans to home builders and borrowers, in the second-largest U.S. bank failure this year.

The Federal Deposit Insurance Corp. was appointed receiver of Guaranty Financial, based in Austin, Texas, which had about $13 billion in assets and $12 billion in deposits as of June 30.

Guaranty has more than 150 branches in California and Texas. It has a strong presence in the Northern San Joaquin Valley, with four branches in Modesto and the others scattered around the region.

Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest bank, agreed to buy all the failed bank's deposits and $12 billion of the assets. It was the first foreign bank to buy a failed U.S. bank.

It marked the 81st failure of a U.S. bank in 2009, a mounting toll and the most in a year since 1992 at the height of the savings-and-loan crisis.

Typically, regulators take over failing banks on a Friday and reopen for business the following Monday to minimize disruption for consumers. When Guaranty branches open Monday, they will be under the ownership of the Spanish bank.

Depositors are protected by the FDIC's general deposit insurance rules, under which coverage is up to $250,000 per depositor (with separate coverage for joint accounts) per insured institution.

FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit.

Last year, as the housing crisis deepened, Guaranty suffered because a high percentage of its mortgage loans — including pay-option, adjustable-rate mortgages — had been made to buyers in California, where the housing crisis is most severe. The company had loan offices in cities such as Riverside and Stockton.

Many of the underlying loans were made by lenders such as Countrywide Financial Corp. and Washington Mutual Bank, both of which failed last year. And many of those loans were pay-option ARMs, which lets borrowers make minimal monthly payments or pay only the interest.

As the housing crisis grew, home values began to fall and buyers began to default on their mortgages, and those securities dropped in value.

Guaranty had an equal problem with loans to home builders. As of Sept. 30, almost 40 percent of its nonperforming builder loans were in California.

Late last year, Guaranty acknowledged in securities filings that its nonperforming assets — problem loans and foreclosed property — had tripled to $520 million from the start of the year.