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Questions Remain Around the Fate of Development Loans in FDIC Receivership

A lot has already been written about the demise of Silicon Valley and Signature Banks. The Fed has so far stepped in to protect depositors of both banks, even if they had more that the $250,000 FDIC limit in the bank. As nice (and controversial) as that is for depositors, it still doesn’t necessarily protect developers that have borrowed from and put their trust in these mismanaged banks. Development loans are often paid in tranches and the future payments of these loans remain in question.

The fate of borrowers is not an express consideration in the FDIC’s written guidance, only what is in the best interest of the receivership. Many developers are wondering if they will be able to pay contractors and suppliers. During the 2008 financial crisis, similar payments to contractors were suspended. But it looks like this time around the FDIC intends to honor those payments. One bank recently put into receivership issued a statement saying all prior bank’s loan positions will be honored. Some same that by bailing out banks we reduce the motivation of banks’ owners and creditors to take accountability for poor decision making but folks hoping to get paid might overlook that sentiment. It’s still possible that a lack of liquidity could delay contractor payments, putting developers in a tough place, at least for the time being.

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