Second lien holders will be facing big trouble once foreclosures gain steam again. If the problem spreads, your bank deposits could be in jeopardy.
In an attempt to clear the backlog of delinquent loans through repossession, banks will be foreclosing from under each other: when the holder of a senior lien such as the first mortgage forecloses on a property with a second mortgage, junior lien holders get wiped out. If they, too, happen to be banks, systemic consequences won’t be far behind.
By realizing losses on second liens, some banks could fall below regulatory capital minimums. They would be forced to either recapitalize (which is never easy when at risk of collapse) or else. In the worst-case scenario, some of these banks could be seized by regulators. Bank defaults would disrupt the flow of capital through the economy by spreading fear, and put a damper on new lending across the board. This could hit both small businesses and individual investors real hard. But there is more to it than the availability of credit.
The FDIC Calculator
Should you happen to be holding a sizable amount of cash at any point in time, for example between two major real estate transactions, remember to split your deposits between several banks. Never put more than $250,000 into one institution because FDIC insurance won’t cover deposits above this limit.
Also, make sure that all your accounts are indeed FDIC insured (not all types of accounts are). In order to find out where you stand, you can use the FDIC calculator. It will give you an idea of the level of your exposure and clarify whether you will be able to recover your deposits in full. Then act. Fortunately, you can obtain the protection you need with very little effort on your part.
Better safe than sorry.