The news keeps getting worse for the banking industry, as recent data released show that it isn’t just the expected commercial loans that are faltering, but the number of foreclosures are finally being reported in a way that more reflects the reality of what is happening out there. Consequently, big banks like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) are in no way exempt from more significant damage as consequences of their decisions and the resultant economic weakness will continue to hamper them over the next couple of years.
Commercial Loans
First lets look at where things stand on commercial loan delinquencies as reported by Moody’s (NYSE:MCO). In just January 2010 alone, commercial mortgage-backed securities (CMBS) delinquency rates increased to 5.42 percent. That’s the worst since the economic disaster struck us.
While larger banks aren’t as susceptible to these commercial loan failures, the smaller and mid-size banks are, and it’s an unknown what will happen if they generate major bank failure numbers as a consequence, which is a surety to happen.
Noncollectable Mortgages
The next category is one that has a dramatic effect on large banks,a and that’s the number of charge-offs from residential loans they originated.
According to data just released from the Federal Deposit Insurance Corp. (FDIC), in the fourth quarter the number of home mortgages listed as noncollectable came to a record-breaking $53 billion.
This was an increase of 47.7 percent from last year in the same quarter, and the worst performance since data were started to be collected on loan failures in 1984.
Even with these high numbers, it’s still doubtful we’re seeing even close to what is really happening with these failed loans, as banks are hesitant to put them on their books as they drag down their quarterly results. But eventually they must be listed, and this looks like what happened in the last reporting quarter, where if the banks continued to hold back too much, the future numbers would have swamped them once they were released.
New Mortgage Re-sets
Another major problem that is already upon the banks is the growing number of mortgage re-sets due in the first half of 2010, which could be extraordinary in number, although there hasn’t been much put out on what that could entail for the major banks.
Now that the possibility of interest rates being raised are closer to the center of what’s happening, that leaves another variable for banks and consumers to be concerned with, although that probably won’t become a significant factor until later in 2010.
There is the continual challenge of homeowners who are underwater with mortgages on their homes worth more than the homes themselves, making them basically unsellable unless the homeowner wants to pay cash for the difference.
Finally with mortgages, all those re-modified mortgages could be another explosion waiting to happen, as the political pressure on the banks to do them could be a disaster if homeowners start to default on those as well, which a number of industry watchers think could and probably will happen.
That would mean the problems we’ve been experiencing over the last couple of years could drag out much longer as a consequence of those actions.
Conclusion
The problem banks identified by the FDIC stand at 702 as of the end of 2009. Assets held by those banks were listed at $403 billion.
The Deposit Insurance Fund of the FDIC is running in the red to the tune of almost $21 billion at this time, while the ratio of reserves to insured deposits is at a negative .39 percent. That’s the lowest percentage on record ever recorded.
Officials at the FDIC in their quarterly banking review said the money they will have to spend on failed banks from 2009 through 2013 stands at about $100 billion, the same as they stated before. The truth is they’ll be really lucky if that’s all they pay out.
Also according to the FDIC’s report, 30 percent of banks it insures reported losses in 2009, an increase of 24 percent over 2008. The last time they were that bad was 1984.
With bank failures at their worst levels in 17 years, and commercial loans and residential loan re-sets about to explode, it’s simply an illusion to think we’re on the other side of the problems in the banking industry, we’re still full in the middle of them with no way of knowing how deep these will effect the overall industry and economy.
Just because several of the largest banks in America aren’t as susceptible to the commercial loan defaults as their smaller counterparts doesn’t mean they’re out of the woods on this, and we have yet to see the full extent of foreclosures put on the books of banks as well as how exposed they are to mortgage re-sets, which the larger banks are definitely vulnerable to. Add to that defaults on the re-modified loans and there are major problems that aren’t even close to being solved yet, and we won’t know how deeply this will hurt the industry probably until the end of 2010 or early 2011.
We’re still in for a long, rough ride before this is all over.
