No End In Sight For U.S. Banking Crisis

Posted In: Banking Crisis, Central Banks, Congress, Economy, Federal Reserve, Homebuilders, Homeowners, Housing, Mortgages, U.S. Government, U.S. Treasury Dept.

The Wall Street Journal, with a little bit of help from federal regulators, managed to torpedo hopes earlier today that the United States was approaching an end to a banking crisis brought on by the housing bust. Michael Corkery, Jonathan Karp, and Damian Paletta wrote:

Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.

At a Senate Banking Committee hearing Thursday, Federal Reserve Vice Chairman Donald Kohn said:

As long as the housing market is on a downward path, as long as those prices continue to fall, I think there’s a risk that the losses could continue to mount on a variety of loans.

Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair added at the same hearing that banks which aren’t diversified, or those with significant exposures to residential construction and development, are of particular concern. Bair said:

That’s where we are really seeing the delinquencies spike.

With no end in sight to the banking crisis, the health of the larger economy is at serious risk. Corkery, Karp, and Paletta explained:

The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending.

The Journal referenced a report sent to clients Thursday by housing research firm Zelman & Associates which forecasts that over the next five years, U.S. banks could “charge off” as bad debt between 10% and 26% of their loans tied to residential construction and land assets, amounting to $65-$165 billion. During the last housing downturn of the late eighties-early nineties, charge-offs totaled around 10% ($31.6 billion, adjusted for inflation) of construction-related bank assets. Ivy Zelman, chief executive of Zelman & Associates, warned:

We believe this period of procrastination is nearly over.

It’s interesting to note that when looking at state percentages of total bank loans tied construction and development, Arizona has 36% of total loans tied to construction and development, Georgia has 34%, North Carolina is at 28%.

Zelman added that construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975.

Oh my.

Source:

“Real-Estate Woes of Banks Mount”
Michael Corkery, Jonathan Karp, Damian Paletta
Wall Street Journal, June 6, 2008

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