Expect Foreclosures to Spike, Bank Failures Ebb in 2011

NEW YORK (TheStreet) -- Two federal bank regulators accentuated the positive on Wednesday when they announced that 87.4% of 33.3 million first-lien mortgage loans held by institutions were "current and performing."

Perhaps what the Office of the Comptroller of the Currency and the Office of Thrift Supervison should have said was that 12.6% of the mortgages were not performing -- an amazingly high number.

Delinquent first-mortgage residential loans are placed in various categories - loans past due 30 to 89 days, loans past due 90 or more days, and nonaccrual loans. Interest continues to accrue and be reported as revenue for the first two delinquent categories.

When publicly traded bank and thrift companies announce their quarterly results, most only include nonaccrual loans when they report "nonperforming loans." What the OCC and the OTS are doing with their reports, is including all delinquent or nonaccrual first-lien mortgages, which is a very useful way of gauging the U.S. mortgage industry's journey through the abyss.

Looking at combined data for all U.S. banks and thrifts provided by SNL Financial, and calculating delinquency percentage by outstanding loan balance rather than the number of loans, there was a total of $1.7 trillion in closed-end, first-lien one-to-four family mortgages on institutions' books as of September 30 and 13.11% were delinquent. Credit quality was still declining on a year-over-year basis, as 11.81% of these loan balances were delinquent in September 2009, 6.45% in September 2008 and 3.44% in September 2007.

As of September 30, 5.02% of all first-lien one-to-four family mortgages were in the process of foreclosure, compared to 3.95% in September 2009. In September 2008, 1.93% of first-lien one-to-four family mortgages held by banks (excluding thrifts, for which the data isn't available) were in the process of foreclosure.

The figures show that the industry has a long way to go in working through its problem mortgages. As the largest banks get past their foreclosure processing delays it is likely the market will see a spike in foreclosures and associated misery in 2011.