Expect Foreclosures to Spike, Bank Failures Ebb in 2011
NEW YORK (
) -- 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.
Although there have been 157 bank and failures this year, accelerating from 140 bank closures in 2009 and 25 in 2008, the good news is that banks and thrifts have much higher levels of capital than they did before the crisis began.
The combined industry's Tier 1 leverage ratio was 8.99% and its total risk-based capital ratio was 15.30% as of September 30, rising from 7.81% and 12.54% two years earlier.. For most banks these ratios need to be at least 5% and 10% for them to be considered
by regulators, although hundreds are being required to hold additional capital.
With the continued shakeout of weaker players, increased capital and aggregate profits for the industry for the past five quarters, the industry as a whole is in reasonably good shape but the largest mortgage lenders face a mountain of bad loans to work through.
Here are some key mortgage delinquency numbers for the "big four" U.S. mortgage lenders as of September 30. The numbers come from the Consolidated Financial Statements for Holding Companies filed with the
Federal Reserve
.
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Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.