Editor's Note: TheStreet.com earlier this month announced the purchase of certain assets of Weiss Group to form "TheStreet.com Ratings." Here is the first article from Melissa Gannon, director of insurance and bank ratings. Let us know what you think of the article by clicking here.
First comes boom, then comes bust, then comes bankers' headaches. Yes, the downturn in the housing market is translating into a rise in the number of nonperforming mortgages in the nation's banks and thrifts.
Following steady increases throughout 2005, nonperforming residential mortgage loans leveled off a bit in the first quarter, at $21 billion, but are still up a whopping 50% over the same period in 2005.
With the exception of New England and the Middle Atlantic states, banks in all regions of the country experienced double-digit increases in nonperforming residential mortgages.
The Pacific region and the West South Central region, which includes those states affected by Hurricane Katrina, experienced the largest increases.
Publicly traded banks with the largest year-over-year increase in nonperforming mortgages naturally include some of the largest banks in the country. Problems at
Wells Fargo Bank
started sooner than at other institutions, with trouble beginning to appear back in 2003.
The problems leveled off in early 2006. Most of the rest of the industry's players experienced the beginning of their downturns last year, including
Is the industry in trouble? Not by a long shot. Total nonperforming loans have continued to decline from their peak in 2002 of $69 billion, and stood at $49 billion at the end of the first quarter of 2006.
At the same time, the industry's profits have grown every year since 2001; in the first quarter, the industry earned $37 billion, an 8.7% increase over the $34 billion profit reported in the first quarter of 2005.
The unknowns, of course, are the movement of interest rates and the extent of the downturn in the housing market. If interest rates resume their rise and home sales continue their decline, then we can expect to see an increase in troubled mortgages.
Which banks are most likely to be affected by a further deterioration in the housing market? Those whose loan portfolios are largely made up of mortgages. Banks and thrifts with large mortgage holdings that overwhelm their equity capital and loan-loss reserves include:
All of these publicly traded institutions are financially sound, but continued growth in nonperforming loans, in conjunction with tightening margins as interest rates rise, will put a strain on earnings going forward.
While bankers at some financial institutions may begin to reach for the aspirin, an increase in the number of troubled loans is only one of the many factors used to evaluate financial safety.
Steady earnings and strong capitalization mitigate the impact of subpar loan portfolios, so financially secure institutions have time to increase reserves and tighten lending practices that may have become too lenient during the boom.
Meanwhile, banks considered financially weak are far more likely to experience a migraine as they face the prospect of further loan defaults.
Melissa Gannon is director of insurance and bank ratings for TheStreet.com Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.
In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
While Gannon cannot provide investment advice or recommendations, she appreciates your feedback;
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