America's vast lending industry hasn't been firing on all cylinders for some time. The bad news is that financial firms' third-quarter numbers show other signs of sputtering that will hamper the economy's recovery.
There's no shortage of horror stories about the holes burned in banks' balance sheets by telecom and other company loans. Just look at
disastrous third-quarter numbers, out Wednesday. But recent financial results and forecasts from several lenders show fast-growing and previously unscathed loan types such as consumer and real estate credits are now having problems. If lending in these areas slows as it has for company loans, there will be little left to drive economic activity.
Greater Bay Bancorp
, a California lender that has substantial exposure to commercial real estate in the San Francisco area, reported higher bad loans Wednesday, crushing its stock. Sure, San Francisco was the site of an acute real estate bubble, but if a similar souring materializes elsewhere in the Western states,
Bank of America
also could take hits in their large commercial real estate books.
Meanwhile, consumer lenders that had gained a reputation for sound borrower selection are showing big rises in problem loans. Credit-card lender
said Tuesday that it expected bad loans to rise well into next year.
, a massive consumer-finance firm, reported numbers Wednesday showing sharp credit deterioration in home-equity type loans, a sector that has been growing rapidly and has remained relatively free of credit problems.
To be sure, the problems at Capital One and Household stem chiefly from loans made to borrowers with iffy credit histories, and such debtors are expected to have more problems than others. But consumer lenders that focus on people with average or above creditworthiness are also reporting worsening credit numbers. For instance,
delinquencies jumped in the third quarter from the second;
also jumped. Scarily, neither release credit data for their 0% loans.
And credit losses may be understated by programs designed to allow distressed borrowers to defer loan repayments or gain other concessions to remain current. Nearly 16% of Household's loans have been "re-aged" in this fashion. September credit numbers for auto lender
show a large jump in re-aged loans. Even
have a policy of offering troubled borrowers concessions in tough times. As Fannie's Web site says: "Where possible, Fannie Mae will work with the servicer to cure a delinquent loan through reinstatement, a payment plan, or a loan modification."
Credit losses usually correlate very closely with the unemployment rate. But that has fallen this year, to 5.6%. Predictions that bad loans will rise could signal a coming jump in the jobless rate.
Consumer mortgage loans are showing historically high delinquencies and losses, even though growth in this sector has been meteoric. If growth slows at the same time as losses spike, credit losses as a percentage of loans will therefore soar. An added drag on growth would be reduced demand at Fannie Mae, which buys enormous amounts of mortgages from lenders.
Indeed, an apparently big bet on interest rate movements at Fannie seems to signal slimmer margins in the future. One way to meet Wall Street's earnings expectations with lower profitability is to increase volume. Fannie may well try that for a while, but the market and the regulators will step in to stop it, forcing a sharp curtailment in Fannie's appetite.
Another sign of coming weakness are the problems at mortgage insurer
The company had to increase reserves sharply to cover losses.
Cutting to the Quick
When confronted with banking sector weakness, the pat line from most commentators is that the Fed should just cut rates more, which reduces banks' costs and should stimulate the desire to lend and the demand for loans. However, neither the balance sheet of corporate America nor the wallet of the average American looks that healthy, which reduces demand for credit, even at knock-down rates. As a percentage of assets, households' liabilities are at around 17%, a postwar high. For individuals, debt payments as a percentage of disposable income are close to a peak.
The Fed's rate cuts have sparked the mother of all mortgage refinancing booms. But little of the monetized equity in homes is being used to pay down other debt, according to a recent Goldman Sachs report. On an annualized basis, U.S. households withdrew a net $200 billion of mortgage equity in the second quarter, says Goldman. "The fact that the saving rate remains very low indicates that most of the withdrawal has gone into spending," writes Jan Hatzius, an economist at the brokerage.
A recovery can't happen until deleveraging does. But develeraging means a higher savings rate and lower demand, which would tip the country into a full-blown recession. Grimly, that is how bubbles end -- and get fixed.