15 April 2009

US banks enjoy Mortgage "eye of storm" but worst to come

benefited from a perfect storm of low mortgage rates spurring increased mortgage activity; foreclosure moratorium pushing out losses and reserves alike; and massive government capital backing. The question going forward is can earnings outpace losses?

If the economy and housing have indeed bottomed and new loan defaults have peaked then perhaps the banks will do very well. But if Q1 was more of an ‘eye of the storm’ then can banks — relying upon consumers and business — out earn the losses at a time when consumers and businesses are experiencing increased balance sheet stress.

The following charts show why some banks may out earn their residential credit losses in Q1. But it is not about what happened in Q1 with the mortgage lender-banks and housing – it’s about going forward. Judging from the hard data over the past several month’s, real estate and mortgage have in fact been the eye of a storm that carries us from the Subprime Implosion to the overall Mortgage and Housing Implosion.

Monthly foreclosures at 1.5 year low…for now - the chart below shows actual CA monthly residential foreclosures for the past two years. As you can see, foreclosures — that result is significant losses especially in the bubble states — were down considerably due to gov’t intervention and bank/GSE specific moratoria. This will keep losses at a minimum for Q1. If banks chose to reserve based upon these temporary conditions in Q1, then that may benefit their bottom line. But foreclosures are a lagging indicator.

Charts and data

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