Mortgage Losses Add to Banking Industry's Woes
Washington-Loan performance continued to deteriorate in the third quarter as banks and thrifts added $50 billion to loan-loss reserves for the second consecutive quarter, according to the Federal Deposit Insurance Corp.
Defaults on residential mortgages and construction lead the way, according to FDIC chairman Sheila Bair, and problems are spreading to other consumer loans and commercial loans. The percentage of non-current single-family loans (90 days or more past due) jumped to 3.9% in the third quarter, up from 3.3% in the second quarter. Charge-offs totaled $8.5 billion, down from $9.6 billion in second quarter. (It is understood this decline could reflect the takeover of Washington Mutual by JPMorgan Chase.)
For construction loans, the non-current rate hit 10.8% in third quarter and charge-offs totaled $1.9 billion.
"Many institutions are aggressively growing reserves. But overall reserve growth continues to lag behind the growth of troubled loans," the FDIC chairman said.
Banks and thrifts posted combined earnings of $1.7 billion in the third quarter, down 94% from the same period in 2007.
But commercial banks and savings banks continued to originate single-family loans.
In the third quarter, banks originated $228.8 billion in one-to-four family mortgages, up 34% from the third quarter a year ago. However, loan production is down 19% from the second quarter, according to origination data collected by the FDIC.
The data show that two-thirds of originations came through wholesale channels and one-third through retail channels. Federally chartered thrifts originated $66 billion in one-to-four family loans in the third quarter.
FDIC chief economist Richard Brown told reporters the economic downturn will further impair credit quality at FDIC-insured institutions in the coming quarters.
However, the "conditions for a recovery are already being put into place even as the downturn intensifies," he said. Capital injections will allow institutions to recognize losses now and to make loans in the future. The FDIC's temporary liquidity guarantee program has helped stabilize funding for banks.
"But more needs to be done to modify loans," he said. Nearly 2 million foreclosures are expected this year. And FDIC researchers calculate that 736,000 mortgages became 60-90 days past due during the second quarter, up from 618,000 new past-due loans in the fourth quarter of 2007.
"What this tells us is that the number of problem mortgages is still rising and that finding alternatives to foreclosures remains a policy priority," Mr. Brown said.
Meanwhile, the deposit insurance fund has declined to a 0.76% reserve level due to the failure of 22 banks this year. The FDIC board is scheduled to meet in December to consider a hike in insurance premiums.
In the third quarter, the FDIC's problem bank list jumped to 171 institutions with $115.6 billion in assets, up from 117 institutions in previous quarter.