Banks' Loss Reserves Top $50 Billion

Banks and thrifts set aside $50 billion in loan loss reserves during the second quarter as the downturn in the housing market shows few signs of bottoming and institutions face higher charge offs on single-family and residential construction loans going forward.

The Federal Deposit Insurance Corp. reported last week that earnings at banks and thrifts fell 87% to $5 billion in the second quarter, compared to $36.8 billion in the second quarter a year ago.

Commercial banks reported $10.2 billion in net income for the second quarter, down from $19.3 billion in the first quarter. Thrifts reported a $5.4 billion loss for the second quarter, according to the Office of Thrift Supervision, compared to a $627 million loss in the previous quarter.

"By any yardstick, it was another rough quarter for bank earnings," FDIC chairman Sheila Bair said. Overall, banks and thrifts set aside $50.2 billion in loan loss reserves and charged off $26.4 billion in loans.

It has been one year since the mortgage markets seized up in August 2007 and the upswing in delinquencies and foreclosures really started.

The serious delinquency rate (90 days or more past due) on single-family mortgages rose to 3.1% in the second quarter -- the highest level since 1990 when FDIC started collecting this information. It was 2.1% at yearend 2007. Charge-offs on those residential mortgages totaled $6.6 billion, up from $4.2 billion in the first quarter.

At the same time, the serious delinquency rate on residential construction and development loans rose to 8.66% in the second quarter and charge-offs totaled $1.7 billion.

FDIC officials expect the continuing deterioration in the residential sector will lead to more bank failures this year, especially among institutions with high concentrations of C&D loans.

"I think we are at least in the midpoint of the cycle," OTS director John Reich told reporters. And he said the institutions are doing the right thing by increasing their reserves. The 829-OTS supervised thrifts socking away $14 billion in loan loss reserves and took $5.6 billion in charge offs in the quarter. These thrifts hold $750 billion in single-family loans on their books and $32.8 billion or 4.4% are troubled loans -- 90 days or more past due, in foreclosure and real estate owned. The serious delinquency rate on thrift 1-4 family loans jumped 100 basis points from the fourth quarter to 3.8% in the second quarter. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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