Real-Estate Woes of Banks Mount

Wall Street Journal ^ | 6 June 2008 | Real-Estate Woes of Banks Mount

[shrinkermd]

...Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.

..."As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee Thursday.

At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila Bair said banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern. "That's where we are really seeing the delinquencies spike," she said.

The surprisingly gloomy outlook is at odds with the sentiment of investors, who appear to have moved on from worrying about the health of the financial system to obsessing about gasoline prices and consumer spending. The Dow Jones Industrial Average rose 213.97 points, or 1.7%, on Thursday on the back of surprisingly strong retail-sales data.

The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending.

[shrinkermd]

Like one of the black holes in the universe, the end of the housing bubble is creating a black financial hole with the good and bad being sucked up into nothingness.

This may not be an exciting topic, but it might be well to hug your local banker before he is gone.

[devane617]

time to but that vacation home on the beach or in the mountains

[RSmithOpt]

There’s a serious glut of housing in many large real estate markets that will take another 3-5 years to work off. I am not even including Fla and it’s 20K+ empty condos. Also, the amount of sub-prime foreclosure include a significant number of high-end homes too.

[Squantos]

BTTT...........tick tick tick.

[KarlInOhio]

This may not be an exciting topic, but it might be well to hug your local banker before he is gone.

One of the big three local banks has commercials on the radio saying essentially "We are not in financial trouble. There is no need to panic." For some reason, I am not reassured.

[STONEWALLS]

you want to know what pisses me off about this whole thing?....I’m a saver...I’m debt free...I did the right thing....and now my CDs up at the bank could be at risk.....and I count on those CDs for my fixed income retirement....meanwhile the gold card crowd keeps racking up the debt....when those fools default en masse’ they could take a lot of us down with them.

[hiredhand]

You heat with wood so you KNOW what it's like when you spot a tree that is obviously dead, or dying and ripe for cutting into firewood. But once in awhile, you get one like this which has stood for some time and wicked up the moisture from the ground and is just as rotten as dirt on the inside, with only a mere shell holding it up. On the outside, it still looks pretty good! Externally, it's still a "Mighty Oak", even though the casual passerby can visually discern that there's "something" wrong with it. But as time passes, this tree rots more and more, until one day a slight breeze brings the whole thing crashing down, and everybody who knows NOTHING about the nature of trees is amazed, and shocked that it happened like it did.

Such is the state of our current financial system here in America.

[mr_hammer]

“One of the big three local banks has commercials on the radio saying essentially “We are not in financial trouble. There is no need to panic.” For some reason, I am not reassured.”

If you repeat a lie often enough it becomes the truth...or something like that.

...but eventually when the roof comes down and kills you it will be hard to deny gravity.

Hello from a N.E. Ohio Buckeye Fan!

[KarlInOhio]

and now my CDs up at the bank could be at risk.....

If you have less than $100,000 per bank the FDIC will insure it (however if a lot of banks fail at once, the Fed will probably start printing Zimbabwe dollars to cover the losses). If you have more than $100k per bank, you need to spread your money out.

[Squantos]

I agree ........great analogy !

creep can be cut off if it’s not ignored. A lot gets ignored for political purposes these days !

[RKBA Democrat]

I think we’re more or less at the beginning of the panic. Home values have held up rather remarkably given the loss of the subprime market and the large number of foreclosures.

Keep in mind that a homeowner who is getting into trouble right now won’t actually face foreclosure for several months.