Despite a peak in chargeoffs, there has been little appreciable improvement in inventories of delinquent and dinged single-family mortgages on bank balance sheets.
That shadow supply of loans is among the key factors behind the all-too-real prospect of a double dip in real estate, according to the International Monetary Fund, and midsize banks are particularly at risk.
Bank writeoffs of home loans as uncollectible fell by 25% from a record high in the fourth quarter of 2009, to $11.6 billion in the second quarter this year, according to data from the Federal Deposit Insurance Corp.
But while delinquent loans, excluding those insured by the government, fell by 37 basis points, to 7.72%, during the same time, the picture looks much worse when modifications, which have redefaulted at astronomical rates, are restored to the frame (see charts below). Delinquent and restructured mortgages as a percentage of the total increased 6 basis points from the fourth quarter, to 9.57% in the second.
According to the IMF's most recent
In a stress test contemplating slow growth in output, stubbornly high unemployment, and a 6% decline in home prices and a 19% decline in commercial real estate prices from 2010 to 2012, the IMF reckoned that five bank holding companies with assets of more than $10 billion — though none of the four largest — would need a total of $13 billion in new capital to maintain Tier 1 common capital ratios of 4%.
To maintain Tier 1 common ratios of 6%, 15 such companies, including two of the four largest, would require $56.7 billion in additional equity.
While the IMF concluded that another leg down in real estate would be unlikely to imperil the stability of the financial system, it could hold back an expansion in credit, perhaps to an average of 8% annually from 2010 to 2012, compared with, for instance, 17% from 2004 to 2007.
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