The FDIC released its decidedly downbeat first quarter banking profile last week. If you think that’s just the opinion of the perennially "doomish" twist, check out the report’s "highlights" listed at the top of the report:
Of the earnings decline, South FL Business Journal states:
[It] was the banking industry’s largest year-over-year decline in quarterly profits since 2001′s first quarter, when the U.S. economy was in a recession.
The FDIC cited the housing slump, unfavorable interest rate conditions, slower growth in the economy and higher levels of problem loans as the main reasons for the recent quarter’s decline.
One of the gloomier pieces of data offered by the FDIC concerns charge-offs:
Net charge-offs totaled $8.1 billion, an increase of $2.7 billion (48.4 percent) from the first quarter of 2006. Charge-offs were higher in most loan categories. Net charge-offs of credit card loans rebounded from an unusually low level a year ago, increasing by $850 million (29.2 percent). Similarly, net charge-offs of other loans to individuals were $754 million (60.0 percent) higher than a year earlier. Net charge-offs of loans to commercial and industrial (C&I) borrowers increased by $470 million (78.6 percent), and net charge-offs of 1-4 family residential mortgage loans were up by $268 million (93.2 percent).
According to FDIC Chairwoman Sheila C. Bair:
It is clear that the operating environment is more challenging now than it has been in recent years.
I might have chosen a stronger term than "challenging," but I suppose that’s one way of putting it.
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>>The FDIC cited… unfavorable interest rate >>conditions… as the main reasons for the >>recent quarter’s decline
In a historical context, how were interest rates so “unfavorable”?
If the FDIC blames interest rates because they are no longer down at their historical lows… let us not forget that interest rates are still (well) below historical averages.
In other words, if even slightly-above-historically-low interest rates are being used as a reason for decline and loss, then the problem is much much bigger, deeply rooted, than they are letting on.
MikeC
Bair tried to put a positive but cautious spin on the release:
It’s hard not to look at the direction and velocity of the decline though and not think that something is very, very wrong.
This is looking more and more like the last recession. Take a look at shopping centers. There are vacancies everywhere. When retail goes down, everything follows. Here’s a real joke….the so called tightening of the lending community. I pulled a bunch of closed sales from MLS over the weekend. Then I went to the county recorder to check out the recordings. Gee, what a surprise. Out of all that I checked I found one cash sale and the rest 80/20. Then I Googled some of the names of the buyers. Hey folks, we got future foreclosures being funded every day. I guess those commission folks in the mortgage industry are not ready to let go. I wonder when the hedge funds will say NO MAS!! But here is the best one of all. My wife and I looked at this totally trashed home. It was on the market for over one year with an original listing price of over $500,000. Since it is in one of our target areas, I noticed it had recently sold. I waited about two weeks after closing to check the recorded documents. Now ya gotta love mortgage companies with compassion. Some lucky Latino family got one of those low interest rate ARMs, ya know with an initial interest rate of 11.99%. But let me show you some real compassion. The interest rate cap is 19.99%. I guess if you are a minorty you are privy to some real deals. The philanthropy does not end here. Don’t forget, there is a benevolent Realtor involved. In this case, the Realtor “double ends” the sale. In other words, he represents both buyer and seller…of course collecting the commissions from both ends. As a goodwill gesture, he loans the buyers $50,000 and puts a lien on another piece of so-called property they own. This leaves the purchaser with a P&I payment of $6100 per month. Add on taxes, insurance and the payment on the second…..and what do you see? I see either this guy is a Mexican drug lord or he ain’t makin’ payment numero uno.
Steve-
It seems all I see is 80/20s anymore as well- and those tend to be interest-only ARMs.
I’m thinking next time I find a sensible mortgage at the Recorders Office- I should do a post- It’s a novelty that would make for a good “Man bites dog” story.
I am a mortgage broker and just closed a 2 million dollar loan with 300k down and at the same time closed a 235k purchase with 30k down. I see that the scenario your looking at is horrible but there are alot of mortgage people out here making honest loans for honest folks. Twist, if you would like to post some sensible real estate transactions I would be more than happy to direct them to you. How about 100k down on a 500k purchase? That seems sensible. I am doing another 575k ,25% down loan this month as well. The VA offers 100% one loan to our veterans, is that a bad loan? (2.2% funding fee first time use) I think that is a great loan at 6.5% with a 30 year fixed.
aaaaudio-
I’m sorry if it sounded like I was disparaging mortgage brokers [I'm not!]- or even everyone who’s getting a mortgage these days. I’d like to think that the entire world hasn’t gone completely mad.
I keeping thinking I’ll sit down and try and calculate the ratio of wonky to sensible loans I see in any given week. So far though, the project has been too daunting.
What I do find myself doing is reading some article about how a family got a great deal in the current “buyers market.” I get curious, look them up and go, “Yup, another wonky loan.” The loans you are describing sound fine, but I rarely find myself just stumbling across loans like the ones you’ve described.
RE: Aaaaudio
When I was an active broker, I was fortunate to sell homes to some very wealthy customers….some you would all recognize. People with money don’t pay interest, they COLLECT interest. No matter how you figure the interest tax deduction, a person is ahead by paying cash for a home. People with big money move it around to various investments where yields vary only slightly. To them, nickels and dimes add up. The aversion to debt by smart people is one of the reasons why 1/3 of all homes in America do not have loans. The two million dollar loan you mention is a big risk provided the purchaser doesn’t have the cash reserves to make his payments should a disaster enter his life. If the market drops only 10%, 200k of his 300k is gone. If you take away 6% for commissions AND closing costs, he is upside down. Let’s say a health or business problem enters his life. He is in trouble. Another advantage of being debt free on a home is that the seller can wait out down markets and adverse situations. Today there are 3160 homes actively for sale in the Phoenix MLS ranging from one million to ten million. In May, 198 sold and May was a VERY good month for expensive homes. I have been receiving lots of flyers from apparently desparate Realtors advertising million dollar plus homes. Apparently, every buyer did not have the financial staying power to keep their home.