Three years after US banks first rattled global markets, they look set to deliver further nasty surprises. One worry is the impact of the foreclosure scandal. Lenders stand accused of using incomplete or falsified paperwork to repossess homes. Some have reportedly been unable to produce the original documents proving they own mortgages.
This will hit banks’ bottom lines, although given the uncertainty surrounding the issue the ultimate toll isn’t clear yet, says IMF chief economist Simon Johnson on Baselinescenario.com. They may end up with new losses of $50bn-$100bn. Much of this will stem from being forced to take dodgy mortgages and mortgage securities (and the losses associated with them) back onto their balance sheets if the documentation underlying those mortgages is faulty.
This sort of sum won’t bring the system to its knees, but it is likely to undermine banks’ confidence and reduce lending – “exactly what the recovery doesn’t need”.
The wider problem, meanwhile, is that foreclosures are so widespread that supply in the US housing market is rising fast. According to David Rosenberg of Gluskin Sheff, it could take over three years to mop up the excess supply. This presages further price falls. More people will sink into negative equity and are likely to walk away from their loan. All this implies more losses for banks too.
The biggest problem, however, is commercial property. This has long been deemed the ‘next shoe to drop’ in the credit crisis, as we pointed out in February. And the thread it’s hanging from is fraying. Banks have around $1.4trn in commercial real estate loans that fall due in 2010-2014. Nearly half of these are delinquent or in negative equity, says the IMF. To avoid having to write down loans, banks have been trying to redesign or restructure them to keep struggling borrowers afloat.
But it seems this has only postponed the pain, as borrowers are still falling behind and defaulting, says Emma Saunders on FT.com. With no sign of the market improving, more foreclosures and losses are on the cards. And not just for banks. Of commercial real estate debt, 54% lies with pensions, government agencies and insurance companies. We’ve heard nothing about what Wirtschaftswoche has called a potential “property crisis part II” for months. But it hasn’t gone away.