March 16, 2009 |
The unprecedented bet that many banks made on mortgages, real estate development and other real estate-related lending during the middle part of this decade has produced a payoff no one imagined just a few years ago -- a huge increase in loan defaults, a soaring number of foreclosures and a plunge in bank profits. And now, an analysis of bank financial statements by the Investigative Reporting Workshop and msnbc.com, sheds new light on just how dangerous conditions have become in many banks across the nation.
The analysis is based on reports every bank is required to file each quarter with the Federal Deposit Insurance Corp., the federal agency that protects deposits and is part of the bank regulatory system.
Here are the key findings:
- The amount of nonperforming loans and foreclosed properties on bank books more than doubled last year, from $123 billion at the end of 2007 to more than $261 billion on Dec. 31, 2008.
- Bank profits fell dramatically in 2008. The nation's banks made nearly $100 billion in 2007. That number declined to $16 billion last year, and the FDIC reported that banks, as a group, lost money in the fourth quarter of 2008, the first time that had happened since 1990. Most of the decline in profits came because banks were writing off many more bad loans.
- As a result, 163 banks had more troubled assets (nonperforming loans and foreclosed property) on their books at the end of 2008 than they had capital and loan loss reserves, meaning that potentially the bank could not cover the losses on loans and other assets it has been absorbing. A year ago, 23 banks had a troubled asset ratio of greater than 100 percent.
- There are great variations among banks. Many smaller, community banks that avoided dealing in the riskiest types of mortgage lending continue to weather the storm relatively well. Meanwhile, for banks that got deeply involved in subprime lending or that are in states where the real estate collapse is most pronounced, the stress levels are high.
- Some of the policy changes brought about by the banking crisis of two decades ago have proven successful, because they forced banks to build up their capital in order to be better protected against loan losses and a general economic decline. Whether they are sufficient -- and it already is clear that among the largest banks they may not have been -- remains an open question. Banks also made a lot of money during the first several years of this decade, again adding to their cushion to absorb losses.
- The effects of the recession, and the subsequent rise in unemployment that always means loan repayment problems for many consumers, likely still has not crested in the results for many banks. In other words, it is possible, perhaps likely, that loan losses and foreclosures still have not peaked.
The American Bankers Association and others in the industry asked msnbc.com and the Investigative Reporting Workshop to refrain from publishing a list of banks and their "troubled asset ratios."
John Hall, senior vice president of the ABA, said such a list might scare consumers. "The public is very jittery," Hall said. He said that some depositors might see their bank on a list with a high amount of troubled debt and create a run on the bank, which could cause the bank to fail. Hall said the industry believes, "The only list that truly matters is the FDIC problem bank list. They don’t make that public for good reason. Banks with problems often work them out over time."
But there is no doubt that the number of banks facing pressure is increasing. According to the FDIC, "At year-end, 252 insured institutions with combined assets of $159 billion were on the FDIC’s 'Problem List.' These totals are up from ...76 institutions with $22 billion in assets at the end of 2007." In other words, the number of officially troubled banks more than tripled and their assets went up sevenfold.
These results do not mean that all banks with a high proportion of troubled assets to capital will fail. Banking experts say that, historically, most troubled banks eventually recover. They may find new capital (and many have since the end of the year, either through private sources or through the federal government's Troubled Asset Relief Program ).
In other cases, loan losses abate as the economy improves -- permitting borrowers to pay off loans the bank might have written off. And still other weak banks will find stronger merger partners who want the customer base of deposits and loans.
However, 17 banks already have failed this year and of those, 15 had a troubled asset ratio of greater than 100 percent. FDIC Chair Sheila Bair has publicly said that the number of bank failures "will continue to grow" this year as the effects of the slumping economy continue to affect the ability of consumers and businesses to pay back their loans. Twenty banks failed last year, the largest number since 1993, but that's still tiny compared to the period of 1986-1992, when 180 banks or more failed each year, peaking at 534 in 1989.
Even when banks fail, consumers are protected, as long as their account balances don't exceed $250,000, the current FDIC insurance limit. No one has lost money in an FDIC-insured account since the agency was formed in 1934, and while Bair has said the agency has about $40 billion to cover losses, consumers are protected in the event of even more catastrophic failures. The FDIC is backed by the full faith and credit of the United States government and can borrow unlimited amounts of money from the Treasury if the need arises.
Real estate loans the heart of the problem
While the recession has put borrowers of all kinds under increasing pressure, it is clear from the numbers that it is real estate lending that is causing banks the most difficulty. At the end of 2008, nearly 80 percent of the troubled assets were connected in some way to real estate lending, even though only about 60 percent of all loans were real estate-related. (It is important to note that not all real estate loans are used to finance or refinance the purchase of real estate. Many business, agricultural loans and personal loans also are secured with land or buildings.)
Home loans (actually 1-4 family residences) account for 45 percent of nonperforming loans, while they account for about 35 percent of all bank loans. These would include first mortgages, second mortgages, home equity lines of credit and other loans secured by homes.
At the end of the year, the banks held more than $27 billion in real estate, mostly properties they acquired through foreclosure. Of all real estate owned by the banks, about $11.5 billion was 1-4 family homes and another $8.7 billion was from construction and development properties. The rest was from commercial real estate or other types of real estate lending.