US Financial Crisis Worsening as Consumer Loan Delinquencies Surge
http://www.marketoracle.co.uk/Article3260.htmlStock-Markets / Financial Crash Jan 04, 2008 - 10:41 AM
By: Money_and_Markets
Stock-Markets
Best Financial Markets Analysis ArticleMike Larson writes: Several weeks ago, I told you we were staring "S&L Crisis II" in the face. I said estimates of losses stemming from the mortgage crisis kept spiraling higher — from $100 billion ... to $250 billion ... to $400 billion and higher. I wish I could say things are getting better. But they're not. In fact, the tally of charges, losses and write-downs across the financial industry continues to rise higher and higher.
Just look what's happened in the past several days ...
National City (NCC) , the super-regional bank, said it will slash another 900 jobs, bringing the total number of cuts to 3,400 in the past year. It also cut its dividend in half— the first payout reduction since 1935. And it said residential mortgage volume would come in between $15 billion and $20 billion for 2008. The previous projection was $36 billion!
National City's Stock Plunges!
KeyCorp (KEY) said it would cease lending to many home builders and get out of the national home improvement lending business. The bank also announced charge-offs of about $110 million related to bum real estate development loans in markets like Florida and California ... and another $55 million to $65 million in losses stemming from commercial mortgage loan holdings.
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Merrill Lynch (MER) , Citigroup (C) , and many other top financial firms have already announced billions of dollars of write-downs stemming from the collapse in the subprime mortgage market, as well as the sharp downturn in leveraged buyout activity and commercial real estate lending. Bloomberg pegged the total losses at a whopping $97 billion as of late 2007! Now, with fourth-quarter earnings reports right around the corner, investors are bracing for even more. Goldman Sachs analysts expect another $34 billion in write-downs from top financial firms. Sanford C. Bernstein predicts that Citigroup will slash the value of its holdings by $12 billion, while Bank of America will fess up to a $5.5 billion charge.
But perhaps the most troubling news of all:
Consumer Loans Are Also Going Sour Left and Right!
Clearly, losses related to a bunch of "garbage" debt securities are piling up on Wall Street. But so are losses related to regular bread-and-butter loans. Mortgage foreclosure rates are at the highest level ever. And this week, we got word that delinquencies are rising in almost every other consumer loan category, too.
According to the American Bankers Association:
Check The delinquency rate on home equity loans rose to 2.28% in the third quarter from 1.79% a year earlier. That's the highest since the third quarter of 2005!....Check The delinquency rate on home equity lines of credit (HELOCs) rose to 0.84% from 0.57%. That's the highest since the fourth quarter of 1997!....Check The delinquency rate on indirect auto loans (loans made through dealers) rose to 2.86% from 2.35%. That's the worst reading since the third quarter of 1991!
What's driving these increases?
Consumer Loan Delinquencies Surging!
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Second, home values are declining. That's making it harder for consumers to refinance higher-cost car and credit card debt into lower-cost home equity loans. And it's giving more consumers an incentive to walk away from their homes — including their home equity debt — in the event of financial stress. Third, rising short-term interest rates have driven the cost of servicing HELOC debt higher, just like they've driven the cost of servicing ARMs higher. Many HELOCs are tied to the prime rate, which closely follows the federal funds rate. As the Fed increased the funds rate, prime rose from 4% in 2004 to 8.25% in 2007. It has since fallen to 7.25%. As a result of all these problems, leading U.S. banks have essentially been forced to beg for change from wealthy foreign countries. They're also considering asset sales to raise money!
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I followed up with a cautionary note on the private equity bubble in April 2007. And I talked about the nuttiness in the commercial real estate lending world in May. I told you that lenders, property owners, and landlords were being overly optimistic, and that they were going to get creamed. Today, that's exactly what's happening. So, what comes next?
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