- Summary: Banks are worried about the cooling housing market. Real-estate downturns often trigger rising delinquency/default ratios, and lack of demand for new loans has begun cutting into otherwise strong earnings. Sales of new homes fell 4.3% in July; existing-home sales fell in July to the lowest level since January 2004. Some banks have begun warning investors through SEC filings of declines of close to 50% in mortgage originations. Real estate, including mortgages, home-equity loans and commercial loans, represents 33.5% of the U.S. banking industry's $9.3 trillion in assets. At bigger banks with multi-faceted operations the percentage is smaller (from 5-15%), but growing. Bank executives and Wall Street analysts have expressed little concern about increases in mortgage delinquencies or defaults, due to low unemployment and a relatively strong economy. Delinquencies are at 4.41% up from 4.31% last year. But the mortgage market is filled with new types of loans, such as interest-only loans and adjustable-rate mortgages, vehicles more interest-rate sensitive than their predecessors.
- Comment on related stocks/ETFs: Barron's Lon Witter sees the current high-leverage mortgage situation as the trigger for a major housing market correction that will have broad repercussions in the stock market. Some related figures: 32.6% of new mortgages and home-equity loans in 2005 were interest-only, up from 0.6% in 2000. 43% of first-time home buyers in 2005 put no money down. 15.2% of 2005 buyers owe at least 10% more than their home is worth. 10% of all home-owners with mortgages have no equity in their homes. $2.7 trillion dollars in loans are slated to adjust to higher rates in 2006 and 2007. Since the end of 2003, the percentage of loans in negative amortization has gone from 1% to 47%. The various financial sector ETFs — (XLF), (IYF), (IYG), (VFH) and (RKH) — can be used to play the short-side of the banking industry. Seeking Alpha now has ongoing summary of articles and data points on the housing market, including a section on Mortgages and Real Estate Lending.
Can Banks Weather Housing Market Chills?
Sep 1 2006, 06:16
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