12 Percent Behind = Banking System is Toast

The US Mortgage Bankers Association reported a record 12 percent of the Nation's homeowners with mortgages are delinquent or in foreclosure. The article referenced does not give dollar amounts, but we will.

According to the Federal Reserve Bank, at year-end 2008, mortgages on 1-4 family units were 11 trillion dollars. Thus 12% times 11 trillion = 1 trillion, 320 billion.

Problem number one: delinquent mortgages aren't really worth any where near their nominal balances. A lot of them will go into foreclosure.

Problem number two: foreclosed houses aren't worth very much. Sometimes they become a liability to the bank.

Problem number three: there is a terrific glut of housing on the market right now. Throwing millions of foreclosed houses onto the market is like, well, putting gasoline on a fire. House prices will crash, and crash hard. Falling prices will create the bad sort of positive feedback in which more homeowners will 'walk away' before their financial position gets even worse.

Problem number four: commercial mortgages, credit cards, consumer loans, and business loans will be no help to banks. They are likely to perform as badly as home mortgages, or worse.

The real world is giving the US banking system a 'stress test' far worse than the coddlers in Washington could ever dream of. Most banks will fail, and resolving the failures through the FDIC will be a lot for that agency to digest. Even now, it is moving through the worst of the worst somewhat slowly as its resources permit. The sluggishness with which it is moving allows the financial rot to worsen and actually increases the ultimate cost to the taxpayer. (By the way, the slow pace of liquidations is a repeat of the lack of proper bank supervision which led up to the S&L fiasco some years back).

We expect the rot to get worse and worse until some sort of 'banking holiday' is declared to perform mass triage on the system. The sooner the reorganisation happens the better for everyone, but we expect that to be put off for a couple of years yet.