How Much Better Are Banks Really Doing?

The banking industry has profits — big profits, according to the latest report from the FDIC. Not only were profits up in the first quarter, the return on assets increased and banks no longer set aside so much money for losses.

What’s remarkable about this information is that at the very same time such strong results were being reported, the government also said bank revenues had declined, loan balances were down and institutions on the FDIC’s “problem list” reached the highest number since 1993.

Equally stunning, the FDIC announcement mentioned nothing about foreclosures and real estate values, nothing about the nation’s vast shadow inventory of unsold lender homes. The worth of real estate assets worth hundreds of billions of dollars is unmentioned, a silence which raises a question: Is the foreclosure situation getting better or worse?

Bank Profits
According to the FDIC the nation’s banking system had profits of $29 billion in the first quarter of 2011, up 66.5 percent from a year earlier.

That’s right, 66.5 percent!

This huge increase in profits did not come from business activities. According to the FDIC, net operating revenue was actually $5.5 billion lower than a year earlier while gains on securities were down by $1.7 billion.

So from where did the money come?

“First-quarter loss provisions totaled $20.7 billion, less than half the $51.6 billion that insured institutions set aside a year ago,” said the government.

In other words, the quarterly results were up because the money set aside for losses was reduced by almost $31 billion — more than the industry’s entire quarterly profit.

“The industry shows continuing signs of improvement,” said outgoing FDIC Chairman Sheila C. Bair, who shrewdly added “though there is a limit to how far reductions in loan-loss provisions can boost industry earnings.”
Looking At Values
The banking industry owns, manages and services mortgages and mortgage-related securities worth trillions of dollars. Testifying before a Senate subcommittee in May, Laurie Goodman with the Amherst Securities Group, explained that mortgages worth $10.6 trillion are now outstanding on U.S. homes with one to four units. Of these holdings, about $5.4 trillion are insured by Fannie Mae, Freddie Mac or Ginnie Mae and some $3 trillion are in lender portfolios.

To establish the value of these assets you need to answer two central questions: Are borrowers making their payments and what’s the value of the underlying assets — the real estate — if borrowers don’t send in their checks?

The FDIC reports that delinquencies are down: “Asset quality continued to improve as noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell for a fourth consecutive quarter. Insured banks and thrifts charged off $33.3 billion in uncollectible loans during the quarter, down $19.9 billion (37.5 percent) from a year earlier.”
But while less may have been charged off, the reason for such smaller losses was not an improvement in home values or fewer delinquencies, it was instead the result of new marketplace mechanics.
Figures from RealtyTrac show that as of May foreclosure activity had declined for eight consecutive months.

We appear to be having fewer foreclosures because many states have enacted additional borrower protections. It now takes an average of 400 days nationwide to foreclose after the initial default, up from 151 days in the first quarter of 2007, according to RealtyTrac. Also, as a result of the robo-signing scandal, courts increasingly want to see proper paperwork before throwing families out on the street.

You can see examples of foreclosure delays and deferrals coast-to-coast.

  • In Hawaii, a new dispute resolution requirement may stall all foreclosures until Oct. 1, according to the Honolulu Star-Advertiser.
  • In Maine, the state Supreme Court just refused to allow a foreclosure because the lender’s affidavits were “inherently untrustworthy.”


  • In Oregon, U.S. District Judge Owen Panner has challenged the private system used to record mortgage paperwork, a system called MERS. He stopped a foreclosure — even though the homeowners had not made payments — ruling that “the MERS system creates confusion as to who has the authority to do what with the trust deed.”

“Flawed mortgage banking processes have potentially infected millions of foreclosures,” said the FDIC’s Bair in congressional testimony, “and the damages to be assessed against these operations could be significant and take years to materialize.”
The looming problem is that once the paperwork mess is cleaned up — something many people thought would happen before now — then foreclosure activity will increase. Unfortunately, more foreclosures won’t be good for home prices, local property tax collections or the value of lender inventories.

Asset Values
Not only are payment and delinquency claims open to question, so too are smaller loss reserves given that lender inventories are not maintaining their value.

  • The National Association of Home Builders says median prices for new homes stood at $217,900 in April 2011, down from $241,200 in December 2010.
  • The National Association of Realtors reports that the typical existing home was worth $168,800 in December but only $163,700 in April.


  • The Federal Housing Finance Agency tells us that home prices in the first quarter were 2.5 percent lower than the prices in the first quarter of 2010. At the end of March, values were down 19.8 percent from the April 2007 peak.
  • “With a large inventory of vacant and foreclosed properties overhanging the market,” says Federal Reserve Chairman Ben Bernanke, “construction of new single-family homes has remained at very low levels, and house prices have continued to fall.”

Following the decline in real estate values during the first quarter, one has to ask why lenders are not increasing loss reserves. One answer might be that we momentarily have a smaller number of distressed homes, but clearly more foreclosures are on the way — the very reason to grow reserves.

It’s not just that property values are generally down, there’s also the reality that distressed properties sell with a substantial discount when compared with non-distressed homes. In the first quarter, “the average sales price of foreclosure properties was nearly 27 percent below the average sales price of properties not in foreclosure,” according to RealtyTrac.
“For the housing sector to get back on track we need to reduce the supply of lender-held properties,” said James J. Saccacio, RealtyTrac’s chief executive officer. “Right now it would likely take the market two years to absorb the real estate inventory controlled by lenders — not counting properties with delinquent loans that have not yet been foreclosed on. It would be better if more incentives were in place to encourage faster absorption and thus a return to stronger and more stable home values.”

With lower prices, massive inventories and big foreclosure discounts, it makes sense to consider distressed properties when looking at real estate today. At the same time, given the paperwork problems that have slowed foreclosures in many states, it also makes sense to buy with eyes open and assure that any property one considers comes with good, marketable and insurable title. For specifics, speak with a real estate attorney in your community.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site,  

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