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Bank profits slide amid mortgage defaults

Surging mortgage defaults whacked U.S. banks and thrifts in the second quarter. Profits fell 3.4 percent to $36.7 billion, and reserves to cover loan losses soared 75 percent from a year ago, regulators aid Wednesday.
/ Source: The Associated Press

Surging mortgage defaults whacked U.S. banks and thrifts in the second quarter. Profits fell 3.4 percent to $36.7 billion, and reserves to cover loan losses soared 75 percent from a year ago, regulators aid Wednesday.

Earnings results for the nation’s financial institutions from the Federal Deposit Insurance Corp. showed that higher expenses for non-current loans, along with lower interest from investments, hurt profits in the April-June period.

The impact on federally insured banks and savings institutions of the nation’s housing slump and foreclosure distress was evident in all aspects of the data for the second quarter.

The increases in non-current loans — 90 days or more past due — and set-aside reserves to cover losses were the biggest in 16 years for banks and thrifts. Total past-due loans jumped by 10.6 percent, to $6.4 billion, and nearly half the increase came from home mortgage loans.

FDIC officials acknowledged that more details of the housing market stress will show up in results for the current quarter. The occurrence of what they called “declining credit quality” for banks likely will hit with fuller force in the July-September period, they said.

In August, for example, banks and thrifts across the country have requested increased loans from the 12 regional banks in the Federal Home Loan Bank System.

FDIC Chairman Sheila Bair noted many high-risk subprime mortgages for borrowers with weaker credit histories, which initially feature low interest rates, will reset this year and next into higher rates that will shock and distress many homeowners.

“The payment reset problem is there and it’s looming large,” Bair said in a meeting with reporters.

In the second quarter, non-current home loans rose by $3.1 billion, or 12.6 percent, from a year earlier, the FDIC’s report said.

It was the fifth straight quarter of increases in residential non-current loans. non-current loans for real estate construction and development soared $2.2 billion, or 39.5 percent.

Banks and thrifts set aside $11.4 billion to cover loan losses during the second quarter, up 75.3 percent and the highest level since the fourth quarter of 2002, the FDIC said.

A huge spike in soured loans for real estate construction and development also hurt bank earnings.

“Banks continued to face two key challenges — a difficult interest-rate environment and ongoing weakness in residential mortgage lending,” Bair said. “The market’s going through a period of adjustment. We knew it was coming; it was inevitable.”

Mortgage delinquencies and foreclosures have skyrocketed this year, driving numerous lending companies into bankruptcy. Figures released Tuesday by research firm RealtyTrac showed foreclosures soaring 93 percent in July compared with a year earlier.

The federally insured and regulated banks and thrifts have not been big issuers of subprime mortgages that triggered widespread anxiety in recent weeks as more evidence surfaced of big jumps in defaults and foreclosures.

As credit worries drag stock and bond prices lower in financial markets, investors have grown increasingly nervous about all types of home loans — stoking concern that lenders are seeing problems with quality-credit mortgages.

In recent weeks, the U.S. Federal Reserve and other nations’ central banks have injected billions of dollars into the banking system. On Aug. 17, the Fed also cut by a quarter point to 5.75 percent the short-term discount rate it charges on overnight loans to banks.

On Tuesday, the Treasury Department’s Office of Thrift Supervision reported that non-current loans at U.S. thrifts jumped to $14.2 billion in the second quarter, up 50 percent from $9.5 billion from a year earlier. That’s the highest level of non-current loans at U.S. thrifts since 1993, with most of the problems in home mortgages.

Still, given the circumstances, Bair said, the industry is in sound financial condition as the market adjusts and its second-quarter performance was “very solid.”