Monday, October 13, 2008

Back to basics: Bank mortgage loans surged

On September 17, I claimed that banks would go back to their staple profit-maximizing behavior: minimizing the risk, while maximizing revenues and making safe loans that yield interest in excess of paid deposit interest. The Federal Reserve's weekly loan data shows that banks have gone back to their business roots with strong conventional mortgage loan growth. Markets spun out of control and interbank-lending came to a grinding halt, but real estate lending has commenced again.
Update (10/17/08): I am surprised that nobody has noticed this, but some sleuthing brings light (or actually darkness) to this anomolous data.

From the Press Release on October 10: Large domestically chartered commercial banks acquired $259.2 billion in assets and liabilities of nonbank institutions in the week ending October 1, 2008. The major asset items affected were: Treasury and Agency securities, investment account, mortgagebacked, $9.6; other securities, trading account, $1.1; other securities, investment account, state and local government, $1.4; other securities, investment account, mortgage-backed, $8.6; other securities, investment account, other, $3.3; commercial and industrial loans, $1.6; real estate loans, revolving home equity, $40.0; real estate loans, other residential, $106.0; real estate loans, commercial, $46.6; consumer loans, credit cards and other revolving plans, $15.5; cash assets, $8.0; and other assets, $21.2. The major liability items affected were: deposits, transaction, $8.2; nontransaction, large time, $17.5; nontransaction, other, $133.6; borrowings from others, $81.2; and other liabilities, $16.2. The major memoranda items affected were: mortgage-backed securities, pass-thru, $11.1; mortgage-backed securities, CMO, REMIC and other, $7.1; securitized consumer loans, credit cards and other revolving plans, $16.5; and securitized real estate loans, $90.5.

So when one accounts for this information, it looks like "other real estate loans" actually fell. We will see this week. I'm not sure exactly what this refers to. I'm guessing it's WaMu, which wasn't -- I think -- a commercial bank.
Mortgage loans surged in the last two weeks.

The chart lists weekly growth rates through 10/1/08 (latest release) of real estate bank credit and its major components: other residential (non-revolving real estate loans), home equity lines of credit, and commercial real estate. The surge in loans commenced the week after the government announced that it would insure money market mutual funds. In spite of the turmoil in the banking system in the weeks that followed, real estate loans have been growing. In the last two weeks, growth has been positive. Compared to its weekly average growth rate in 2008, 0.2%, total real estate loan growth averaged 2.4% over the last two weeks (9/17-10/1). Other residential loans grew 3.1% over the last two weeks, compared to 0.0% growth in 2008, and commercial real estate loans grew 1.3% over the last two weeks, compared with 0.2% over the year.

This is phenomenal, given the recent banking crisis and the surge in bank excess reserve holdings.

The chart lists weekly growth rates through 10/8/08 (latest release) of excess reserves held by banks. Excess reserves surged on 9/17/08 – the week of Lehman Brother’s bankruptcy and have remained elevated. The average holding of excess reserves since 9/17, $ 102 billion, is 8.6 times greater than the average holding since the beginning of the year, $12 billion. Banks are hoarding their cash.

However, banks need to finance their operations, and extending loans is the standard way to turn a profit. With national home values down 16% over the year for three consecutive months and the secondary mortgage market standing on solid foundation with the government’s explicit guarantee, banks have gone back to their roots. The data implies that lending for real estate loans may have eased a bit.

Certainly, this is just a two week surge, and a positive trend is far from certain. However, it is encouraging to see that real estate loans are flowing. High foreclosure rates persist, and the supply of homes exceeds demand – perhaps new loan growth will allow potential homebuyers to scoop up some of the excess supply.

Admittedly, the risks are ubiquitous. If the recent government interventions – today's global central banks (led by the Fed) offering unlimited dollar funding – fail to ease investor angst, the worst-case scenario systemic banking meltdown may occur. In the event of mass bank failure, the stabilization of the housing market would certainly be pushed back several quarters, if not years. But for now, it is encouraging to see the surge in real estate loan growth.

Rebecca Wilder


  1. Seems like a lot of the money "under the mattress" is actually in banks and it is being loaned. Like the fact that the excess reserves are rising. Now, if we can just get the non-banks out of the banking business....

  2. I think this is a side-effect of the bank rescue package:

    Here in Denmark I can get 6.75% on a one year deposit account, fully guaranteed by the government.

    I would be an idiot *not* to borrow all I could against the present valuation of my home and then stick the money in that 6.75% p/a account because I can get a mortgage for 30 years at a fixed interest of 7%!!!

    Long interest rates *will* rise, wiping out a good part of my debt and I might not be able to borrow later, so why not do it now.

    Of course this 'borrow long', 'invest short' will cause long rates to increase exponentially and at the same time the annually adjusted borrowers will suffer because the rates will now be above the 6.75% - nobody will lend for less than the guaranteed rate!!

  3. Hi fajensen, you said, “I would be an idiot *not* to borrow all I could against the present valuation of my home and then stick the money in that 6.75% p/a account because I can get a mortgage for 30 years at a fixed interest of 7%!!!”

    That is a really interesting point! However, I think that you give the average American household a little too much credit; they are likely very risk averse right now, with debt to income ratios in excess of 100% and a banking crisis underway. Further, the spread between guaranteed savings and a 6% mortgage rate (if you can get that) is more like 250-400 bps (depending on the type of saving account you open), rather than just 75bps. Finally, the TARP bill that included the new federal insurance limits (up to $250,000) did not pass until 10/1/08, which is the last date of the series, so any effects coming from new regulation would not show up in this data.

    Thank you for reading and thank you for your interesting comments!


  4. Thank you for your post and comments. Finding a good mortgage lender can be tricky. It's good to have professional information about what's going on in the world of mortgages.