Saturday, August 8, 2009
Friday the FDIC closed another three banks: Community First Bank in Prineville, OR, Community National Bank of Sarasota County in Venice, FL, and First State Bank in Sarasota, Fl. While the FDIC transfers the deposits and liquidates the assets, one must wonder how many more bank failures are to come? With 97 banking institutions having failed in 2008 and 2009, I can assure you the number is set to rise.
Not because the number is simply "small" compared to historical standards, but because of the share of the commercial banking system's aggregate balance sheet that is mortgage loans.
The chart illustrates the share of mortgage assets in the commercial banking system listed in the Federal Reserve's flow of funds accounts (see Table L.109 here). There is certainly an upward trend in the series - homeownership rates began to surge in 1995. However, spanning the years 1999 to 2007 banks held an increasing share of mortgages on balance, peaking at 33.2% in 2007.
AgainsUnder the pressure of mounting job losses, totalling 6.7 million to date and the unemployment rate rising to its current 9.4%, foreclosures are surging. There are the Big "6" foreclosure states - the chart to the left - according to RealtyTrac, which I define as as the 6 states that experienced either >150% growth in foreclosure filings during the first half of 2009 or >1.5% foreclosure rate. These states include Alabama, Hawaii, Nevada, Florida, Arizona, and California.
But across the US, foreclosures are growing at double-digit rates.
The lower left quadrant (marked by the green arrows) shows the states with the most benign foreclosure problems, where filings fell during the first half of the year (compared to the second half of 2008) and foreclosure rates are relatively low (the US average is 1.19%). Notably, though, most of the US is not in that quadrant.
Banks are writing down the foreclosures, where many of the loans are underwater (i.e., the loan amount exceeds the value of the home). Banks will increasingly be insolvent, as the value of the collateral (the home) is worth less than the mortgage itself. More banks will fail - I'm just surprised that the number is not greater than 97 to date.