"Problem Banks" Look Even More Problematic

The FDIC’s “problem bank” list expanded again in the first quarter of this year. The total now is 775. That’s 10% higher than the previous quarter…when the number grew by 27%. So we’re still bleeding, just not as profusely.

The numbers are included in a report on the overall state of the banking industry, which crows about growing earnings numbers. That’s fine as far as it goes, but…

  • Most of that improvement owes to the banks cutting the amount of money set aside for loan losses
  • The banks cutting their loss reserves most aggressively are the biggest ones, that is, the too-big-to-fail set…


The FDIC’s insurance fund is still in the red, but not quite as much as it was three months ago.

This paper dragon can probably remain uncombusted if interest rates remain low… and if Fannie, Freddie and the FHA can keep propping up the housing market. Those are big “ifs”.

As it is, the downward pressure on the housing market remains intense…

Roughly 10% of mortgages were delinquent in the first quarter, and roughly another 5% were in foreclosure, according to the Mortgage Bankers Association. Seasonal adjustments muddy the figures a bit, but no matter how you slice it, it’s as ugly as the horse in front of you stopping to relieve himself on the trail.

Then there’s the latest laundry list of failure from HAMP, the government’s Home Affordable Modification Program.

  • In April, over 122,000 borrowers had their trial modifications canceled. That’s 40% of all the cancellations since the program began a year ago. We’re talking 277,640 total cancellations…compared with 295,348 that actually made it through to permanent modifications
  • Among those permanent modifications, the typical borrower’s “back-end” debt ratio (mortgage plus credit cards, car payments, student loans, etc.) rose last month from 61% to 64% of pretax income. Yeah, that’s sustainable.

No surprise here, demand for new mortgages plunged to a 13-year low after the homebuyer tax credit expired at the end of April.

Falling Mortgage Demand

Addison Wiggin
for The Daily Reckoning