Even More Troubling Housing Data

 | Jul 31, 2012 | 4:00 PM EDT  | Comments
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wfc

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c

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bac

The media discussions concerning the state of the U.S. housing market have been lacking in substantive data. The data that are easy to come by are often quoted, while the data that are more difficult to access and analyze are treated with anecdotal and often erroneous observations.

New- and existing-home sales, average prices paid, number of homes on the market, builder comments and those offered by Case-Shiller, Zillow and others are readily available and easy to understand.

What is more difficult to ascertain are the state of bank balance sheets and what they indicate about loan defaults, foreclosures, real estate owned and the way banks account for it.

Banks are required to file quarterly "call reports" with their regulators which detail their financial condition. These reports are not easy reading, though.

There is an enormous amount of information included in the reports, and in this column I will focus on the status of residential mortgage debt and real estate owned (REO) at the four largest money centers, JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C).

First trust residential mortgages are the largest category of loans at U.S. banks, representing about 25% of all loans at all banks. At Wells Fargo and Bank of America, the dominant residential mortgage lenders, its about 30% of the loan portfolios, while at JPMorgan and Citigroup it's about 18% and 16% respectively.

Of these loans, 10% on average are nonperforming industry-wide; nonperformers have remained in that range for the past three years.

At Bank of America, Wells Fargo and JPMorgan, however, the nonperforming residential loans are at a much higher percentage -- about 20%, 15% and 20% respectively.

At Bank of America, the value of nonperforming loans and their percentage of all loans has doubled in the past three years and is continuing to rise. At Wells Fargo and JPMorgan, the 15% and 20% figures have remained steady for the past three years.

Citigroup, at about 9%, is the only one of the four that has experienced a substantial reduction during that time.

The first conclusion is that nonperforming loans, contrary to the popular meme, are actually still rising, both in real terms and as a percentage of performing loans.

Nonperforming loans and real estate owned make up the bulk of what is referred to as the "shadow inventory" -- homes that have already been foreclosed on or will be, and which will have to be sold by the bank at some point.

The next area to consider then is the real estate owned. Residential REO accounts for about 25% of all REO at all banks. In comparison, the levels at the money centers are as follows: Bank of America about 50%, JPMorgan 37%, Wells Fargo 25% and Citigroup 50%.

The value of real estate owned at all but Bank of America has decreased by about 30% over the past few years. Bank of America's has actually increased by about 30%. However, this net reduction in REO appears to be the genesis of the meme that the shadow inventory has decreased.

In reality, it is a reflection of the banks slowly bringing previously foreclosed properties to the market while simultaneously allowing the nonperforming loans to increase and not foreclosing on them.

And this is not a new pattern; it's been happening since shortly after the banks were provided TARP funds.

As I discussed in May, only about 3% of the nonperforming loans that are attributable to the housing crisis have completed the process of foreclosure and final resale. The remaining 97% still have to go through that process; and the number of them is still increasing.

The bottom line is that the housing situation is getting worse rather than better.

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