I have written several columns this year on the situation facing the banks with respect to their large and increasing portfolio of non-performing loans, especially residential mortgages.
Since the housing bubble began to pop in 2006, which eventually led to recession, the collapse of Lehman Brothers and the implementation of the TARP (Troubled Asset Relief Program) and ZIRP (Zero-Interest Rate Policy) programs, the number of non-performing loans has increased dramatically.
The value of outstanding non-performing loans being held by the banks is now substantially larger than their loan loss reserves. As a result, many banks have simply stopped taking action on their non-performing loans because doing so would require booking losses that would be greater than their loan loss reserves.
One of the hopes by the banks, regulators, legislators, rating agencies, politicians and investors has been that the economy would eventually recover and it would be supported by increasing loan creation and decreasing loan defaults. If that were to occur, the banks would be able to build up loan loss reserves allowing them to begin to send non-performing loans through the recovery process.
Additionally, an expanding economy indicates that demand for the collateral associated with the non-performing loans would increase allowing for a greater rate of recovery of the balance owed on the non-performing loans which would decrease the amount of losses the banks would actually have to absorb.
In order for such a situation to arise, loans that originated since the recession ended must not begin to default. Unfortunately, there are nascent and broad signs that the consumer loans created since the most recent recession ended in June of 2009 are again increasing for the first time since then -- and before the older non-performing loans have been absorbed.
The early signs of this are loans that are accounted for as past due between 30 and 89 days by the banks. Across every consumer loan category, these numbers are rising again for the first time since the recession ended in June 2009.
First Trust residential mortgages that are past due from 30-89 days increased from 2.24% in the second quarter of this year to 2.27% in the third. Credit card delinquencies increased from 1.36% to 1.42%, home equity loans from .91% to .97% and auto loans from 1.32% to 1.50%.
Although the increases in the number and value of past due loans is relatively small, with the exception of autos, this is the first time since the last recession ended in 2009 that all consumer loan categories have experienced an increase at the same time. Another disturbing aspect of these numbers is that they are occurring with interest rates already at record lows and by borrowers with the highest credit quality.
The data referenced is from the third quarter call reports filed by the banks with the regulators with the majority of them doing so during the last week of October and first week of November.
One calendar quarter of loan data does not yet indicate a trend, but be mindful of this issue. If the data for the fourth quarter of 2012, which will be available in early February, indicate that a new trend toward rising delinquencies and defaults is occurring, it will compound the issues facing the Fed and perhaps impact the ongoing discussions concerning the federal budget and tax policies.