Banks and savings institutions are boosting reserves and loan loss provisions at a pace not seen in decades, but the increases aren’t keeping up with a sharp rise in delinquent loans — particularly mortgages — federal regulators warned in a report today.
The Federal Deposit Insurance Corp.’s Quarterly Banking Survey reveals that the 8,560 institutions it insures boosted their reserves by 7 percent during the third quarter, to $87 billion. It was the largest quarterly increase in reserves in 18 years, but failed to keep pace with a “sharp rise” in delinquent loans, the report said.
Residential mortgage loans were the focal point of the deterioration in asset quality, said FDIC Chairman Sheila Bair, but delinquency and loss rates were up across all major loan categories.
Noncurrent loans were up 23.8 percent from the previous quarter, to $83 billion — the largest increase in 20 years. More than half the increase was attributed to residential real estate loans. Noncurrent residential mortgage loans were up 27.2 percent, to $35 billion, while noncurrent home equity lines of credit were up 27.4 percent, to about $1 billion.
During the quarter, the industry’s “coverage ratio” fell from $1.21 in reserves for every $1 of noncurrent loans to just $1.05 — the lowest level since the third quarter of 1993.
Most FDIC-insured banks and savings institutions remained profitable during the quarter, reporting $28.7 billion in third-quarter net income. But that’s a 24.7 percent decline from the same quarter a year ago, and the lowest level since the fourth quarter of 2002.
“Because insured financial institutions entered this period of uncertainty with strong earnings and capital, they are in a better position both to absorb the current stresses and to provide much-needed credit as other sources withdraw,” Bair said. “Going forward, the outlook for the industry depends on the severity of the housing downturn and the extent to which it spills over into the broader economy.”
Bair renewed her previous calls for lenders and loan servicers to modify the loan terms of homeowners who have remained current on their mortgages but who face interest-rate resets.
“I am hopeful that lenders and servicers will see that it is in their own best interest, as well as the interests of their investors and, of course, the many homeowners who have remained current on their mortgage payments, that they provide some relief from interest-rate resets,” Bair said in a press release accompanying the release of the report.
The American Bankers Association released a statement by the group’s chief economist, James Chessen, who said banks remain well capitalized.
With $1.3 trillion in capital and another $87 billion in reserves set aside to cover potential losses from problem loans, “banks could write off all of these (noncurrent) loans and still have reserves left over,” Chessen said.
“Today’s news from the FDIC confirms what we’ve known — banks are adjusting to the economic stress in the housing market and are taking the necessary steps to put the losses behind them,” Chessen said. “This will be an ongoing process, but because the health of the industry has been so strong for so long, banks have the capital and reserves to weather this storm.”
The report said FDIC-insured institutions more than doubled their third-quarter loan loss provisions from a year ago, to $16.6 billion. That’s the highest level in more than 20 years, as banks plan for a wave of anticipated mortgage defaults.
Actual loan losses, or “charge-offs,” at the reporting banks and savings and loans were also up 49.9 percent from a year ago, to $10.7 billion. That’s the biggest quarterly charge-off seen since the fourth quarter of 2002.
Net charge-offs of residential mortgage loans were up 164.8 percent from a year ago, to $1.1 billion. Charge-offs on loans to commercial and industrial borrowers surged to $1.7 billion, a 91.4 percent increase. Charge-offs of on consumer loans other than credit cards were up 46.1 percent, to $1.5 billion.
At institutions with more than $1 billion in assets, the loss rate on residential mortgage loans increased to 0.21 percent during the third quarter, up from 0.08 percent a year ago. Smaller institutions had much lower charge-off rates on residential mortgage loans — 0.09 percent during the quarter, compared with 0.05 percent a year ago.
The number of institutions on the FDIC’s “Problem List” increased for the fourth quarter in a row, rising from 61 to 65, although the assets held by those institutions fell 22 percent to $18.5 billion.