Who says the mortgage crisis is over? Regulators revealed today that the nation’s banks and thrifts have an alarming delinquency rate of almost 20% on their $2.6 trillion mortgage portfolio.
The Office of the Comptroller of the Currency and the Office of Thrift Supervision jointly released the 2011 first quarter Mortgage Performance Report. The Report provides an in depth analysis on $5.7 trillion of outstanding first mortgages, representing 63% of all first mortgages in the United States.
According to regulators only 80.3% of all bank and thrift held mortgages are current compared to 88.6% of all reported mortgages. Regulators said that the elevated delinquency rate of 19.7% was due to an over concentration in risky nonconforming mortgages geographically concentrated in weaker real estate markets. The banks not only managed to pack their mortgage portfolios with risky loans, but also managed to write loans in areas that had the largest decline in real estate values.
In addition to a massively delinquent first mortgage portfolio, banks also hold about $760 million in second mortgages. Most banks have not provided specific data on their second mortgage portfolio, but the large decline in real estate values has rendered many second mortgages effectively worthless. The relentless decline in housing values further erodes the value of second mortgages. Despite recent reductions or reversal of loan loss reserves, it is highly likely that many banks are severely under reserved for future losses on both first and second mortgages, barring a miraculous recovery of both the housing and job markets.
Ironically, the regulators report that the performance of GSE mortgages held by Fannie Mae and Freddie Mac have a very low rate of default compared to mortgages owned by banks and thrifts. Fannie and Freddie, both currently in government receivership, have a default rate of 6.8% which is 300% better than the performance of bank owned mortgages. Regulators ascribe the better performance of Fannie and Freddie mortgages due to holding a greater percentage of prime loans.
Fannie and Freddie have a long way to go before they return to solid profitability, but perhaps long suffering investors in stocks such as Bank of America should consider a “lottery ticket” investment in Fannie Mae or Freddie Mac.
Bankers took ridiculous risks to achieve the largest paychecks. Lending without regard to risk and common sense underwriting guidelines has caused massive losses for both bank shareholders and the taxpayers.
Alan Greenspan, former Federal Reserve Chairman, said recently in an interview with Charlie Rose in Bloomberg Businessweek that “One of the things that I had been almost taking as a given was that corporate executives, specifically bank executives, knew enough about their organizations and cared enough to act in support of the solvency of their institutions. I was wrong. They did not.”